No Asset Tests for ACA Subsidies

Medicaid expansion and ACA subsidies depend on income

The Affordable Care Act's (ACA) premium subsidies (premium tax credits) have no asset test. Neither does the expansion of Medicaid under the ACA. In both cases, eligibility is simply based on income. It doesn't matter how much money people have in the bank or the stock market, or how much their homes are worth. The assistance available via expanded Medicaid or premium subsidies depends only on income. (Annual income is used to determine premium subsidy eligibility, although Medicaid eligibility can also be based on monthly income. This makes Medicaid particularly useful for people who experience a sudden drop in income mid-year).

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Medicaid Expansion

In the District of Columbia and the 36 states that have expanded Medicaid (this will increase to 38 in mid-2021, when Medicaid expansion takes effect in Oklahoma and Missouri), Medicaid coverage is available to enrollees with household income up to 138% of the poverty level. That corresponds to an income limit of $17,774 for a single person in 2021, but as the poverty level increases over time, the upper income limit for Medicaid eligibility also increases (asset tests are still used for Medicaid eligibility in some circumstances, including people over the age of 64). 

In most of the remaining 14 states (all but Wisconsin), there are an estimated 2.2 million people who are in the coverage gap, with no realistic access to health insurance—they don't qualify for Medicaid, and their incomes are too low for premium subsidies, which don't extend below the poverty level.

Premium Tax Credits (aka, Subsidies)

In states that haven't expanded Medicaid, eligibility for premium subsidies in the exchange starts at the poverty level and extends up to 400% of the poverty level.

In states that have expanded Medicaid, eligibility for premium subsidies begins where Medicaid eligibility ends (138% of the poverty level) and extends up to 400% of the poverty level.

[Note that Congress is considering COVID relief legislation in 2021 that would temporarily remove the income cap for premium subsidy eligibility, for 2021 and 2022. For this article, however, we'll continue to use the current rules, which limit premium subsidy eligibility to people whose income doesn't exceed 400% of the prior year's poverty level.]

For a family of four applying for 2021 coverage, 400% of the poverty level is $104,800 in annual income. For a household of two, it's $68,960 in annual income (note that this is based on the 2020 poverty level numbers, as the prior year's amounts are always used, but are compared with the enrollee's current income).

It's important to note that some applicants don't qualify for subsidies, despite having an income that's under 400% of the poverty level. This is especially true for younger people (whose premiums are lower because of their age) and people who live in areas where average pre-subsidy premiums are relatively low. This is less common than it was a few years ago, because premiums are significantly higher in most areas than they were in the early years of ACA implementation. But it's important to understand that you won't get a subsidy if coverage in your area is already considered affordable (as a percentage of your income) without a subsidy.

But for everyone legally present in the US with an income up to 400% of the poverty level (except, unfortunately, people affected by the family glitch and the people in the aforementioned Medicaid coverage gap), the ACA guarantees that the second-lowest-cost Silver plan (the benchmark plan) won't cost more than a pre-determined percentage of their income (note that people who are eligible for Medicaid are not eligible for premium subsidies in the exchange, because they have access to other affordable coverage).

What Counts as Income?

Eligibility for expanded Medicaid and premium subsidies under the ACA depends on modified adjusted gross income (MAGI). And there's an ACA-specific MAGI—it is NOT the same as the regular MAGI with which you might already be familiar. You start with your adjusted gross income (AGI), which is Line 11 on the 2020 Form 1040.

Then there are three things that must be added to your AGI in order to get your MAGI to determine subsidy and Medicaid eligibility. If you have income from any of these sources, you have to add it to your AGI (if you don't have income from any of these sources, your MAGI is simply equal to your AGI): 

  • Non-taxable Social Security income
  • Tax-exempt interest income (for example, if you have federally tax-exempt municipal bonds)
  • Foreign earned income and housing expenses for Americans living abroad 

Your subsidy eligibility (and Medicaid eligibility in the states that have expanded Medicaid) depends on your MAGI. But there's no asset test.

Some opponents of the ACA have cried foul, complaining that people with millions of dollars worth of investments can be receiving premium subsidies in the exchange. This is true, although investment income outside of a tax-advantaged account (401k, IRA, HSA, etc.) counts as annual income. So a single person who doesn't work but earns $55,000 in dividends—or capital gains if they sell some of their investments—during the year in a taxable account would not be eligible for premium subsidies in the exchange (the income cap for subsidy eligibility is $51,040 for a single individual purchasing 2021 coverage in the continental U.S.; income limits are higher in Alaska and Hawaii).

Tax Breaks for Health Insurance Are the Norm

But it's also important to note that the ACA's premium subsidies are simply a tax credit. For people who get their health insurance from an employer—which is the majority of non-elderly Americans—there have always been significant tax breaks. The portion of the premiums paid by the employer is tax-free compensation for the employee. And the portion of the premium that's paid by the employee is payroll deducted pre-tax.

There have never been any asset tests—or income tests for that matter—with this arrangement. 

On the other hand, individual health insurance premiums are only fully tax-deductible for self-employed people. People who purchase their own coverage but aren't self-employed (eg, they work for an employer that doesn't offer coverage) can include health insurance premiums in their total medical expenses for the year, but only medical expenses that exceed 7.5% of income can be deducted. And in order to deduct medical expenses that are more than 7.5% of your income, you have to itemize your deductions, which very few people do (the Tax Cuts and Jobs Act, enacted in late 2017, significantly increased the standard deduction, so itemizing deductions isn't worth it for most tax filers).

Now that the ACA is providing premium subsidies to more than 9 million people with individual health insurance, it's essentially leveled the playing field in terms of the tax advantages for people who buy their own health insurance and people who get insurance from an employer (although people who earn more than 400% of the poverty level and buy their own health insurance are still at a disadvantage tax-wise when compared with their counterparts who receive employer-sponsored health insurance).

A person with a million dollars in savings but only $30,000/year in income (either investment income or income from a job, or a combination of the two) can benefit from the ACA's premium tax credit. Some opponents of the ACA have lamented that this is unfair and that it's taking advantage of a "loophole" in the ACA.

But if that same person worked for an employer who provided health insurance, they would be receiving tax-free compensation in the form of the employer's contribution to the premiums and would be paying their own portion of the premiums with pre-tax dollars. She might only be paying $100 or so in premiums each month (or nothing at all, depending on how generous her employer is; the average covered single employee pays just over $100/month for their coverage, while their employer pays an average of more than $500/month). And yet this is rarely perceived as a loophole, nor is it seen as rich people "taking advantage" of the system. 

When viewed from this perspective, the ACA's premium tax credits have simply helped to put individual health insurance more on par with employer-sponsored health insurance. And they've also made it possible for people younger than 65 to take the plunge into self-employment, part-time work, or early retirement, without having to worry that health insurance premiums will eat up all of their savings before they reach Medicare age.

The tax advantages of employer-sponsored health insurance are not a loophole in the tax code. And neither are premiums tax credits in the individual market for high-assets enrollees.

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Article Sources
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  1. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation. U.S. federal poverty guidelines used to determine financial eligibility for certain federal programs. Updated January 13, 2021.

  2. Garfield R, Orgera K, Damico A. The coverage gap: uninsured poor adults in states that do not expand medicaid. The Kaiser Family Foundation. Updated January 21, 2021.

  3. U.S. House of Representatives; Ways and Means Committee, Chairman Richard Neal. Chairman Richard Neal Announces Markup of COVID-19 Relief Measures. February 8, 2021.

  4. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation. U.S. federal guidelines used to determine financial eligibility for certain federal programs: HHS Poverty Guidelines for 2019. Updated January 17, 2020.

  5. Norris L. I thought subsidies were available for anyone with incomes up to 400 percent of poverty level, but the calculators I’ve used say our family doesn’t qualify. Why? Updated April 7, 2020.

  6. Norris L. Is the IRS changing how much I’ll have to pay for my health insurance next year? Published August 14, 2019.

  7. Brooks T. Health policy brief: the family glitch. Health Affairs. Published November 10, 2014

  8. UC Berkeley Labor Center. Modified adjusted gross income under the Affordable Care Act. Updated April 2020. 

  9. US Department of Health and Human Services. Centers for Medicare and Medicaid Services. Effectuated Enrollment for the First Half of 2020. September, 2020.

  10. Kaiser Family Foundation. 2020 Employer Health Benefits Survey. October 8, 2020.

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