Understanding the Affordable Care Act Subsidy Enhancement Extension

Since 2014, millions of Americans who purchased health insurance through the exchange/marketplace have received premium subsidies (premium tax credits).

These subsidies were created by the Affordable Care Act (ACA) and offset some or all of the monthly premium costs people would otherwise have to pay themselves. This makes self-purchased coverage much more affordable and somewhat levels the playing field between employer-sponsored coverage and self-purchased coverage.

But there were concerns that coverage still wasn’t affordable enough. So the American Rescue Plan (ARP), enacted in the spring of 2021, included provisions to temporarily enhance the ACA’s premium subsidies.

Without additional action from Congress, the enhancements to the ACA subsidies would have expired at the end of 2022. The ACA subsidies would have reverted to how they used to be structured, leaving some enrollees without affordable coverage options.

The Inflation Reduction Act, enacted in August 2022, extends the most important ARP subsidy enhancements through 2025.

This article will explain which ACA subsidy enhancements have been extended by the Inflation Reduction Act, how those subsidy enhancements work, how many people are affected, and what consumers can expect in terms of subsidy rules through 2025.

What Does the Inflation Reduction Act Subsidy Enhancement Extension Do?

As a result of the Inflation Reduction Act, the American Rescue Plan’s enhancements of the ACA’s subsidies will continue to be in effect through 2025. The following sections will explain what those subsidy enhancements are, what would have happened if they had been allowed to expire, and what will happen now that they’ve been extended.

How the American Rescue Plan Enhanced Subsidies

Under the ARP, the ACA subsidies are larger and available to more people. This is because the ARP temporarily (through 2022):

Reduced the percentage of income that people have to pay for the benchmark plan, which increases the size of the subsidies: Under the ACA, this is a sliding scale that ranges from 2% to 9.5% of income (indexed for inflation each year). Under the ARP, the sliding scale instead ranges from 0% to 8.5% of income.

So at all income levels, people pay less for the benchmark plan. And on the lower end of the income scale, people qualify for premium-free coverage rather than having to pay roughly 2% of their income in premiums.

Removed the income cap (previously set at 400% of the federal poverty level) for subsidy eligibility: Instead, a person is eligible for ACA subsidies if the benchmark plan would otherwise cost more than 8.5% of their household income.

The ARP temporarily eliminated the “subsidy cliff,” meaning that subsidy eligibility no longer ends abruptly if a household’s income exceeds 400% of the poverty level.

If the ACA Subsidy Enhancements Had Expired: Theoretical Effects

Without the Inflation Reduction Act, the ARP’s enhancements of the ACA subsidies would have expired at the end of 2022. The ACA subsidies would have reverted to the structure and rules used before 2021.

For people who buy their health insurance through the exchange/marketplace, the following changes would have occurred as of January 2023:

The “subsidy cliff” would have returned. As a result, exchange/marketplace applicants with household incomes over 400% of the poverty level would have been ineligible for any subsidies—regardless of how much their coverage would have cost.

For 2023 coverage in the continental United States, a single person with an income above $54,360 would have been ineligible for a subsidy. A household of four would have been ineligible for a subsidy with an income above $111,000. This would have been true regardless of what percentage of their income had to be spent on health insurance.

The percentage of income people have to pay for the benchmark plan would have reverted to the ACA structure. The ACA’s inflation-adjusted 2% to 9.5% of income scale would have been used again to determine the percentage of income enrollees would have paid for the benchmark plan. (For 2023, the sliding scale would have been set at 1.92% to 9.12% of household income.)

The federal government estimated that 3 million people would have lost their health coverage completely. They also projected that 10 million people would have continued to have coverage but with smaller subsidies to offset the cost. Most of these individuals would have still had at least some subsidy, but an estimated 1.5 million would have lost their subsidy altogether.

The year-round open enrollment opportunity for subsidy-eligible low-income applicants (income up to 150% of the poverty level) would no longer have been available as of 2023. This window is only available as long as the benchmark plan is premium-free for these applicants.

If the ARP’s subsidy structure had been allowed to expire, these applicants would have had to pay roughly 2% of their income for the benchmark plan. And they would have been limited to only enrolling during open enrollment or a special enrollment period triggered by a qualifying event.

How Consumers Are Affected by the Subsidy Enhancement Extension

As a result of the Inflation Reduction Act, the ACA subsidy rules in effect in 2022 (due to the ARP’s subsidy enhancements) will continue to be in effect through 2025. For people who buy their coverage through the exchange/marketplace, this means:

The ARP’s subsidy structure will remain in effect through 2025. Subsidies will be sufficient to keep the cost of the benchmark plan at no more than 8.5% of income. The sliding scale for that will continue to be 0% to 8.5% of income (depending on income), and this scale is not inflation adjusted.

For perspective, nearly 10.3 million people enrolled in coverage through HealthCare.gov (the exchange used in 33 states) during the open enrollment period for 2022 coverage. Almost 9.5 million of them qualified for subsidies.

Their average full-price premium was $594/month, and the average subsidy amount was $524/month. So for most enrollees, subsidies cover the large majority of the cost of coverage.

The year-round enrollment opportunity for subsidy-eligible low-income applicants (those with income up to 150% of the poverty level) will continue to exist through 2025. This is because the benchmark plan will continue to be premium-free for applicants in this income range.

The “subsidy cliff” will continue to not exist through 2025. This means subsidies will not abruptly end if a household’s income exceeds 400% of the poverty level. To clarify, there is still an upper income limit for subsidy eligibility—but it’s different for each person, depending on their age and location.

A young person in an area where health insurance is fairly inexpensive might find that they’re not eligible for a subsidy with an income of $60,000. But an older person in an area where coverage is more expensive might be subsidy-eligible with an income of $100,000.

Crucially, there is no “cliff,” meaning that subsidies gradually phase out as income increases rather than ending abruptly at a certain income level. This is an important part of keeping health coverage affordable. It also helps to prevent situations in which people are incentivized to earn less money to avoid losing thousands of dollars in ACA subsidies.

Enrollment in health coverage through the exchanges hit a record high in 2022, thanks to the American Rescue Plan’s enhancements of the ACA subsidies.

With the Inflation Reduction Act now in place, enrollment is expected to continue to be higher than it used to be. Without the Inflation Reduction Act, it likely would have returned to previous levels, with some people simply dropping their coverage due to reduced affordability.

The Affordable Care Act Is Still in Effect

To clarify any possible confusion: The ACA is still in effect, and the premium subsidies it created are permanent.

Those ACA subsidies were temporarily enhanced by the American Rescue Plan, just for 2021 and 2022. The Inflation Reduction Act has extended the temporary enhancements through 2025.

But even if the American Rescue Plan and Inflation Reduction Act had never been enacted, the ACA subsidies would have remained in place. However, the ACA subsidy structure included a strict cut-off for subsidy eligibility if a household’s income exceeded 400% of the poverty level.

Although the ACA still requires exchange enrollees to spend a certain percentage of their household income if they buy the benchmark health plan, the American Rescue Plan reduced that percentage. The Inflation Reduction Act keeps that reduction in place, ensuring that coverage continues to be more affordable than it used to be.

Is Anything Changing?

There are always annual changes for exchange/marketplace enrollees, and that continues to be true for 2023.

For example, enrollees in some areas will find that new insurers will be offering plans for 2023, while enrollees in other areas will find that their insurer is no longer offering plans and they have to switch to a different insurer for 2023.

And even though the ARP’s subsidy enhancements are remaining in place through 2025, subsidy amounts will still change from 2022 to 2023. That’s because the benchmark plan (on which subsidy amounts are based) can change from one year to the next, both in terms of what plan holds that spot and how much it costs.

The benefits a plan offers can also change from one year to the next, including things like the amount of the co-pays, deductible, and out-of-pocket maximum, as well as the drug formulary and provider network.

ACA Eligibility and Enrollment Period

It’s important, every year, for exchange/marketplace enrollees to actively compare their plan options during open enrollment.

Most states have open enrollment from November 1 to January 15. It gives people a chance to newly enroll or switch plans if there’s a better option available for the coming year.

Although the ARP’s subsidy enhancements will remain in effect in 2023 due to the Inflation Reduction Act, consumers must compare their coverage options carefully. Letting an existing plan renew might be the best choice. But it’s a good idea to actively check if there might be better options.

In most states, plan selections must be made by December 15 to have coverage effective January 1. Also, in most states, open enrollment will continue through at least January 15 (with coverage effective February 1 if the enrollment is completed after December 15).

This gives people a chance to select a different plan even after the start of the year, which can be very useful if someone didn’t notice that their after-subsidy premium was changing more than they expected.

This could happen, for example, because a new insurer joined the market with lower-cost plans, pushing down the price of the benchmark plan and thus reducing subsidy amounts.

But the best approach is to make a plan selection by December 15 (or your state’s deadline for a January 1 effective date, if different). This will ensure that you have one plan for the entire coming year, with one deductible and one out-of-pocket cap.

If you start the year with Plan A and then switch to Plan B as of February, your deductible and out-of-pocket spending will reset to $0 when the new plan starts. If you had medical claims in January, that could result in higher total out-of-pocket costs during the year since you’ll still have to meet the new plan’s cost-sharing requirements as well.

Eligibility Calculator

Nearly all Americans are eligible to enroll in a health plan through the exchange. The only exceptions are people who aren’t legally present in the United States, people who are incarcerated, and people who are enrolled in Medicare.

But subsidy eligibility is much stricter. To be eligible for a subsidy, you must not have access to an employer-sponsored plan that provides minimum value and is considered affordable. You must not be eligible for Medicaid or CHIP (Children's Health Insurance Program).

You must also not be in the coverage gap that still exists for low-income people in 11 states. Unfortunately, these people are not eligible for subsidies due to their low incomes, but they’re also not eligible for Medicaid because their states have refused to implement the ACA’s Medicaid expansion.

Assuming you meet all of those criteria, subsidy eligibility depends on how your household income compares with the poverty level and how much the benchmark plan costs as a percentage of your income.

Applying to a health plan through the exchange will allow you to apply for premium subsidies. But you can also use HealthCare.gov’s plan comparison tool to estimate your subsidy eligibility without creating an account or providing any identifying information.

(HealthCare.gov is used in 33 states; if you’re in Washington, D.C., or one of the other 17 states, that tool will point you to the website used in your state, which will have a similar plan comparison tool available.)

Kaiser Family Foundation also has a subsidy calculator that you can use to get an idea of how much your subsidy would be.

These tools are generally updated in late October with data for the coming year. You’ll see current-year pricing and subsidy amounts if you use them before that point.

This can give you a rough idea of what to expect, but premiums and subsidy amounts change from year to year—sometimes by quite a bit—so you’ll need to check again once the coming year’s numbers are available.

Summary

The ACA created income-based premium tax credits (premium subsidies) that have made self-purchased health coverage more affordable since 2014.

The American Rescue Plan (ARP) enhanced these subsidies, making them larger and more widely available. As a result, a record number of people enrolled in plans through the exchange/marketplace in 2022, and plans are more affordable than they used to be.

The ARP’s subsidy enhancements were due to expire at the end of 2022, but the Inflation Reduction Act, enacted in August 2022, extended them through 2025. As a result, the “subsidy cliff” will not return in 2023, and subsidies will continue to be larger and more widely available than they were before the ARP.

A Word From Verywell

If you don’t have employer-sponsored health insurance, Medicare, or Medicaid/CHIP, you probably have to purchase your health coverage. Millions of Americans do this through the exchange/marketplace, and most benefit from the ACA subsidies that have been enhanced under the American Rescue Plan and Inflation Reduction Act.

But millions of Americans also choose to go without coverage or rely on substandard plans such as short-term health insurance, fixed indemnity plans, or healthcare sharing ministry plans. Often, this is because they don’t think they’d be eligible for ACA subsidies. But with the American Rescue Plan’s subsidy enhancements extended through 2025 by the Inflation Reduction Act, there’s a good chance you would be eligible for a subsidy.

It’s worth your while to check your options in the exchange/marketplace in your state during open enrollment. You can start at HealthCare.gov, and if your state runs its own enrollment platform, you’ll be directed there. This is a better approach than using an online search engine, as you will avoid ending up on a website that sells non-ACA-compliant health plans.