How the Affordable Care Act’s subsidies are calculated, and who is eligible to receive them
Obamacare premium subsidies: Key takeaways
- Your subsidy eligibility depends on your income: 100-400 percent of FPL.
- But it also depends on your access to employer-sponsored coverage or Medicaid.
- You don’t have to be a U.S. citizen to get subsidies, but you do have to be in the country legally.
- Subsidies for people 65+ if they’re not eligible for premium-free Medicare A
- Subsidy eligibility hasn’t changed, despite GOP efforts to repeal the ACA.
- Subsidies are much larger than they were in the first few years.
- Your subsidy is based on the cost of the benchmark Silver plan in your area.
- Here’s how your subsidy is calculated — with examples.
As we approach the tenth anniversary of the enactment of the ACA, the law remains almost fully intact (the individual mandate penalty was eliminated as of 2019, and some of the law’s taxes have also been repealed, including the Cadillac tax). The structure of the ACA (aka Obamacare) premium subsidies — also known as premium tax credits — is unchanged, and subsidies continue to adjust each year to keep pace with premiums. (Here’s how that works.)
Average premiums changed very little for 2020, but average benchmark premiums (on which subsidy calculations are based) dropped by an average of 4 percent in the 38 states that use HealthCare.gov. In many cases, lower benchmark premiums are a result of new insurers entering the market with lower-priced plans; this can result in subsidy fluctuations and big swings in after-subsidy premiums, even when the full-price cost of a person’s existing plan changes very little. It’s always important to shop carefully during open enrollment, as opposed to auto-renewing an existing plan.
Because of the small reduction in average benchmark premiums, subsidy amounts in 2020 are likely a little smaller than they were in 2019. But subsidy amounts continue to be considerably larger than they were prior to 2018. This has been the case since the Trump administration stopped funding cost-sharing reductions (CSR — a different type of ACA subsidy) in the fall of 2017. To cover the cost, insurers in most states now add the cost of CSR to Silver plan premiums. That makes the Silver plans disproportionately expensive, and since premium subsidies are based on the cost of the benchmark Silver plan, it also makes the premium subsidies disproportionately large.
Premium subsidies can be used to offset the premiums for any metal-level plan in the exchange. Because the subsidies are so large, some enrollees can get free Bronze plans, or Gold plans that are less expensive than Silver plans. According to an analysis by the Kaiser Family Foundation, 4.7 million uninsured Americans were eligible for free Bronze plans for 2020 — even more than the estimated 4.2 million uninsured people who could have obtained free bronze plans for 2019.
As of mid-2019, there were 10.2 million people with effectuated coverage through the exchanges nationwide. Of those, 8.9 million – or 87 percent – were receiving premium subsidies. For those enrollees, premium subsidies were covering the bulk of their premiums, with an average subsidy amount of $514/month and an average full-price premium of $593/month.
In short, the subsidies are a significant part of the “affordable” in Affordable Care Act. With each successive open enrollment period, awareness of the law’s premium tax credits (subsidies) has continued to grow. But many Americans may still be wondering, “Am I eligible to receive a premium subsidy – and if so, what should I expect?”
Who is eligible for a subsidy?
So who are the nearly 9 million people who were receiving premium subsidies as of mid-2019? Subsidy eligibility is based on income (ACA-specific MAGI): You have to earn at least 100 percent of the federal poverty level (139 percent of the poverty level in states that have expanded Medicaid), but not more than 400 percent of the poverty level. (This is all discussed in more detail below.) But there are other factors that determine eligibility.
Let’s take a look at what they are:
Access to affordable employer-sponsored coverage
If your employer offers coverage that’s considered affordable and provides minimum value, you’re not eligible to receive a subsidy in the exchange. Note that the affordability test only applies to coverage for the employee; the cost to add dependents to the plan is not taken into consideration. But if the employee’s coverage is considered affordable, the dependents are not eligible for premium subsidies in the exchange — and this situation is known as the family glitch.
If your employer offers affordable coverage that provides minimum value, you already are receiving a subsidy from your employer in the form of pre-tax health insurance benefits and an employer contribution to your premiums. The exchanges offer subsidized health insurance benefits to the self-employed, the unemployed, and employees who work for a company that does not offer affordable health benefits.
Note that some employers offer coverage that is either not affordable or does not provide minimum value (by doing this, they can avoid the potentially larger penalty they would pay if they didn’t offer coverage at all). These plans, while technically considered minimum essential coverage, can be quite skimpy — and to clarify, employers are subject to a penalty if they offer these plans and their employers opt for a subsidized plan in the exchange instead. If your employer offers a plan that doesn’t meet the affordability rules and/or the minimum value rules, you do have access to premium subsidies in the exchange if you’re otherwise eligible based on your income, immigration status, etc.
Access to Medicaid or CHIP
In addition, premium subsidies aren’t available to people who qualify for Medicaid or CHIP, since Medicaid and CHIP (the Children’s Health Insurance Program) generally provide even more financial assistance than premium subsidies.
It’s important to understand that CHIP eligibility extends to much higher incomes than Medicaid eligibility. Kids in households with MAGI at 200 percent of the federal poverty level (FPL) are eligible for CHIP in nearly every state, and there are several states where CHIP eligibility extends to above 300 percent of the poverty level.
If your kids are eligible for CHIP, they aren’t eligible for premium subsidies. That means the subsidy amount you’ll see when you enroll is just for the adults in your household, as the kids will be on CHIP instead.
Age: Nothing but a number
There’s no upper age limit for subsidy eligibility. Most people become eligible for premium-free Medicare Part A when they turn 65. In that case, they lose their eligibility for premium subsidies (unless they reject Medicare Part A, which also means they have to reject their Social Security benefits).
But if you’re not eligible for premium-free Medicare Part A because you don’t have enough work history in the U.S., you can continue to buy coverage in the exchange, and you’ll continue to receive premium subsidies if your income makes you eligible. (See question A6 in this guide from CMS.)
The Medicaid coverage gap
Premium subsidies aren’t available to people with income below the poverty level (with the exception of recent immigrants, as described below), because when the ACA was written, it was expected that everyone living in poverty would be eligible for Medicaid. But two years after the law was enacted, the Supreme Court ruled that states couldn’t be forced to expand Medicaid, and some states still haven’t expanded coverage.
This results in a coverage gap for people with income below the poverty level in those states. In most cases, they’re not eligible for Medicaid because they’re in states with strict Medicaid eligibility guidelines. But they’re also not eligible for premium subsidies.
Premium subsidies aren’t available to people who aren’t in the U.S. legally, although they are available to immigrants living legally in the U.S. In other words, you don’t have to be a U.S. citizen to get premium subsidies. In fact, premium subsidies are available for recent immigrants with income below the poverty level, even though they’re not available to the general population with income below the poverty level.
That’s because Medicaid is not available to recent immigrants until they’ve been in the U.S. for at least five years. When the ACA was written, the expectation was that Medicaid would be expanded in every state to cover people living in poverty.
But lawmakers knew that recent immigrants wouldn’t be eligible for Medicaid, even with the expanded eligibility guidelines. So they were careful to clarify that these individuals would be able to receive premium subsidies in the exchange. (Their goal was to make it so that all lawfully present U.S. residents would have access to affordable coverage, one way or the other.)
The income cap for subsidy eligibility
Premium subsidies also aren’t available to people with income (ACA-specific MAGI) above 400 percent of FPL. When the law was written, the expectation was that coverage would be affordable without subsidies at that income level. (For 2020 coverage, that upper income cap is $49,960 for a single person and $103,000 for a family of four.) But as premiums have grown, there are some areas of the country where coverage can easily exceed 25 percent of household income for a family just a little above 400 percent of the poverty level.
It’s important to understand that contributions to a health savings account (HSA) and/or pre-tax retirement plans will reduce your income for subsidy-eligibility purposes, but it’s also important to understand the subsidy cliff, and the effect it has on the affordability of coverage. The number of people with off-exchange coverage—and unsubsidized coverage in general, including people who buy full-price plans in the exchange — has declined precipitously in recent years in many areas. This is not surprising given the sharp premium increases in 2017 and 2018, which caused coverage to become unaffordable for some people who earn a little too much to qualify for subsidies (although rates have stabilized in 2019 and 2020, they’re still too high to be affordable in many areas when a household’s income is just a little above the subsidy eligibility cap).
Ideally, the income cap for subsidy eligibility would be removed, and we’d switch to a system that just compares the cost of the benchmark plan to the applicant’s income, adding premium subsidies if it exceeds a certain percentage. For 2020 coverage, it’s 9.78 percent of income for people with income between 300 and 400 percent of the poverty level; that could just be extended to apply to people with income above 400 percent of the poverty level too.
Obviously, there would still be no subsidies for people earning millions of dollars, as health insurance premiums wouldn’t even come close to eating up 9.78 percent of their income. But people with income in the 400 to 600 percent of FPL range would start to qualify for subsidies in some areas, and the subsidy cliff would be eliminated. California has created its own state-funded subsidies for people earning up to 600 percent of the poverty level, and other states might follow suit (at the federal level, there would likely need to be a Democratic majority in both chambers to Congress to make it happen).
Subsidies are based on the cost of Silver plans
Now that we know who is eligible, let’s take a look at how the subsidies actually work. The subsidies are tax credits that are available to help middle-income and low-income people afford health insurance when they don’t have access to affordable employer-sponsored coverage or government-sponsored coverage (Medicaid or Medicare). Most eligible enrollees take those tax credits in advance, paid directly to their health insurance carrier each month to offset the amount that has to be paid in premiums.
But you can also pay full-price throughout the year for a plan through the exchange, and then claim your subsidy as a lump sum when you file your taxes. Subsidy reconciliation is completed when you file taxes, using form 8962. If the subsidy you receive during the year is too high, you’ll pay back some or all of it when you file taxes. If it was too low—or if you didn’t receive an advance subsidy at all during the year—you’ll get the balance of the tax credit when your return is processed.
As discussed above, premium subsidies are available to exchange enrollees if their MAGI is between 100 percent and 400 percent of FPL. (Off-exchange enrollments are not eligible for subsidies, regardless of income.) In states that have expanded Medicaid under the ACA, Medicaid is available to enrollees with incomes up to 138 percent of the poverty level, and subsidies are not available below that threshold.
In all states, the upper limit for ACA subsidy eligibility is 400 percent of FPL (as noted above, California has its own subsidies, starting in 2020, for people with income up to 600 percent of the poverty level). For 2020 plans in the continental US, that upper subsidy threshold is $103,000 for a family of four; subsidy availability extends well into the middle class. Alaska and Hawaii have higher poverty levels, so the income cutoff of subsidies is higher in those states as well, since it’s still 400 percent of their state-specific poverty levels: In 2020, a family of four in Alaska can qualify for a premium subsidy with an income as high as $128,760, and a family of four in Hawaii can qualify for a premium subsidy with an income as high as $118,480.
[Note that some people with MAGI under 400 percent of the poverty level don’t receive subsidies simply because the unsubsidized cost of coverage in their area is under the threshold established by the ACA.]
Subsidies are tied to the cost of the second-least expensive Silver plan in your area (ie, the benchmark plan). The architects of the Affordable Care Act (ACA) wanted to make sure that people who must buy their own insurance can afford that benchmark Silver plan, even in regions where health care is extremely expensive. So knowing the price of the benchmark plan in your region is key to calculating the size of your subsidy.
The benchmark can be a different plan from one year to the next, as insurers adjust their prices—but it’s always the second-lowest-cost Silver plan in a given area. And as the cost of the benchmark plan changes, the size of the premium subsidy changes too, to keep pace with the benchmark plan cost. If the benchmark rate goes up, subsidies increase. But if the benchmark rate goes down, premium subsidies will decline. This has happened quite often recently, especially in areas where new insurers join the exchange.
The enrollment software will automatically calculate your subsidy, but many enrollees are curious about how the subsidy amount is determined, so here are the details:
What exactly is a Silver plan?
In the exchanges, insurers offer Bronze, Silver, Gold and–in a few areas–Platinum plans. (Catastrophic plans are also available to young adults and people with hardship exemptions, although subsidies are not available on catastrophic plans). All must cover the ACA’s essential health benefits, and cannot refuse to cover you or charge you more because you suffer from a pre-existing condition.
The difference between the four tiers is their actuarial value. Bronze and Silver plans tend to have lower premiums, with higher co-pays and deductibles–up to a maximum of $8,150 in out-of-pocket costs in 2020 (many plans have out-of-pocket caps that are below this level.) After an enrollee hits the out-of-pocket limit, the insurer pays for all essential benefits, as long as the patient stays in-network.
Gold and Platinum plans’ premiums are higher, but deductibles, copays, and total out-of-pocket exposure on those plans are often lower. Silver plans pay roughly 70 percent of enrollees’ expected healthcare costs, and generally have premiums that are higher than Bronze plans, but lower than Gold plans. (Note that “expected healthcare costs” is in relation to the average costs for the entire population covered by the plan, including those with very high health care costs; it does not apply to each individual insured.)
It’s important to understand, however, that because the cost of cost-sharing reductions has been added to Silver plan rates in many states, you may find that there are Gold plans in your area that are less expensive than silver plans. Shop carefully!
How to calculate your subsidy in four easy steps
The size of your subsidy is based on how your household’s income (ACA-specific MAGI) compares with the prior year’s poverty level, and the price of the benchmark Silver plan in your region.
To calculate the size of your subsidy:
1) Use this table to find out whether your income and household size will make you eligible for a subsidy in 2020. [These numbers are based on the 2019 federal poverty guidelines in the continental US. Since open enrollment for 2020 took plans in 2019, these numbers will be used for all plans with 2020 effective dates.] As noted above, the numbers are higher in Alaska and Hawaii, and California has its own supplemental premium subsidies that extend to incomes above these levels as well.
For instance, as the table indicates, a family of three with household income up to $83,120, and a family of five with income up to $117,680, are eligible to receive a premium tax credit for 2019, depending on the cost of a Silver plan in their area.
|Percent of Federal Poverty Level (FPL)|
|For each additional person, add||$4,420||$6,100||$6,630||$8,840||$13,260||$17,680|
2) Find out how much the Affordable Care Act expects you to contribute to the cost of your insurance by consulting Table 2. The expected contribution is adjusted slightly each year. The percentages listed below are for 2020.
|If you earn||Your expected contribution is|
|Up to 133% of FPL||2.06% of your income|
|133%-150% of FPL||3.09%-4.12% of your income|
|150%-200% of FPL||4.12%-6.49% of your income|
|200%-250% of FPL||6.49%-8.29% of your income|
|250%-300% of FPL||8.29%-9.78% of your income|
|300%-400% of FPL||9.78% of your income|
The subsidy will make up the difference between the amount an individual is expected to contribute (based on income) and the actual cost of the area’s second-lowest-cost Silver plan.
3) Determine out how much a benchmark Silver plan costs in the area where you live. You can scroll through the available quotes in your state’s exchange and see what the second-lowest-cost Silver plan’s premium would be for you and your family, or you can call the exchange.
It’s important to note that the benchmark plan changes from one year to another: Carrier A might have the second-lowest-cost Silver plan one year, but due to premium fluctuations, Carrier B might take over that spot the following year.
4) See Table 2. Subtract the amount that you are expected to contribute (based on your income) from the cost of your benchmark Silver plan. For instance, let’s say your Silver plan costs $3,000 a year, and you are expected to contribute $1,000. You will receive a subsidy of $2,000.
Sample calculations for 2020
*****This example is based on 2020 numbers, including the required contribution percentages for 2020*****
Rick is 27 and lives in Alabama. In Alabama for 2020, the average benchmark Silver plan costs $453 a month for a 27-year-old or $5,436 annually. (The exact amount for Rick would depend on his zip code, but for the sake of this example, we’re just using the state-wide average; note that in Alabama, the average benchmark premium for 2020 is slightly higher than it was for 2019.)
If Rick earns $24,980 (that’s 200 percent of FPL, based on the 2019 FPL numbers) he would be expected to kick in 6.49 percent of his income, or $1,621 toward his insurance. (0.0649 x $24,980 = $1,621.)
To calculate his subsidy, he just needs to subtract $1,621 (the amount he kicks in) from $5,436 (the cost of the benchmark plan). His subsidy will be $3,815 for the year. That means the exchange will send $318/month to his insurer, and Rick will have to pay the other $135/month. Of course, that’s assuming he picks the benchmark plan; if he buys a less-expensive plan, he’ll pay less, and if he buys a more expensive plan, he’ll pay more. The $318/month subsidy will stay the same regardless of what plan he buys — unless he finds a plan that costs less than $318/month. In that case, the subsidy will cover the full price, but he won’t be able to claim the excess subsidy.
[Note that you can also calculate your expected contribution percentage if your income is somewhere in the middle of one of the ranges shown in Table 2. Here’s how it works.]
Rick’s 27-year-old cousin Alice, earns the same amount as Rick, but lives in Arkansas, where the pre-subsidy cost of the benchmark plan is quite a bit lower. After her subsidy, she’ll pay the same amount as Rick for the benchmark plan (because they earn the same income), but her subsidy won’t need to be as large. In Arkansas, the average benchmark premium for a 27-year-old is only $300/month for 2020, or $3,600 for the year (note that this is a little lower than it was in 2019; average benchmark premiums declined slightly in Arkansas for 2020).
If Alice also earned $24,980 (200 percent of the FPL) the government would expect her to spend 6.49 percent of her income on the benchmark plan, just like her cousin in Alabama. (Remember, the expected contribution is tied to income (MAGI), not the underlying cost of the plan.) So she, too, would have to pay $1,621 of her own money to buy an average benchmark plan in Arkansas. But because the average benchmark plan in Arkansas costs $3,600, her subsidy would be just $1,979, or $165/month. ($3,600-$1,621 = $1,979).
Since Rick and Alice earn the same amount, they pay the same in after-subsidy costs for the benchmark plan: $1,621 for the year. This is based on their MAGI — not their age, health status, or location. But Rick’s subsidy has to be larger than Alice’s, because the unsubsidized cost of his plan is so much more, due to his location.
If Rick and Alice were younger, the Silver plan would be less expensive and their subsidies would be smaller. If they were older, the Silver plan would be more expensive, and their subsidies would be higher.
The idea behind the subsidies is to level the playing field and bring average premiums to a middle ground for everyone who has the same general level of income (MAGI). So at the same income level, an older person will receive a higher subsidy than a younger person, but they’ll both ultimately pay the same price for the benchmark plan.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.
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