How the ACA Health Insurance Subsidy Works

Understanding the ACA's Premium Tax Credit Health Insurance Subsidy

Need help paying for health insurance? The health insurance subsidy might be your lifeline. Image © Ascent Xmedia/Getty Images

The Affordable Care Act 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.

Under the Trump Administration, Republican lawmakers spent much of 2017 trying to repeal the ACA and replace it with various other proposals, but they were not successful.

The Tax Cuts and Jobs Act (H.R.1), which was enacted in December 2017, will eventually repeal the ACA's individual mandate penalty, but that won't take effect until 2019 (there is still a penalty for being uninsured in 2018). And January's continuing budget resolution delayed a few of the ACA's taxes, including the Cadillac Tax

But otherwise, nothing has changed about the ACA. Cost-sharing reductions are still available to eligible enrollees, despite the fact that the Trump Administration eliminated funding for them in the fall of 2017 (insurers simply added the cost to premiums instead, which are largely offset by correspondingly larger premium subsidies). And the premium tax credit, aka premium subsidy, remains in effect, and is still available for people who purchase coverage through the exchange.

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.

If you don't use it correctly, you could end up in a financial pickle. 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 (Senators Lamar Alexander and Bob Corker, both Republicans representing Tennessee, introduced the American Health Care Options Act of 2017, which would have allowed enrollees to obtain the premium tax credit for plans purchased outside the exchange, in the event that no insurers offer plans in the exchange in a particular area; the legislation did not progress in the 2017 session, and all areas of the country did end up having plans available through the exchange for 2018).

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 (there's no charge for their assistance).

Will I Qualify for the Subsidy?

People making between 100 and 400 percent of the federal poverty level can qualify for the premium tax credit health insurance subsidy (the lower threshold is 139 percent of the poverty level if you're in a state that has expanded Medicaid, as Medicaid coverage is available below that level).

Federal poverty level changes every year, and is based on your income and family size. You can look up this year’s FPL here.

You'll use this year's FPL figures to apply for next year's health insurance subsidy. For example, if you applied for a 2018 Obamacare plan during open enrollment in the fall of 2017, OR if you're applying for 2018 coverage in mid-2018 using a special enrollment period (triggered by a qualifying event), you'll use the FPL figures from 2017. That's because open enrollment for 2018 coverage was conducted in late 2017, which is before the 2018 FPL numbers become available. For consistency, the same FPL numbers are used for the full coverage year.

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.

For coverage effective in 2018, using 2017 FPL levels, in the continental U.S. (FPL is higher in Alaska and Hawaii), you'll qualify for the health insurance subsidy as an individual with an income range of:

  • $12,060 to $48,240 for a single individual (the lower threshold is $16,763 if you're in a state that has expanded Medicaid)
  • $16,240 to $64,960 for a couple (the lower threshold is $22,823 if you're in a state that has expanded Medicaid
  • $24,600 to $98,400 for a family of four (the lower threshold is $33,194 if you're in a state that has expanded Medicaid).

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.
  • You're eligible for an affordable, minimum value plan from an employer (yours or your spouse's). 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.

How Much Money Will I Get?

In order to figure out how much your premium tax credit will be, 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. The 2018 contribution percentages were detailed in IRS Revenue Procedure 2017-36, and were actually a decrease from the contribution percentages for 2017 (this was the first time that the percentages have decreased from one year to the next, instead of increasing).
  2. The cost of your benchmark health plan
    Your benchmark plan is the silver-tiered health plan with the second lowest monthly premiums in your area. Your health insurance exchange can tell you which plan this is and how much it costs. 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!).

Can I Buy a Cheaper Plan To Save Money, 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.

If you choose a plan that costs more than the benchmark plan, in addition to your expected contribution, you’ll pay the difference between the cost of the benchmark plan and the cost of your more expensive plan. 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 people in many areas have access to bronze plans with no premiums for 2018—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 for 2018).

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 coinsurance and copays when you use your health insurance. But in another oddity for 2018 coverage, 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 percent of FPL—and especially if it's below 200 percent 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 poverty level. Eligible people can use it in addition to the premium tax credit subsidy. However, it’s only available to people who choose a silver-tier plan.

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. 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 percent of the poverty level in states that have expanded Medicaid).

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.

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 you're low on cash-in-hand, you might find the advance payment option more user-friendly. 

Why Wait Until I File My Taxes To Get the Subsidy?

Most people don’t want to wait; they prefer to choose the advance payment option. However, consider opting to get the subsidy along with your tax refund if:

  • Your income is very close to 400 percent of FPL.
  • Your income varies from year to year so you’re not sure how much you’ll make.

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 have to pay back part or all of the excess subsidy money when you file your taxes. Even worse, if your actual income ended up more than 400 percent of FPL, you’ll have to pay back every penny of the subsidy. This could be thousands of dollars.

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 income of $23,000 per year. FPL for 2017 (used for 2018 coverage) is $12,060 for single people.

  1. To figure out how Tom’s income compares to FPL, use:
    income ÷ FPL x 100.
    $23,000 ÷ $12,060 x 100 = 191.
    Tom’s income is 191 percent of FPL.
  2. Using the table below, Tom is expected to contribute between 4.03 to 6.34 percent of his income. We have to determine what percentage of the way along that spectrum he is with an income of 191 percent of FPL. We do that by taking 191-150 = 41, and then dividing that by 50 (the total difference between 150 and 200 percent of FPL. 41/50 = 0.82, or 82 percent.
  3. Next, we determine what number is 82 percent of the way between 4.03 and 6.34. We use 6.34-4.03 = 2.31, and take 82 percent of that. 2.31 multiplied by 0.82 = 1.89. So we start with 4.03 and add 1.89, and that gets us 82 percent of the way along that range. 4.03+1.89 = 5.92
  4. Tom is expected to pay 5.92 percent of his income for the benchmark silver plan.
  5. To calculate how much Tom is expected to contribute, use this equation:
    5.92 ÷ 100 x income= Tom's expected contribution.
    5.92 ÷ 100 x $23,000 = $1,361.60.
    Tom is expected to contribute $1,361.60 for the year, or $113.47 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. The benchmark health plan at 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 - $1,361.60 = $2,538.40.
    Tom’s premium tax credit subsidy will be $2,538.40 per year or $211.53 per month.

If Tom chooses the benchmark plan, or another $325 per month plan, he’ll pay $113.47 per month for his health insurance. If he chooses a plan costing $425 per month, he’ll pay $213.47 monthly for his health insurance. If he chooses a plan costing $225 per month, he’ll only pay $13.47 per month for his health insurance.

Your Expected Contribution Toward Your 2018 Health Insurance Premiums

If your income is:Your expected contribution will be:
100%-132% of poverty level2.01% of your income
133%-149% of poverty level3.02%-4.03% of your income
150-%-199% of poverty level4.03%-6.34% of your income
200%-249% of poverty level6.34%-8.1% of your income
250%-299% of poverty level8.1%-9.56% of your income
300%-400% of poverty level9.56% of your income
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