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How Premium Tax Credits And Cost-Sharing Reductions Work

Individuals who purchase a plan in the health insurance marketplace may qualify for federal premium tax credits that will help lower premiums. The credit can be used at the time premiums are paid, with the credit sent directly from the federal government to the individual’s health insurer. Individuals may also qualify for cost-sharing reductions, which help lower their out-of-pocket costs like deductibles and other forms of cost-sharing when using their health insurance coverage.

How the premium tax credit works. Individuals who qualify for the tax credit have the choice to have the full amount of the credit in advance, to reduce premiums up front, or wait to get the credit when they file their taxes. Individuals can also take a lower advance credit than the full amount for which they are eligible, and receive the rest when they file their taxes.

The premium tax credit is provided on a sliding-scale basis, in order to give more financial help to lower income buyers (beginning at 100 percent of the federal poverty level, or $12,140 for an individual in 2019) and less help to those at the higher end of the income scale (400 percent of poverty, or $48,560 for an individual in 2019). The credit lowers premiums based on how much individuals must pay for health insurance as a share of their income. For example, families with incomes of 100 percent of poverty ($25,100 for a family of 4 in 2019) will pay annual premiums that are no more than 2.08 percent of their household income. At 400 percent of poverty ($100,400 for a family of four in 2019), families will pay annual premiums that are no more than 9.86 percent of their household income in 2019.

The credit is pegged to the cost of the premium for the second lowest cost silver plan in a health insurance marketplace, known as the benchmark plan. A consumer can “buy up” from this benchmark by buying a more expensive silver, gold or platinum plan, but the tax credit won’t cover as much of the premium as it will for a silver plan. Conversely, a consumer could “buy down” by looking for an inexpensive bronze plan. Because the premium tax credit is pegged to the cost of a silver plan, it will cover a greater percentage of the premium for a bronze plan.

For example, if John has an income of 100 percent of poverty ($12,140 in 2019), his premium would be capped at 2.08 percent of his income, or $252. If the benchmark plan costs $5,000 a year, John would owe $252 and the credit would cover $4,748. If John chose to buy a plan with a higher premium (for example, either a higher cost silver plan or a gold plan), he would pay more than $252. For example, if the premium for the plan he buys is $5,500, John would pay $752 ($5,500 minus the $4,748 credit based on the benchmark).

Because the amount of the credit is based on income, any changes in income must be reported to the health insurance marketplace within 30 days. An individual whose income goes down may qualify for a bigger premium tax credit. Someone whose income goes up may be eligible for a smaller credit and will be responsible for repaying the difference between the smaller credit they should have gotten and the larger one they were getting based on old income information.

How cost-sharing reductions work: Individuals and families with income between 100 and 250 percent of the federal poverty level may also qualify for help paying out-of-pocket costs for services covered by their plan. The subsidy, known as a “cost-sharing reduction,” lowers the out-of-pocket limit and increases the generosity of coverage for eligible individuals depending on income. The subsidy goes directly to the insurer to reduce an enrollee’s out-of-pocket costs at the time the covered service is received. However, the cost-sharing reduction is only available for people enrolled in a silver plan. Where the standard value of a silver plan is 70 percent of total average costs for covered services, individuals eligible for the cost-sharing reduction will get a silver plan that covers 73 percent, 87 percent or 94 percent of total average costs for covered services, depending on income, with lower out-of-pocket limits as indicated below.

Income

Actuarial Value

Out-of-Pocket Limit

100 – 150 % FPL

94 %

$2,600 Individuals; $5,200 Family

150 – 200 % FPL

87 %

$2,600 Individuals; $5,200 Family

200 – 250 % FPL

73 %>

$6,300 Individuals; $12,600 Family