The following example illustrates how the SOTU subsidies were simulated. Suppose Joe is eligible for a $500 low-income premium tax credit.18 After the credit, his net premium is $1,500 - $500 = $1,000. Assuming his income tax rate is 20 %, he receives an income tax deduction on the net premium of $1,000 * .20 = $200. He also receives an employment tax credit of $1,000 * .153 = $153. Joe's fully-adjusted insurance premium is therefore $1,500 - $500 - $200 - $153 = $647.
Joe also is able to increase his pre-tax HSA contribution to the out-of-pocket maximum of his insurance policy coverage, assumed to be $3,500 in our simulations. In effect, this provision makes all of Joe's out-of-pocket spending under the HDHP eligible for pre-tax status. In addition, individuals making after-tax HSA contributions would be allowed an employment tax credit on those contributions. In Joe's case, the two subsidies result in an after-tax HSA cost of ($3,760 - $3,500) * (1 - .153) + $3,500 * (1 -.20) = $3,020 (rounded to the nearest dollar). Therefore, Joe's total premium is $3,667.