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Affordable Care: Premium Tax Credit

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Affordable Care: Premium Tax Credit

The US Supreme Court upheld the government regulations that provide that an otherwise qualified individual who obtains health insurance through the federal exchange (rather than a state exchange) is entitled to a Premium Tax Credit (PTC). This is the 6/25/15 decision in King v Burwell.Since this is the “Affordable Care” Act we are talking about, the PTC is a key part that helps make insurance affordable.

Some Possible Issues

  • States with exchanges may consider ending them to save costs and let people go to the federal exchange. This seems to be an unintended consequence of the decision and the feds might not have sufficient resources to handle this possible action.
  • This survival of the PTC may lead Congress and President Obama to fix it. It is too complex. The IRS likely does not have the resources to determine if people properly claimed it.
  • The PTC behaves as if individuals of all ages and all geographic regions can spend about 8% of their income to obtain health insurance. Because insurance costs more as you age and housing costs a lot more in some regions, that assumption is unrealistic.

Should health insurance tax rules be examined as a whole to try to better equalize the treatment among different ways to obtain health insurance? Currently the best deal is to get employer-provided coverage because it is tax-exempt to the worker – no income or payroll tax. And you get this benefit regardless of your income level.

Should we take the bold step of divorcing health insurance from employment? It drives up costs, it creates unfair tax advantages for those who have it, and the cost to employers helps make them uncompetitive in the global market. The tax cost of the employer-provided health insurance exclusion is over $200 billion per year. Why not use this money to lower rates and improve and expand the PTC?

Also – note that the King ruling also affects the employer mandate. With more individuals eligible to avail themselves of the PTC, it is more likely that an applicable large employer can have at least one full-time employee claiming it thereby possibly exposing the employer to the employer mandate penalty.

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