How the ACA's Subsidy Cliff Has Been Temporarily Eliminated

The Affordable Care Act's (ACA) "subsidy cliff" refers to the fact that premium subsidy (premium tax credit) eligibility—for people who buy their own health insurance in the exchange—normally ends abruptly at a household income of 400% of the poverty level.

This was the case from 2014 through 2020, and it meant that a small increase in income could result in a drastic increase in a person's net health insurance premiums.

But for 2021 and 2022, the American Rescue Plan (ARP, also referred to as the third COVID relief bill) eliminated the subsidy cliff. Instead of ending subsidies when a household's income exceeds 400% of the poverty level, the ARP ensures that subsidies gradually decline as income grows.

Under the ARP, people who earn more than 400% of the poverty level are subsidy-eligible in 2021 and 2022 if the benchmark plan would otherwise cost more than 8.5% of their household income.

It's possible that this provision could be made permanent with future legislation, although that had not happened as of mid-2022. But Americans with income a little above 400% of the poverty level do not need to worry about the subsidy cliff at least through the end of 2022.

The subsidy cliff was most significant for older enrollees in areas where health insurance is particularly expensive, but it also existed for younger enrollees and in areas where coverage was less expensive. This article explains how the subsidy cliff worked before the American Rescue Plan (and how it would work again as of 2023, if the ARP's provisions are not made permanent), and how the ARP temporarily eliminated it.

Subsidy Cliff Examples and How the American Rescue Plan Makes Coverage More Affordable

For this example, we'll look at how the numbers would have played out for 2021 with the subsidy cliff in place, and then show how it's changed under the American Rescue Plan.

As of 2020, average individual market health insurance premiums—before any subsidies were applied—were most expensive in West Virginia and least expensive in Massachusetts. But Massachusetts is one of a handful of states where insurers cannot charge older adults three times as much as younger adults—in Massachusetts, it's limited to a 2-1 ratio instead of 3-1. And West Virginia is one of only three states where silver loading is not used, making premium subsidy amounts smaller in West Virginia than they would otherwise be in most other states.

For more of an apples-to-apples comparison, we'll compare premiums in Wyoming with premiums in Utah. Wyoming's average rates were second-highest in 2020, although they decreased a bit for 2021. And Utah had the second-lowest average pre-subsidy premiums in 2020, and their rates remained fairly stable for 2021. In both Utah and Wyoming, premiums for older adults can be up to three times as much as the premiums that are charged for younger adults.

Both of those states use HealthCare.gov as their marketplace/exchange, so we can use HealthCare.gov's plan browsing tool to see premiums (note that the tool currently shows premium subsidies that incorporate the American Rescue Plan's additional subsidies; for the pre-ARP numbers, we can calculate them based on the rules that applied before the new law was implemented).

In both states, we'll look at 2021 and 2022 premiums for a 25-year-old and a 62-year-old, and we'll calculate premiums based on the person having an income of $51,000 and $52,000. We'll show premiums both pre-ARP and post-ARP so that you can see how much of a difference the ARP has made, particularly for someone who was previously affected by the subsidy cliff.

We're using those particular income levels because they are just below and just above 400% of the poverty level for a single person in the continental United States. So before the ARP, a person earning $51,000 in 2021 would have been subsidy-eligible, whereas a person earning $52,000 would not have been eligible for a subsidy.

(Note that the 2020 poverty guidelines were used to determine premium tax credit eligibility for 2021 coverage. The 2021 poverty guidelines are used to determine premium tax credit eligibility for 2022 coverage. The ARP was enacted in March 2021, so people saw both pre-ARP and post-ARP rates in 2021, but only post-ARP rates in 2022.)

Cheyenne, Wyoming, 2021 premiums before the American Rescue Plan

• 25-year-old earning $51,000: Cheapest plan in 2021 was $219/month (after a $157/month premium subsidy was applied)
• 25-year-old earning $52,000: Cheapest plan in 2021 was $376/month (the person was not eligible for a subsidy)
• 62-year-old earning $51,000: Cheapest plan in 2021 was free (after a $1,226/month premium subsidy was applied).
• 62-year-old earning $52,000: Cheapest plan in 2021 was $1,075/month (the person was not eligible for a subsidy)

Note that in these examples, we're talking about the cheapest plan. But if we look instead at the benchmark silver plan, it will cost the same amount ($418/month) for both the 25-year-old and the 62-year-old in the scenario where they each earn $51,000 and are eligible for premium subsidies.

The whole point of the premium subsidy is to keep premiums at an affordable level relative to a person's income. So older people receive larger premium subsidies than younger people (because their pre-subsidy premiums are so much more expensive), and if two people live in the same area and have the same income, their after-subsidy premiums for the benchmark plan will be the same. This is the same all across the country.

Cheyenne, Wyoming, 2021 and 2022 premiums after the American Rescue Plan

Now we'll take a look at how these numbers have changed under the American Rescue Plan:

• 25-year-old earning $51,000:
• Cheapest plan in 2021 was $162/month (after a $214/month premium subsidy is applied).
• Cheapest plan in 2022 is $165/month (after a $210/month premium subsidy is applied)
• 25-year-old earning $52,000:
• Cheapest plan in 2021 was $170/month (after a $206/month subsidy is applied; this person is no longer ineligible for a subsidy, thanks to the ARP).
• Cheapest plan in 2022 is $177/month (after a $198/month subsidy is applied).
• 62-year-old earning $51,000:
• Cheapest plan in 2021 was free (after a $1,283/month premium subsidy is applied).
• Cheapest plan in 2022 is free (after a $1,263/month premium subsidy is applied).
• 62-year-old earning $52,000:
• Cheapest plan in 2021 was free (after a $1,276/month subsidy is applied; this person is no longer ineligible for a subsidy, thanks to the ARP).
• Cheapest plan in 2022 is free (after a $1,252/month subsidy is applied).

As you can see, the ARP has made coverage more affordable for the 25-year-old who already qualified for a subsidy but now qualifies for a larger subsidy. But it's made coverage drastically more affordable for the folks who are earning just a little above 400% of the poverty level. Instead of having to pay the full cost of their coverage themselves, they now qualify for a fairly significant subsidy—enough to cover the full cost of the lowest-cost plan for the 62-year-old.

Salt Lake City, Utah, before the American Rescue Plan

• 25-year-old earning $51,000: Cheapest plan (a catastrophic plan) was $211/month (this person did not qualify for a subsidy because the premium for the benchmark plan already met the definition of affordable without any subsidy)
• 25-year-old earning $52,000: Cheapest plan (the catastrophic plan) was $211/month (the person was not eligible for a subsidy)
• 62-year-old earning $51,000: Cheapest plan was $55/month (after a $487/month premium subsidy was applied).
• 62-year-old earning $52,000: Cheapest plan was $542/month (the person was not eligible for a subsidy)

For the 62-year-old who qualified for a premium subsidy, the benchmark plan was about $418/month after the subsidy was applied. This was the same as the subsidy-eligible applicants in Cheyenne, because their incomes are the same.

For the 25-year-old, the monthly premium for the benchmark plan is $392, which is why this person didn't qualify for a premium subsidy pre-ARP, even with an income of $51,000. The full-price premium was already lower than the after-subsidy premium would have been if this person were to receive a subsidy.

Now let's take a look at how the picture has changed under the American Rescue Plan:

Salt Lake City, after the American Rescue Plan

• 25-year-old earning $51,000:
• Cheapest plan in 2021 was $203/month (after a $30/month subsidy; note that this is only a little less expensive than the full-price catastrophic plan, but subsidies cannot be applied to catastrophic plans).
• Cheapest plan in 2022 is $208/month (this is a catastrophic plan, which is cheaper than the lowest-cost bronze plan, even though a small subsidy is available for the bronze plan and not for the catastrophic plan).
  
• 25-year-old earning $52,000:
• Cheapest plan (the catastrophic plan) is $211/month (this person would be eligible for a $23/month subsidy under the ARP, but the full-price catastrophic plan still ends up being priced below the lowest-cost bronze plan, even after the subsidy is applied to the bronze plan)
• Cheapest plan in 2022 is $208/month (again, this is a catastrophic plan; no subsidy is available, but it's still slightly less expensive than the cheapest bronze plan with a very small subsidy).
  
• 62-year-old earning $51,000:
• Cheapest plan in 2021 was free (after a $544/month premium subsidy is applied).
• Cheapest plan in 2022 is $28/month (after a $520/month premium subsidy is applied).
  
• 62-year-old earning $52,000:
• Cheapest plan in 2021 was $5/month (after a $536/month subsidy is applied).
• Cheapest plan in 2022 is $39/month (after a $509/month subsidy is applied).

You can see that the effect of the ARP's extra subsidies aren't as strong in Salt Lake City as they are in Cheyenne, since full-price premiums are so much lower in Salt Lake. But there's still a significant impact for an older applicant who would have been just over the subsidy cliff before the ARP was enacted.

Big Impact of a Small Income Increase

The examples above illustrate how the subsidy cliff worked—and will work again after 2022 if the ARP's subsidy provisions aren't made permanent.

It's easy to see how being older and/or living in an area where premiums are high will result in a more significant "cliff." For a young person in Salt Lake City, Utah, there was no subsidy cliff at all, even pre-ARP.

This was because premium subsidies phased out gradually before their income reached 400% of the poverty level, and a person with income just below 400% of the poverty level wasn't receiving a subsidy at all before the ARP increased the size of premium subsidies.

But on the other hand, an older person in Cheyenne, Wyoming pre-ARP went from having access to a free plan (ie, with no premiums at all) to having to pay nearly $1,100/month for the cheapest available plan, with an income increase of just $1,000/year.

And that was just to make the example simple to follow—in reality, the boost in income could have been much smaller; premium subsidies were available in 2021 (pre-ARP) for a single person with an income up to $51,040, but not for someone with an income above that level.

A Kaiser Family Foundation analysis in 2019 found that the subsidy cliff was particularly significant in rural areas, with Wyoming and Nebraska among the least affordable places for an older person to purchase health insurance if their income was just a little above 400% of the poverty level.

Avoiding the Subsidy Cliff

Depending on an applicant's age and location, there could be a drastic difference between qualifying for premium subsidies and not qualifying for premium subsidies—as you can see in the examples above.

Having a household income that didn't exceed 400% of the poverty level was the key to obtaining premium subsidies, and this will once again be the case after 2022, unless the ARP's subsidy enhancements are made permanent with future legislation. So it's wise to understand how "household income" is calculated.

For most applicants, it's the same as their adjusted gross income, but there are things that some applicants will need to add back to AGI to get their ACA-specific household income. These include non-taxable Social Security income, tax-exempt interest, and, for Americans living abroad, foreign earned income and housing expenses.

Fortunately, contributions to pre-tax retirement accounts and/or health savings accounts will reduce your household income, possibly to under 400% of the poverty level. This is not as important as it used to be, since subsidies phase out gradually now, rather than ending abruptly if income goes over 400% of the poverty level.

But it could be an issue again after 2022, depending on the approach that lawmakers take in terms of ongoing health care reform. As of mid-2022, Congress had not extended the ARP's subsidy provisions. And it's possible that if they do extend them, it may be with modifications, including a partial subsidy cliff (ie, a subsidy cutoff that's set higher than 400% of the poverty level).

Summary

The ACA's "subsidy cliff" exists because the law calls for premium subsidies (premium tax credits) to end abruptly if a household's income exceeds 400% of the poverty level—regardless of how much they'll end up having to pay for health coverage without a subsidy.

Depending on location and age, some people had to pay a very large percentage of their income for health insurance as a result. But the American Rescue Plan (ARP) addressed that issue for 2021 and 2022. Under the ARP, premium subsidies are available if the benchmark plan would otherwise cost more than 8.5% of the household's income, regardless of how high that income is.

This provision is particularly useful for older enrollees and for people who live in areas where health coverage is more expensive than average. But the ARP's provisions are temporary, and will expire after the end of 2022 unless Congress reauthorizes them.

A Word From Verywell

Enrollment in 2022 marketplace coverage is still possible if you experience certain qualifying life events. If you're eligible to enroll, it's well worth your time to compare the plan options that are available to you, and see whether you'd be eligible for premium subsidies. You might be surprised to see how affordable the coverage is, especially with the American Rescue Plan's subsidy enhancements in place.

Even if Congress doesn't extend the ARP's subsidy provisions and the subsidy cliff returns in 2023, most marketplace enrollees will continue to receive premium subsidies. But without Congressional action on this issue, it will once again be important to make sure that your household income doesn't exceed 400% of the poverty level if you want to be subsidy-eligible.