Are Obamacare Premium Tax Credits Ethical for High-Asset Households?

Eligibility is based on income, not assets

Premium tax credits (aka premium subsidies) are a major component of the "affordable" part of the Affordable Care Act (ACA). Without them, coverage in the individual market would be unaffordable for a lot of people.

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To put this into perspective, keep in mind that the average pre-subsidy premium for plans purchased via in 2020 was $575 per person per month. But for the 86% of enrollees who qualified for premium subsidies, the subsidies covered an average of $491 per month, leaving them with an average cost of just $84 per month.

Clearly, the subsidies make health insurance coverage much more realistically accessible than it would otherwise be. But there's a false perception that Obamacare premium subsidies are a form of welfare, and/or that they only benefit low-income households.

Why Premium Subsidies Are Not Welfare

The subsidies are a tax credit—albeit a tax credit that you can take in advance, paid directly to your health insurance company, rather than having to wait to claim on your tax return like other tax credits. And they function much the same as other tax credits that limit eligibility based on income—for example, the saver's credit and the child tax credit.

Other tax-advantaged situations—like traditional IRA contribution deductions if you're covered by a retirement plan at work, Roth IRA contributions, and student loan interest deduction—are also only available if your income is below a certain threshold.

Premium subsidies don't have an asset test, but neither do any of the aforementioned examples of income-limited tax credits and tax-advantaged contributions. That means your eligibility for the tax credit doesn't depend on how much you already have in assets; it only depends on how much you earn during the year.

This is in contrast to programs like TANF (Temporary Assistance for Needy Families), SNAP (Supplemental Nutrition Assistance Program), and non-MAGI Medicaid, all of which have eligibility rules based on assets/resources and/or a work requirement, as well as income limits.

Premium subsidies under the ACA are available for households with income up to 400% of the poverty level. For a family of four, that's $104,800 in 2021 (for 2021 coverage, the 2020 poverty level guidelines are used). That's certainly not low-income by any stretch of the imagination; premium subsidy eligibility extends well into the middle class.

But What About People With Substantial Assets?

One of the issues that sometimes arises regarding premium subsidies has to do with eligibility for high-net-worth households that have significant assets but modest annual income. Early retirees are one example; they may have saved for decades to amass a significant net worth, and are now retired—prior to age 65 when Medicare becomes available—and living off the income created by their investments. As a result, their income could be well within the subsidy-eligible range, despite the fact that they might have six or seven-figure investment portfolios.

Is it ethical for these folks to use the ACA's premium subsidies? The topic comes up on a regular basis on a variety of internet forums, and invariably there are people who claim that the premium subsidies should only be used by people who "need" them, or only by "poor" people.

But neither of these claims has any logical explanation. Premium subsidies are a tax credit. Tax credits aren't based on "need," they're based on numbers. If you qualify based on the IRS rules, you qualify—there's nothing subjective about tax credits.

And as mentioned above, premium subsidies are available to middle-class households—they weren't designed solely for "poor" enrollees.

If the lawmakers who wrote the ACA had intended for premium subsidies to have asset tests (i.e., like SNAP, or Medicaid eligibility for seniors who need nursing home care), they would have included them and they could still decide to do so at some point in the future.

But adding asset tests would have made an already complicated system even more so, and would have stymied the lawmakers' goal, which was to get as many people as possible into the health insurance risk pools in order to reduce the uninsured rate and spread health risk across as broad a pool as possible.

As a result, we have premium subsidies that function much the same as other income-limited tax credits that apply to much of the middle class. Eligibility for those tax credits has nothing to do with assets, and everything to do with income. Of course, it is unethical—and illegal—to misrepresent your income in order to qualify for tax credits. But as long as you're accurately reporting your income to the IRS, there's nothing unethical about taking tax credits when you qualify for them.

Interestingly enough, it's rare to hear people claim that it's unethical to, for example, claim the child tax credit or the saver's credit when the tax filer in question has substantial assets. But for all practical purposes, there's no difference between those tax credits and the premium tax credit, except for the fact that the premium tax credit can be taken in advance throughout the year, and then reconciled on your tax return.

It's also uncommon for anyone to question whether high-net-worth households should be eligible for employer-sponsored health insurance (most are), despite the fact that such plans are heavily tax-advantaged. According to a 2018 CBO report, the government is projected to spend $3.7 trillion subsidizing employer-sponsored insurance from 2018 to 2028 (due to the exclusion of premiums from income and payroll tax), but less than one-fourth of that amount ($0.8 trillion) on premium subsidies for the individual market (this makes sense, given that the population with coverage under employer-sponsored plans is much larger than the population with individual health insurance).

In all likelihood, the political polarization around the ACA is the reason for the misperceptions about the premium subsidies being a form of welfare, when they're actually just an income-limited tax credit, just like others that already existed long before the ACA.

If You're Eligible for a Tax Credit, Take It

In summary, you do not need to worry that it's unethical to claim your premium subsidy because you have a substantial nest egg. It's a tax credit, just like any other tax credit. Accountants tend to advertise that they'll get you every possible tax credit and deduction, and tax filers tend to appreciate any breaks they get on their tax return.

Whether it's deducting things like mortgage interest, HSA contributions, student loan interest, or IRA contributions, or claiming tax credits like the saver's credit or premium tax credit, most tax filers are all too happy to end up with a lower total tax bill. And at the end of the day, that's all the premium tax credit does.

You Can Wait to Claim the Subsidy on Your Tax Return

For some people with significant assets, it might feel more comfortable—and familiar—to pay full price for health insurance throughout the year (assuming you can afford to do so) and then claim the premium tax credit on your tax return using Form 8962.

As long as you:

you can claim your tax credit in advance (i.e., paid directly to your health insurance carrier each month), or on your tax return just as you would any other tax credit.

But either way, rest assured that there's nothing unethical about claiming the premium tax credit if your income makes you eligible for it. Your assets are not part of the equation.

A Word About MAGI Medicaid

The ACA also expanded Medicaid eligibility rules to allow people age 19-64 with household income up to 138% of the poverty level to enroll in Medicaid, and eliminated the asset tests for this population (eligibility for this population is based solely on MAGI).

A subsequent Supreme Court ruling made this optional for states, and there are still some states that have not expanded Medicaid. But in most states, Medicaid eligibility for adults under age 65 includes those with income up to 138% of the poverty level, regardless of their assets.

It's important to understand, however, that in some states, the assets of Medicaid enrollees age 55 and older could be subject to estate recovery after they pass away. If you're 55 or older and eligible for the ACA's expanded Medicaid, you'll want to make sure you understand your state's rules for Medicaid estate recovery and how it might affect the assets you're able to leave to your heirs someday.

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Article Sources
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  1. U.S. Centers for Medicare & Medicaid Services. Effectuated Enrollment for the First Half of 2020. Published December 2020.

  2. U.S. Department of Agriculture. SNAP Eligibility. Updated August 14, 2019.

  3. Kaiser Family Foundation. Explaining Health Care Reform: Questions About Health Insurance Subsidies. Published January 16, 2020.

  4. Congressional Budget Office. Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2018 to 2028. Published May 23, 2018.