Q: Health Insurance Premiums: What They Are, How They Work, and Other Stuff to Know

A health insurance premium is the amount an insured person pays every month for their health insurance. The premium is among the factors that an individual should consider when determining what coverage they want.

A business’s employees need to understand how premiums work so they can make the best choice when choosing an insurance plan.

How are premiums determined?

Overall, premium amounts—especially for employer-sponsored plans—can vary significantly based on several factors. Under the Affordable Care Act (ACA, also known as Obamacare), premiums for health insurance plans for individuals or small group plans sponsored by an employer are based solely on age, location (i.e., zip code), and sometimes tobacco use. Certain states don’t allow tobacco use to be taken into account, and some insurers don’t impose tobacco surcharges even where allowed. Insurers decide what the premium rates for individual and small group plans will be annually and usually have to file those rates with the state they are located in. 

A premium will also be affected by the plan’s “metal tier” (bronze, silver, gold, or platinum) and whether the coverage is for an individual or a family. This can be true for both individual plans and small group employer-sponsored plans.

In contrast, plans sponsored by large employers have different factors that may impact the premiums employees and dependents pay, such as the claims from the prior year for the group as a whole. In this situation, each enrollee usually pays the same premium. Though it may still be based on an employment class, instead of paying a particular amount based on age.  

It’s worth noting that premiums are allowed to be up to three times more for older people (ages 50-64 who are not yet eligible for Medicare) than for younger persons with the same policy. Some states have stricter limits on how much more insurers can charge older individuals.

How do pre-existing conditions affect my premiums?

Thanks to the ACA, they shouldn’t. Health insurers can’t refuse to cover anyone or charge them more because of a pre-existing condition. They also can’t charge women more than men. This may differ for a group health plan that has been grandfathered in under the ACA, which may allow certain limitations. 

Who pays premiums?

For individuals receiving health insurance through their job, employers are generally required to pay a portion of the monthly premium to the insurance carrier. Some employers choose to cover up to 100% of the monthly premium, though they can require participants to pay a portion of it. When employees are required to pay for part of their premiums, that amount is often deducted pre-tax from their paychecks. This can depend on an employer’s setup, as well as dependents an employee may enroll.

For an individual plan purchased through HealthCare.gov, the federally facilitated marketplace created by the ACA or one of the increasing number of state-run exchanges, premiums are paid directly to the insurance company out of pocket, after-tax.

Can premiums be paid with HSA funds?

A health savings account (HSA) is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. In some cases, the HSA may be contributed to with post-tax dollars and declared on an individual’s taxes. 

HSA money can be used to pay for deductibles, copayments, coinsurance, and other eligible expenses. It generally can’t be used to pay premiums.

Can premiums be paid with health FSA funds?

A health flexible spending arrangement (aka FSA) is an account you can contribute money to pre-tax and use to pay certain out-of-pocket health care costs. Health FSAs are only sponsored by an employer. You can spend health FSA funds to pay deductibles, copayments, coinsurance, and other eligible expenses, but not for insurance premiums.

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What can help my premium be lower?

There are a few ways to obtain lower premiums. For example, if employer coverage is available, the premium is generally less than an individual plan.

High deductible health plans

One option is a high-deductible health plan (HDHP). An HDHP is a type of health insurance plan with lower premiums but higher deductibles than a more traditional plan. It’s also the type of plan required to contribute money to an HSA (though additional factors may impact eligibility).

Premium tax credits 

A person who purchases a health insurance plan through the individual Marketplace Exchange may qualify for premium tax credits (PTCs) that could substantially cut their premium. Generally, PTCs are available for households with incomes of 100% up to 400% of the federal poverty level. How much you will save depends greatly on a variety of factors. 

Healthcare.gov and the Kaiser Family Foundation both have calculators to help estimate what you might qualify for. 

The American Rescue Plan and PTCs

The American Rescue Plan Act passed in March 2021 has temporarily expanded the PTC. It is available to those with incomes above 400 percent of the federal poverty level through the 2022 plan year. The credit limits their premiums to 8.5% of their modified adjusted gross income, regardless of their income. The IRS has provided a tool for determining PTC eligibility. 

Changes in household income or family size could result in changes in the PTC amount. These changes must be reported to the marketplace when they occur. It’s always a good idea to consult with a tax advisor about the effect of such changes.

How does the premium amount affect cost-sharing?

A health insurance plan’s premium is just one factor to consider when selecting a plan. The cost-sharing provisions can also significantly affect how much someone pays for their health care expenses every year. It’s important to note that funds used to pay the premium do not go toward the deductible or coinsurance. 

Cost-sharing refers to how a health insurer splits expenses with an insured individual. Generally, the higher your premium, the less one pays for the three types of cost-sharing:

  • Deductibles: A deductible equals the amount of money paid toward health care before the plan begins to pay its share.
  • Copayments: A copayment is a flat fee paid for certain medical expenses like prescriptions, doctor visits, and trips to the emergency room—even after the deductible is met.
  • Coinsurance: Coinsurance is the percentage of the costs paid out of pocket for office visits, procedures, and medications after meeting the deductible. If, for example, you have a 20 percent coinsurance rate for a procedure, you’ll pay 20 percent of the cost.

Are my premiums tax-deductible?

Individuals who itemize deductions on their personal tax returns may be able to deduct health insurance premiums paid with after-tax dollars. The medical and dental expense deduction is currently limited to expenses that exceed 10 percent of their adjusted gross income. Employer-paid premiums are exempt from an individual’s federal and payroll taxes.  

In addition, a person may qualify for the self-employed health insurance deduction if they have income from self-employment and aren’t eligible for an employer plan. You can take this deduction even if you don’t itemize, but it’s limited to the amount of your net profit from self-employment income.

If you deduct your health insurance premiums on your individual tax return, you can’t deduct the portions paid for by PTCs or APTCs.

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