Health Insurance Subsidies When You Add or Subtract Family Members

If you buy your own health insurance (as opposed to getting it from an employer), you're probably aware by now that there are premium subsidies available through the exchange/marketplace if your income is within the eligible range.

And you've probably also heard that those subsidies are larger and more widely available through the end of 2022, thanks to the American Rescue Plan. (The subsidy enhancements could be extended for another three years under the Inflation Reduction Act of 2022.)

But there's still plenty of confusion about exactly how the subsidies work. This article will explain how premiums change when family members are added to the plan or removed from the plan, and how the premium subsidy changes in that situation can sometimes be counterintuitive.

Changes in ACA Subsidies Can Be Confusing

In some circumstances, the interaction between income, family size, and exchange enrollment creates results that can be counter-intuitive—things like a decrease in after-subsidy premiums when you add a new baby to the plan, or no change in after-subsidy premiums when one family member switches to other coverage, like Medicare.

There are a few points to keep in mind here:

• The subsidies are designed to limit the amount you pay for your household's coverage through the exchange. But amounts you pay for other coverage outside the exchange (e.g., from an employer, or from Medicare) are not applied to the limit.
• Subsidies are based on the cost of the benchmark plan (second-lowest-cost silver plan) but you can apply the subsidy to any metal-level plan.
• Your household's total income is taken into consideration, regardless of how many family members are enrolling in the exchange plan.
• The total number of people in your household are counted in terms of determining where your income is in relation to the poverty level, regardless of how many family members are enrolling in the exchange plan.
• For the most part, your income is what's reflected on your tax return. In most cases, it's your adjusted gross income, although there's a specific methodology for calculating income under the Affordable Care Act, and for some enrollees, it won't match their AGI
• There's a provision to allow young adults to remain on their parents' health insurance until they turn 26, regardless of whether the parents claim them as dependents. If a young adult is included on a parent's health insurance plan through the exchange, the young adult's subsidy amount would still be based on their own income. Depending on the state, the exchange might be able to process this under one application, or they may require two separate applications. The young adult and the parents would file separate tax returns after the end of the year and would reconcile their subsidy amounts separately, since they are two separate tax households.

The Kaiser Family Foundation has a subsidy calculator that allows you to either pick a state or use the US average. For these examples, we'll use the US average, but you can play around with the calculator and get more exact numbers for your own situation.

You'll see some scenarios below that will help you understand how the subsidy is calculated and how it relates to your household. In all cases, the examples use the Kaiser Family Foundation calculator for 2022 health coverage and rates are based on the US average costs, assuming the enrollees select the second-lowest-cost silver plan (i.e., the benchmark plan).

Spouse Moving Onto Medicare

Javier and Pauline are 60 and 64, respectively. They both have coverage in the exchange under the benchmark plan in their area, and their household income is $50,000. Using the U.S. average costs, their subsidy in 2021 is $1,728 per month. Their after-subsidy premium for the second-lowest-cost silver plan (ie, the benchmark plan) is $228 per month, which is 5.48% of their household income (before the American Rescue Plan was enacted, they were expected to spend 9.53% of their income for the benchmark plan, but that was reduced for 2021 and 2022, resulting in a larger premium subsidy).

Now let's say Pauline turns 65 and moves onto Medicare. She'll likely qualify for premium-free Medicare Part A, but she'll have a monthly premium for Medicare Part B, and if she opts for supplemental coverage, she'll also have a premium for a Medigap plan and Part D prescription drug coverage.

But even though she'll be paying premiums for some parts of her Medicare coverage, those premiums will not be counted towards the 5.48% of household income that the Gutierrezes are expected to pay for the benchmark plan in the exchange.

So when you run the numbers again, with a household of two but only one person (Javier) enrolling in coverage through the exchange, you still come up with an after-subsidy premium of $228 per month for the second-lowest-cost silver plan. The total subsidy amount will only be $701 per month, however, instead of the $1,728 per month subsidy that the Gutierrezes were getting when Javier and Pauline were on the exchange plan together.

This is because they still have a household of two people, and a household income of $50,000. That puts them at 287% of the poverty level (2021 poverty level guidelines are used to determine subsidy eligibility for plans with 2022 effective dates; that delay applies every year, since open enrollment for a given year's coverage occurs before the poverty level numbers for that year have been published).

Since the household's income is at 287% of the poverty level, the household's maximum total after-subsidy premium for the benchmark plan in the exchange is 5.48% of the household's income (this percentage is calculated based on this household's position on the income spectrum, under the terms of the American Rescue Plan). It doesn't matter how many members of the household are actually enrolled in the exchange plan, or how much the household spends in premiums for other plans outside the exchange.

Adding Your Spouse to Your Plan

Amy is 51 and Bill is 53. Amy has had her own health insurance from her employer. Her employer doesn't offer coverage for spouses, so Bill has been getting coverage in the exchange since 2014.

(Note that if Amy's employer did offer coverage to spouses, Bill would not have been eligible for a subsidy in the exchange as long as Amy's insurance was affordable for just her own coverage—this is known as the family glitch, but it doesn't apply in this case since Bill wasn't eligible to join Amy's plan. The family glitch is expected to be fixed by 2023, but the scenarios we're describing here would still apply, in terms of how subsidies are calculated when members of a household have coverage from multiple sources.)

Amy and Bill's household income is $48,000 per year. Based on the US average, Bill pays $201 per month in 2022 for the benchmark plan in the exchange, and the remaining $498 per month is covered by his subsidy.

Now let's say Amy's employer stops offering health insurance. Loss of coverage is a qualifying event, which means Amy can enroll in a plan in the individual market. If she joins Bill on his benchmark plan, the after-subsidy cost of the plan will still be $201 per month, but the subsidy will jump to $1,137 per month. Amy and Bill are still a household of two, and their income is still the same 276% of the poverty level that it was before. So they still have to pay the same percentage of their income for the benchmark plan in the exchange—it just covers two of them now, instead of one.

This scenario would be different, however, if Amy and Bill were newlyweds. Getting married is also a qualifying event, and assuming Amy didn't have coverage from her employer, she'd be eligible for subsidies in the exchange. But prior to getting married, Bill would have been a household of one, with only his own income counted for subsidy eligibility determination. Once a couple gets married, their income is counted together, and they're a household of two (assuming they don't have other dependents) in terms of comparing that income to the poverty level.

Let's say Bill's income is $20,000 and Amy's is $28,000, and neither of them has access to an employer's plan. Prior to getting married, Bill pays $4 per month for the benchmark plan in 2022, and a subsidy of $695 per month pays the rest of his premium. Amy pays $63 per month, and her subsidy is $576 per month.

Once they get married, their household income is $48,000. Their total after-subsidy premium for the benchmark plan for the two of them is now $201 per month, and their total subsidy is $1,137 per month (note that there's an alternative subsidy calculation for the year of marriage if the combined income would result in excess subsidies having to be repaid to the IRS).

The reason they're paying higher total after-subsidy premiums ($201/month as opposed to a combined $67/month) after they get married is that their total household income is a higher percentage of the poverty level for a household of two than either of them had for a household of one. In order to receive subsidies, married couples must file joint tax returns—they do not have the option to file separately and claim the higher total subsidy that they had prior to getting married.

Adding a Child

In 2013, the federal government finalized rules for setting rates in the new ACA-compliant insurance market. The final rule states that for a single household, no more than three children under the age of 21 will be counted for the purpose of determining the family's premium.

Children from the ages of 21 to 25 are all counted, regardless of how many there are, or how many additional children younger than 21 are in the household.

Tom and Renee are 40 and 39, and they have three kids, ages two, four, and seven. They earn $90,000 per year, and have their family enrolled in the benchmark plan through the exchange. Based on the US average rates, they're paying $420 per month for their coverage, after a subsidy of $1,236 per month picks up the remaining premium.

But if Tom and Renee have a fourth child, they will actually end up paying a smaller after-subsidy premium for their health insurance each month after they add the baby to the plan (a new baby is a qualifying event that triggers a special enrollment period). Their total health insurance premium for the family will still be $1,656 per month, since the insurer isn't allowed to add any additional premium for the fourth child. But they will only be responsible for $309 of it, and their subsidy will grow to $1,347 per month.

This is because their household has grown from five people to six people, which means they've dropped a little bit on the percentage-of-the-poverty-level scale (assuming their income remains at $90,000).

When they had five family members, their $90,000 income put them at 290% of the poverty level. But once they're a family of six, they're only earning 253% of the poverty level. Because the percentage of income that people have to pay for the benchmark plan is based on income, they end up having to pay a slightly smaller percentage of their income for the benchmark plan after the new baby is born.

(Note that depending on where they live, the kids may be eligible for CHIP instead of a premium subsidy, especially once their income drops to 253% of the poverty level. If children are eligible for Medicaid or CHIP, they are not eligible for premium subsidies. In that case, subsidies would only be available for the parents' coverage.)

If Tom and Renee initially have two children and then add a third, their total monthly premium (ie, the amount they pay plus the amount that's covered by their subsidy) will increase, since the insurer adds an additional premium to cover the third child. But because the increase in family size results in the family's household income ending up at a lower percentage of the poverty level, the after-subsidy amount they pay will drop, just as it did in the previous scenario.

Initially, they are a family of four, and their after-subsidy premium is $524 per month, with a subsidy of $870 per month picking up the rest (note that premiums for kids used to only vary based on age once the kid turned 21, but as of 2018, kids' premiums start to increase once they turn 15. For Tom and Renee, this isn't a factor, as their kids are younger than 15).

Once the third baby is born, they're a family of five, and their after-subsidy premium is $420 per month, after a subsidy of $1,236 per month. Their after-subsidy premium goes down when they add a third child, because their income is now a smaller percentage of the poverty level, since they've become a household of five instead of four.

Assuming their income has stayed at $90,000 the whole time, their income was 340% of the poverty level when they were a family of four, but it's 290% of the poverty level once they're a family of five (again, this is for 2022 coverage, so it's based on the 2021 poverty level).

But let's imagine that Tom and Renee have an income of $300,000 per year. Even though the American Rescue Plan has eliminated the "subsidy cliff" through the end of 2022, Tom and Renee would still not qualify for a premium subsidy in most areas of the country with an income that high (since we're using the U.S. average for these calculations, their subsidy amount is $0; in some areas where coverage is particularly high, however, they would actually qualify for a subsidy at that income level as a result of the American Rescue Plan).

If they go from three children to four, they won't pay any additional premiums, because insurers can only charge premiums for the first three children under the age of 21. But if they go from two children to three, their total family premium for the benchmark plan will rise from $1,394 per month to $1,656 per month. This is still only 6.62% of their household income, which is under the 8.5% cap that the American Rescue Plan applies to households earning more than 400% of the poverty level (again, this is why they don't qualify for a subsidy, even with the American Rescue Plan's new rules in place).

Summary

Marketplace health insurance subsidies are based on keeping the cost of the second-lowest-cost silver plan at a certain percentage of household income. The percentage itself is on a sliding scale that depends on the household's income relative to the previous year's poverty level.

The total household income is used, regardless of how many members of the household are applying for coverage in the marketplace. The household's income relative to the poverty level is determined by accounting for all members of the household, regardless of whether all of them are applying for marketplace coverage. And the amount, if any, that some household members spend on non-marketplace coverage is not taken into consideration.

All of this can result in somewhat counterintuitive subsidy changes if a household adds or subtracts family members from the marketplace plan.

A Word From Verywell

If you have questions about how your premiums will change based on various life changes, you can use a subsidy calculator, or reach out to the exchange in your state for help. A trusted broker or local navigator in your community will also be able to help you make sense of it all, and there won't be any charge for their services (note that in a few areas around the country, brokers are allowed to charge fees. But very few brokers have chosen to do so, and they're required to disclose any fees upfront).