What do Tax Credits really mean for the individual market?

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What do Tax Credits really mean for the individual market?

Enrollment on the state and federal health exchange will begin Oct. 1st, 2013 for a Jan. 1st, 2014 effective rate.  As of today very little information on plan design and rates is available. What is available is a new study from Kaiser Family Foundation showing the average current family premium and average subsidy available to consumers based on their income.

This study shows that consumers that today have a family premium average $8,250 per year.  This rate currently may range greatly depending on age, geography, plan design and specifically the health and utilization of that insured and their dependents.   Come Jan. 2014 if individuals who are eligible for these credits re-enroll in a federal or state government run exchange they will be eligible for a subsidy to make insurance more affordable.  This dollar amount of the savings is incredible at $2,672 per year on average.


The elephant in the room is taxes!!  While the tax credit is fantastic and HUGE premium savings.  It is really swapping one dollar for another for many families who are middle america.  Under current law individuals could run their personal contributions through a Section 125 plan as an out of pocket medical expense.  However under healthcare reform the law states that premiums purchased through an individual exchange CANNOT utilize a Section 125 plan that would allow tax free treatment for insurance.  The Section 125 allows federal and state income tax & FICA tax.  The savings for someone in a 15% federal tax bracket and state tax of 8% and FICA savings of 7.65%.  So the current tax savings under a Section 125 plan for average american is 30.65%.  If purchased under a federal or state run exchange and utilizing subsidies which in many cases insurance is expected to raise anywhere from 0-150% is 32%. 

Based on the information above you can see why so many americans are frustrated and confused.  I would argue the true (net cost) of insurance will change very little or possibly increase for most individuals.  If premiums increase dramatically for the youngest and most healthy consumers (which will be the ones hit the hardest) the tax savings or premium credits won’t equal any savings.

The best way to analyze your personal circumstances is to find an insurance expert who can analyze all the options.  Make sure and ask about taxes and big picture as premium is not the only consideration.  This tax conundrum applies only to individual insurance as there are no plans or current law that limits the tax free treatment for employer sponsored coverage.