Understanding the advanced premium tax credit
Oct. 17, 2013
Customers purchasing a qualified health plan on the individual Health Insurance Marketplace may qualify for an advanced premium tax credit (APTC) to help reduce the premium cost. This credit may be available to eligible taxpayers who have household incomes between 100 and 400 percent of the federal poverty level (FPL), based on the taxpayer’s family size. In order to qualify for an APTC, applicants must also meet other eligibility criteria, including not having access to other health coverage (such as Medicare, Medicaid or, in general, coverage through an employer).
How is APTC calculated for eligible individuals?
In general, the dollar amount of an individual’s tax credit is:
- Premium of the second-lowest-priced silver plan1 minus the maximum payable amount for the benchmark plan2) equals the dollar amount of premium tax credit.
Below is an illustrative example using the latest information about premium costs and plans offered throughout the state of Michigan:
| County in Michigan | Age | Status | Annual Income | Income as percentage of Federal Poverty Level | Applicable percentage | Premium amount of the second lowest-cost Silver plan for 45 year old (benchmark plan) | Maximum payable amount for benchmark (Annual income x Applicable percentage) |
|---|---|---|---|---|---|---|---|
| Wayne | 45 | Single | $28,500 | 248% | 7.98% | $3,038.19 | $28,500 x 7.98% = $2,274.72 |
(Premium of the second lowest-priced silver plan) – (Maximum payable amount for the benchmark plan) = Dollar amount of premium tax credit
For this individual, the premium tax calculation would be:
$3,038.19 – $2,274.72 = $763.47 annual dollar amount of premium tax credit (or $63.62 per month)
The resulting dollar amount of the premium tax credit can be used for any metal-level plan available in Wayne County.
Is it possible for an individual to receive zero tax credit, even if the government initially determines he or she is eligible for an APTC?
Yes. This occurs if the premium for the benchmark plan (premium of second lowest priced silver plan) is less than the maximum payable amount for the benchmark plan (annual income multiplied by applicable percentage).
The tax credit formula is designed to guarantee that, at a specific combination of income and family size, the benchmark plan will cost no more than the applicable maximum payable amount.
Individuals who have access to benchmark plans that are cheaper than the maximum payable amount will not receive a tax credit, but will pay less for the benchmark than they would have paid if the benchmark plan were more expensive than the maximum payable amount.
Using the earlier illustrative example, if you only change the age of the individual from 45 to 25 (which affects the premium amount of the benchmark plan), then it results in zero premium tax credit dollars for the 25-year-old.
| County in Michigan | Age | Status | Annual Income | Income as percentage of Federal Poverty Level | Applicable percentage | Premium amount of the second lowest-cost Silver plan for 45 year old (benchmark plan) | Maximum payable amount for benchmark (Annual income x Applicable percentage) |
|---|---|---|---|---|---|---|---|
| Wayne | 25 | Single | $28,500 | 248% | 7.98% | $2,112.42 | $28,500 x 7.98% = $2,274.72 |
Since the premium amount of the second lowest-priced Silver plan costs less than the maximum payable amount, this results in zero premium tax credit dollar amounts for this individual.
What are the factors that can impact an individual’s premium tax credit amount?
If an individual is determined to be eligible for a premium tax credit, then the calculation of the actual amount they receive will depend on a variety of factors, including:
- Cost of the second-lowest-priced silver plan (benchmark plan) in your county
- Age
- Family size
- Income
- The plan selected by the individual
| Factor | General Impact |
|---|---|
| Cost of the second-lowest-priced silver plan (benchmark plan) in your county |
More expensive benchmark plans yield a higher dollar value of tax credit. |
| Age | Since premiums are age adjusted, the dollar value of the tax credit increases with age. |
| Family size | In general, larger families at the same FPL income level will receive a higher dollar value of tax credit. |
| Income | The tax credit decreases as income increases. |
| The plan selected by the individual |
|
Where can I find more information?
If you would like to receive estimates of your premium tax credit, you can see if you qualify for lower costs.
1 Premium of the second lowest-cost silver plan: Cost of the applicable benchmark plan.
2 Maximum payable amount for the benchmark plan: This amount is determined by multiplying household income by the “applicable percentage.” The applicable percentage varies depending on income relative to the federal poverty level.
The information in this document is based on preliminary review of the national health care reform legislation and is not intended to impart legal advice. The federal government continues to issue guidance on how the provisions of national health reform should be interpreted and applied. The impact of these reforms on individual situations may vary. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. As required by US Treasury Regulations, we also inform you that any tax information contained in this communication is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code.