Why Taxable Income Matters When Choosing a Health Insurance Plan
When helping folks enroll in individual marketplace health insurance plans, we always ask, “What is your taxable income?”
Your income significantly impacts the premium, deductible, and out-of-pocket expenses of your plan. Your projected taxable income for the current year is essential because it determines the cost and subsidies, as well as the cost-sharing reductions, you qualify for. Rates are age-based, and the less you make, the more aid you receive.
Let’s break it down! Here’s why we need your income info.
Subsidies are income-based premium reductions available for plans purchased in the individual market, also known as the marketplace, which is accessed through healthcare.gov. Subsidies are tax credits that are paid directly to the insurance carrier to offset the monthly premium costs of your insurance plan. The lower your income, the more tax credit and subsidy you receive to offset your monthly fee. Plan costs start at $1 per month for those receiving the maximum subsidy.
Folks with incomes between 100% and 400% of the federal poverty level (FPL) qualify for subsidies. The lower your income, the lower your monthly premium will be. The older you are, the more subsidy is needed to offset your rate. This means an individual in their 30s can earn up to around $50,000 and still get aid, whereas an individual in their 60s could earn around $80,000 and still receive aid. Larger families qualify for subsidies at higher income thresholds, since there are more.
Folks with incomes between 100% and 250% of the FPL qualify for even more aid in the form of cost-sharing reductions. Cost-sharing lowers the deductibles, copays, and out-of-pocket expenses. The cost-sharing is only for Silver Plans. This means that folks get not only lower premiums from the subsidies but also lower out-of-pocket costs from the cost sharing. Refer to the graphic to the right, which illustrates the different tiers of cost sharing, to understand the variations within silver plans available on the individual market.
It's important to note that these subsidies and reductions are available exclusively on individual plans in the Marketplace, which can be accessed through healthcare.gov. If you purchase a plan directly from an insurance carrier or are on a group health insurance plan, you are not eligible for subsidies or cost-sharing.
If you provide an income when signing up for a Marketplace plan that differs from your actual taxable income, it will be reconciled when you file your taxes. If you received too much aid, you will be required to repay it, and if you took too little, you will receive a refund. For instance, if you underestimate your taxable income and borrow $1,000 a month in aid, but later only qualify for $500 a month in aid, then you will pay back $6,000 when you file your taxes the following year. With this in mind regarding subsidies, it is essential to note that the cost-sharing portion of your plan is NOT reconciled and will not be rolled back even if you later report more income when filing your taxes. This means that the low deductibles and copays are locked in, regardless of the income you file on your taxes after the fact.
We ask for your taxable income when putting together your options because your date of birth, zip code, and income are the three factors that determine your rates and plans. We know the income question can feel awkward, but it is mission-critical so that we can provide you with accurate rates. We encourage you to guesstimate your income carefully. If you need assistance with your guesstimate or selecting a plan, please don't hesitate to reach out! We are always happy to look over your documents and answer any questions you may have about purchasing a plan through the Marketplace.
