How the ACA Health Insurance Subsidy Works

Understanding the ACA's Premium Tax Credit Health Insurance Subsidy

The Affordable Care Act (ACA) includes government subsidies to help people pay their health insurance costs. One of these health insurance subsidies is the premium tax credit which helps pay your monthly health insurance premiums.

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Despite significant debate in Congress over the last few years, premium subsidies continue to be available in the health insurance marketplace/exchange in every state. And the American Rescue Plan has made the subsidies larger and more widely available for 2021 and 2022.

[Note that the other type of ACA subsidy, cost-sharing reductions, are also still available to eligible enrollees, despite the fact that the Trump administration eliminated funding for them in the fall of 2017. Insurers simply add the cost to premiums instead, which are largely offset by correspondingly larger premium subsidies, making coverage even more affordable for many enrollees.]

The premium tax credit/subsidy is complicated. In order to get the financial aid and use it correctly, you have to understand how the health insurance subsidy works. Here's what you need to know to get the help you qualify for and use that help wisely.

How Do I Apply for the Premium Tax Credit Health Insurance Subsidy?

Apply for the premium tax credit through your state’s health insurance exchange. If you get your health insurance anywhere else, you can’t get the premium tax credit.

If you're uncomfortable applying on your own for health insurance through your state's exchange, you can get help from a licensed health insurance broker who is certified by the exchange, or from an enrollment assister/navigator. These folks can help you enroll in a plan and complete the financial eligibility verification process to determine whether you're eligible for a subsidy.

If you're in a state that uses HealthCare.gov as its exchange (most states do), you can use this tool to find an exchange-certified broker who can help you pick a health plan. If you already know what plan you want and just need someone to help you with the enrollment process, there are also navigators and enrollment counselors who can assist you, and you can use the same tool to find them. If you're in a state that runs its own exchange, the exchange website will have a tool that will help you find enrollment assisters in your area (if you're not sure whether your state has its own exchange platform or not, you can start at HealthCare.gov and select your state; if your state does not use HealthCare.gov, they will point you to the correct website).

Will I Qualify for the Subsidy?

Prior to 2021, the rule was that households earning between 100% and 400% of the federal poverty level could qualify for the premium tax credit health insurance subsidy (the lower threshold is 139% of the poverty level if you're in a state that has expanded Medicaid, as Medicaid coverage is available below that level; the majority of the states have expanded Medicaid). Federal poverty level (FPL) changes every year, and is based on your income and family size.

You can look up this year’s FPL here, and this article explains how income is calculated under the ACA.

But the American Rescue Plan (ARP) has changed the rules for 2021 and 2022 (these changes may ultimately become permanent, but for now, they are only in effect through 2022): Instead of capping subsidy eligibility at an income of 400% of the poverty level, the ARP ensures that households with income above that level will not have to pay more than 8.5% of their income for the benchmark plan.

If the benchmark plan costs more than 8.5% of income, a subsidy is available, regardless of how high the income is. So the ARP accounts for the fact that full-price health insurance premiums are much higher in some areas than in other areas, and are higher for older enrollees. Subsidies are available in 2021 and 2022 to smooth out these discrepancies. But if a household earning more than 400% of the poverty level can pay full price for the benchmark plan and it won't cost more than 8.5% of their income, there is still no subsidy available.

The prior year's FPL figures are used to determine premium subsidy amounts. For example, if you applied for a 2021 Obamacare plan during open enrollment in the fall of 2020, OR if you apply for 2021 coverage in mid-2021 using a special enrollment period or the COVID-related enrollment period that runs through mid-August in most states (no qualifying event necessary), you'll use the FPL figures from 2020. That's because open enrollment for 2021 coverage was conducted in late 2020, which was before the 2021 FPL numbers became available.

For consistency, the same FPL numbers are used for the full coverage year, so they continue to be used for people who enroll during special enrollment periods, even after the new poverty level numbers have been published. The new FPL numbers come out each year in late January, but they aren't used for subsidy eligibility determinations until open enrollment begins again in November, for coverage effective the following year (they do start to be used immediately, however, to determine eligibility for Medicaid and CHIP).

Due to the job losses—and associated loss of employer-sponsored health insurance—caused by the COVID-19 pandemic, the number of people who have qualified for special enrollment periods to enroll in a plan through the exchange in 2020 and 2021 has been far higher than usual. And the COVID-related enrollment window in 2021 doesn't require a qualifying event; in most states, it's simply an extended open enrollment window.

In addition, 2021 premium subsidies are larger and available to more people as a result of the American Rescue Plan. The COVID-related enrollment window allows uninsured Americans to sign up for health insurance, but it also gives current enrollees an opportunity to switch to a different plan if that would allow them to better take advantage of the newly increased subsidies (for example, a person who had a bronze plan might find that with their larger subsidy, they can now afford a silver plan with built-in cost-sharing reductions).

Although there is no upper income limit for subsidy eligibility in 2021 and 2022, there is still a lower limit. In states that have expanded Medicaid (most of the country), Medicaid is available to adults under age 65 with a household income of up to 138% of the federal poverty level (FPL). In states that have not expanded Medicaid, subsidies are available if income is at least 100% of the poverty level. For 2021 coverage in the continental U.S., those amount to the following dollar amounts:

  • Household of one: 138% of FPL is $17,774, and 100% of FPL is $12,880
  • Household of four: 138% of FPL is $36,570, and 100% of FPL is $26,500

(Although premium subsidies are not available if household income is below the poverty level, subsidies are available if a person is receiving unemployment compensation in 2021, regardless of the actual amount of their income.)

But even if you meet the income qualifications, you may still be ineligible for a subsidy. That would be the case if:

  • The second-lowest-cost silver plan in your area is considered affordable at your income level, even without a subsidy. But this phenomenon is much less common now than it was in 2014 and 2015, because average premiums have increased significantly, making premium subsidies necessary for most enrollees. This is especially true now that the American Rescue Plan has reduced the percentage of income that people have to pay for the benchmark plan in 2021 and 2022.
  • You're eligible for an affordable, minimum value plan from an employer (yours or your spouse's). For 2020, "affordable" means that the coverage costs no more than 9.83% of household income. Note that affordability of employer-sponsored plans is calculated based only on the employee's costs, regardless of what it costs to add a spouse and dependents. But the spouse and dependents are not eligible for a subsidy in the exchange if the employee's coverage is considered affordable for the employee and is offered to the family members. This is called the family glitch, and the American Rescue Plan did not change this.
  • You're incarcerated, or not living in the U.S. legally.

How Much Money Will I Get?

The exchange will calculate your premium subsidy amount for you. But if you want to understand how that calculation works, you have to know two things:

  1. Your expected contribution toward the cost of your health insurance
    You can look this up in the table at the bottom of the page. Note that it changes each year, although Section 9661 of the American Rescue Plan has created new set percentages for 2021 that will remain unchanged in 2022.
  2. The cost of your benchmark health plan
    Your benchmark plan is the second-lowest-cost silver-tiered health plan available in your area. Your health insurance exchange can tell you which plan this is and how much it costs (the cost of the benchmark plan varies from one person to another, even in the same location, based on the person's age). You can also locate it on your own by simply getting quotes for yourself on the exchange, sorting them by price (that's typically the default), and then looking at the second-lowest-cost silver plan.

Your subsidy amount is the difference between your expected contribution and the cost of the benchmark plan in your area.

See an example of how to calculate your monthly costs and your subsidy amount at the bottom of the page. But know that the exchange will do all of these calculations for you—the example is just to help you understand how it all works, but you don't have to do these calculations to get your premium tax credit! If you're in a state where the state-run exchange hasn't yet updated its calculations to account for the American Rescue Plan's additional premium subsidies, you can use the Kaiser Family Foundation's calculator.

Can I Save Money By Buying a Cheaper Plan, or Must I Buy the Benchmark Plan?

Just because the benchmark plan is used to calculate your subsidy doesn’t mean you have to buy the benchmark plan. You may buy any bronze, silver, gold, or platinum plan listed on your health insurance exchange. You may not use your subsidy to buy a catastrophic plan, though, and premium subsidies are never available if you shop outside the exchange (if you shop outside the exchange, you won't be able to go back and claim the premium subsidy tax credit when you file your taxes either; because the subsidy is more widely available in 2021 due to the American Rescue Plan, some people with off-exchange coverage will want to consider switching to the exchange during the COVID-related enrollment window that continues through mid-August in most states) .

If you choose a plan that costs more than the benchmark plan, you’ll pay the difference between the cost of the benchmark plan and the cost of your more expensive plan—in addition to your expected contribution.

If you choose a plan that’s cheaper than the benchmark plan, you’ll pay less since the subsidy money will cover a larger portion of the monthly premium.

If you choose a plan so cheap that it costs less than your subsidy, you won’t have to pay anything for health insurance. However, you won’t get the excess subsidy back. Note that for the last few years, people in many areas have had access to bronze or even gold plans with no premiums—after the application of their premium tax credits—due to the way the cost of cost-sharing reductions has been added to silver plan premiums starting in 2018. And as a result of the American Rescue Plan, far more people are eligible for premium-free plans at the bronze, gold, and even silver levels.

If you’re trying to save money by choosing a plan with a lower actuarial value, (like a bronze plan instead of a silver plan), be aware that you’ll likely have higher cost-sharing (deductible, coinsurance, and/or copays) when you use your health insurance. But in another oddity that began in 2018, gold plans in some areas are actually less expensive than silver plans (since the cost of cost-sharing reductions has been added to silver plan premiums), despite the fact that the gold plans have higher actuarial value.

However, if you have an income below 250% of FPL—and especially if it's below 200% of FPL—consider choosing a silver-tier plan, as the actuarial value of that plan will be even better than a gold plan, or in some cases, even better than a platinum plan. That's because there’s a different subsidy that lowers copays, coinsurance, and deductibles for people with incomes below 250% of the poverty level. Eligible people can use it in addition to the premium tax credit subsidy, and it's automatically built into the plan for people with eligible income levels. However, it’s only available to people who choose a silver-tier plan.

The American Rescue Plan makes it easier for lower-income enrollees to afford a silver plan, by enhancing the premium subsidies and thus bringing down the after-subsidy cost of these plans. For people with income up to 150% of the poverty level, the after-subsidy premium is $0 for the lowest-cost and second-lowest-cost silver plan in 2021 and 2022.

Do I Have to Wait Until I File My Taxes to Get the Subsidy Since It's a Tax Credit?

You don’t have to wait until you file your taxes. You can get the premium tax credit in advance—paid directly to your insurance company each month—which is what most people do. However, if you’d rather, you may choose to get your premium tax credit as a tax refund when you file your taxes instead of having it paid in advance.

This option is only available if you enrolled in a plan through the exchange. If you buy your plan directly from an insurance company, you won't be eligible for up-front premium subsidies, and you also won't be able to claim the subsidy on your tax return.

If your income is so low that you don’t have to file taxes, you can still get the subsidy, although you won't be eligible for a subsidy if your income is below the poverty level (or below 139% of the poverty level in states that have expanded Medicaid).

When the subsidy is paid in advance, the amount of the subsidy is based on an estimate of your income for the coming year. If the estimate is wrong, the subsidy amount will be incorrect.

If you earn less than estimated, the advanced subsidy will be lower than it should have been. You’ll get the rest as a tax refund.

If you earn more than estimated, the government will send too much subsidy money to your health insurance company. You’ll normally have to pay back part or all of the excess subsidy money when you file your taxes. For 2020 only, however, the American Rescue Plan removes the requirement that excess premium subsidies be repaid. People who would have had to repay excess premium subsidies for 2020 do not have to do so, and do not have to file Form 8962 with their 2020 tax return. This is a one-time provision, however, and repayment of execess premium tax credits will resume for the 2021 tax year.

Regardless of whether you take your subsidy up-front throughout the year or in a lump sum on your tax return, you'll need to file Form 8962 with your tax return. That's the form for reconciling (or claiming in full) your premium tax credit (this does not apply for people who would have had to repay some or all of their premium tax credit for 2020).

How Do I Get the Money?

If you choose to get the premium tax credit in advance, the government sends the money directly to your health insurance company on your behalf. Your health insurer credits that money toward your cost of health insurance premiums, decreasing how much you'll pay each month.

If you choose to get the premium tax credit as a tax refund, the money will be included in your refund when you file your taxes. This could mean a big tax refund. But, you'll pay more for health insurance each month since you’ll be paying both your share of the premium and the share that would be have been covered by the subsidy if you'd chosen the advanced payment option. It will come out even in the end, but if your cash flow is relatively low, you might find the advance payment option more user-friendly. 

If you get your subsidy when you file your income taxes rather than in advance, you’ll get the correct subsidy amount because you’ll know exactly how much you earned that year. You won’t have to pay any of it back.

What Else Do I Need To Know About How the Health Insurance Subsidy Works?

If your subsidy is paid in advance, notify your health insurance exchange if your income or family size changes during the year. The exchange can re-calculate your subsidy for the rest of the year based on your new information. Failing to do this could result in getting too big or too small a subsidy, and having to make significant adjustments to the subsidy amount at tax time.

Example of How To Calculate the Health Insurance Subsidy

Keep in mind that the exchange will do all of these calculations for you. But if you're curious about how they come up with your subsidy amount, or if you want to double-check that your subsidy is correct, here's what you need to know:

  1. Figure out how your income compares to FPL.
  2. Find your expected contribution rate in the table below.
  3. Calculate the dollar amount you’re expected to contribute.
  4. Find your subsidy amount by subtracting your expected contribution from the cost of the benchmark plan.

Tom is single with an ACA-specific modified adjusted gross income of $24,000 in 2021. FPL for 2020 (used for 2020 coverage) is $12,760 for a single individual.

  1. To figure out how Tom’s income compares to FPL, use:
    income ÷ FPL x 100.
    $24,000 ÷ $12,760 x 100 = 188.
    Tom’s income is 188% of FPL.
  2. Using the table below, Tom is expected to contribute between 0% and 2% of his income. We have to determine what percentage of the way along that spectrum he is with an income of 188% of FPL. We do that by taking 188-150 = 38, and then dividing that by 50 (the total difference between 150% and 200% of FPL). 38/50 = 0.76, or 76%.
  3. Next, we determine what number is 76% of the way between 0 and 2. This one is pretty easy, since we're starting at 0. We just need to take 2 and multiply it by 0.76, then add the result to 0. We end up with 1.52.
  4. Tom is expected to pay 1.52% of his income for the benchmark silver plan.
  5. To calculate how much Tom is expected to contribute, use this equation:
    1.52 ÷ 100 x income= Tom's expected contribution.
    1.52 ÷ 100 x $24,000 = $364.80.
    Tom is expected to contribute $364.80 for the year, or $30.40 per month, toward the cost of his health insurance. The premium tax credit subsidy pays the rest of the cost of the benchmark health plan.
  6. Let's say the benchmark health plan on Tom’s health insurance exchange costs $3,900 per year or $325 per month. Use this equation to figure out the subsidy amount:
    Cost of the benchmark plan – expected contribution = amount of the subsidy.
    $3,900 - $364.80 = $3,535.20.
    Tom’s premium tax credit subsidy will be $2,582.10 per year or $294.60 per month.

If Tom chooses the benchmark plan, or another $325 per month plan, he’ll pay about $30 per month for his health insurance. If he chooses a plan costing $425 per month, he’ll pay about $130 per month for his coverage. But if he chooses a plan costing about $295 per month or less, he'll pay nothing, since his premium subsidy will cover the full amount of the premium.

Your Expected Contribution Toward Your 2021 Health Insurance Premiums (updated under American Rescue Plan)

If your income is: Your expected contribution will be:
up to 150% of poverty level 0% of your income
150%-200% of poverty level 0%-2% of your income
200%-250% of poverty level 2%-4% of your income
250%-300% of poverty level 4%-6% of your income
300%-400% of poverty level 6%-8.5% of your income
400% of poverty level or higher 8.5% of your income
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8 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Rae, Matthew; Cox, Cynthia; Claxton, Gary; McDermott, Daniel; Damico, Anthony. Kaiser Family Foundation. How the American Rescue Plan Act Affects Subsidies for Marketplace Shoppers and People Who Are Uninsured. March 25, 2021.

  2. Norris, Louise. healthinsurance.org. Biden Administration Announces COVID-Related Special Enrollment Period. January 28, 2021.

  3. Schwab, Rachel; Giovannelli, Justin; Lucia, Kevin. The Commonwealth Fund. During the COVID-19 Crisis, State Health Insurance Marketplaces Are Working to Enroll the Uninsured. May 19, 2020.

  4. Norris, Louise. healthinsurance.org. American Rescue Plan Delivers $0 Silver Premiums to Unemployed. March 11, 2021.

  5. Internal Revenue Service. Revenue Procedure 2020-36.

  6. Congress.gov. H.R.1319, the American Rescue Plan Act. Section 9661: Improving Affordability by Expanding Premium Assistance for Consumers. Enacted March 11, 2021.

  7. Kaiser Family Foundation. Analysis: 4.7 Million Uninsured People Nationally Could Get a No-Premium Bronze Plan in the ACA Marketplace,Though Deductibles Would be High. December 10, 2019.

  8. Internal Revenue Service. IRS suspends requirement to repay excess advance payments of the 2020 Premium Tax Credit; those claiming net Premium Tax Credit must file Form 8962. April 9, 2021.