The American Rescue Plan: Premium Tax Credits

Premium Tax Credits became a new keyword for individuals in healthcare, when the Affordable Care Act was implemented.  The American Rescue Plan will now include the availability of Premium Tax Credits (PTC) to those who earn 400% or more of the Federal Poverty Level (2021 & 2022).  Today, PTCs are only applicable for those people that earn between 100% – 400% of the FPL (about $12,760 to $51,040 for an individual).  Premium Tax Credits do apply to a sliding scale, therefore, those with lower income levels receive more relief than those that are higher earners.

When ACA determined that those making 400% more than Federal Poverty Level (FPL) were not applicable for Premium Tax Credits, this created something called a ‘subsidy cliff.’  This has mainly affected middle-income people and has resulted in loss of coverage for those that could not afford healthcare without the help of a subsidy.  These challenges are extremely specific to those middle-income individuals that are older and live in more rural areas.  An example of this would be someone at the 400% cutoff – this individual would not receive subsidies but would pay on average, $12,886 annually in premiums, therefore, 25% of their income would go to their healthcare plan.

With the new legislation, any middle- and upper-income individual who purchased their own coverage can access PTCs if the premium of the selected plan is more than 8.5% of their overall household income.  The individuals who earned 150% or less of FPL would pay no premiums for healthcare, down from $800 under current legislation.  For individuals who make 450% of the FPL, specifically older Americans, this could result in a savings of almost $8,000 year.

Along with the expansion of PTCs based off of income, subsidies will also be increased for individuals that are already receiving PTCs.  Currently, those who fall between 100% – 133% of FPL pay about 2% of their income, yet individuals that fall between 300% – 400% pay no more than 9.78% of their income toward premiums.  The legislation does not overhaul the sliding scale nature for PTCs but rather it is a reduction of premium percentage at all income levels as compared to FPL.  Those that fall into the 100% -150% can be eligible for no-premium coverage and although the premium contribution increases as income increase, it is capped at 8.5% for those higher income earners.  These changes drastically increase the generosity of PTCs because the Federal Government will be paying a larger portion of premiums relative to ACA.

The ARP created a ‘special rule,’ for PTCs pertaining to those who receive unemployment compensation during 2021.  If someone is approved and/or receives unemployment compensation during 2021, their income will be treated as no higher than 133% of the Federal Poverty Level.  Ultimately, this means that anyone that receives unemployment compensation in 2021 can receive maximal subsidies for ACA coverage, which could include no-premium coverage.  This provision does not affect access to employer-based coverage, either.  It speaks directly to the fact that the cap of 133% of FPL does not apply to determining whether an employee has access to affordable employer-based coverage.  It is expected that 1.4 million people receiving unemployment benefits will enroll in subsidized marketplace coverage.

The ARP, as pointed out in our previous blog, will hold anyone who underestimated income (in 2020), harmless.  Typically, most marketplace enrollees receive their PTCs in advance and then are required to reconcile as the year proceeds.  This reconciliation or ‘clawback,’ results in smaller tax refunds or even possibly larger balances owed to the IRS.  Because of the difficult times and calculations for ‘clawbacks,’ in 2020, the ARP temporarily waives taxpayers to pay back any excess advance PTCs.  This will protect those at all income levels, regardless of income earned.  This change does not seem to affect anyone who overestimated their income for 2020 to receive PTCs that they will be owed during tax time.

In closing, there are various pieces to the ARP when focusing upon PTCs but the highlights seem to fall into the categories of subsidy enhancements, dissolving the subsidy cliff, maximizing existing subsidies, extension of subsidy eligibility for those that received unemployment and, finally, reconciliation clawbacks.

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