The American Rescue Plan and Your Health Insurance

Makes Coverage More Affordable for Many Americans

Kamala Harris, Joe Biden, Chuck Schumer, and Nancy Pelosi, wearing masks and making comments regarding the passage of the American Rescue Plan.

Alex Wong / Getty Images

On March 11, 2021, President Joe Biden signed H.R.1319, the American Rescue Plan Act, into law. This sweeping piece of legislation is designed to provide widespread relief to address the ongoing COVID-19 pandemic. It includes a vast range of provisions.

Among the most widely known are the third round of stimulus checks, enhanced child tax credits, and the extension of additional federal unemployment compensation.

But the legislation also includes several important provisions that make health insurance more affordable for millions of Americans. Let’s take a look at how the provisions work and what consumers can expect:

  • Subsidy cliff temporarily eliminated for marketplace enrollees
  • Enhanced premium tax credits in 2021 and 2022 for people who are already subsidy-eligible
  • Full premium tax credits and cost-sharing reductions for people receiving unemployment compensation in 2021
  • Six months of COBRA subsidies
  • Excess premium subsidies from 2020 do not have to be repaid to the IRS

Subsidy Cliff Temporarily Eliminated

Since 2014, Americans who need to buy their own health insurance have been able to use the exchange/marketplace. Most are eligible for premium tax credits (premium subsidies) that make their coverage much more affordable than it would otherwise be.

However, there has always been an income limit for premium tax credit eligibility. People with household incomes above 400% of the poverty level have been ineligible for premium tax credits.

This was true regardless of where they lived (although the poverty level is higher in Alaska and Hawaii, making the income limit higher in those states) and regardless of how old they were.

These are important factors because full-price health insurance (i.e., without a subsidy) is much more expensive in some parts of the country than in others. It’s also three times as expensive for older enrollees as it is for younger enrollees.

The sharp cutoff for subsidy eligibility at 400% of the poverty level created what was known as a subsidy cliff. It resulted in some people paying well over a third of their annual income for health insurance.

But for 2021 and 2022, Section 9661 of the American Rescue Plan (ARP) has eliminated the subsidy cliff. Instead of an income limit for subsidy eligibility, the new rule says that people who earn 400% of the poverty level or more are only required to spend 8.5% of their household income to buy the benchmark plan.

For people who are younger and/or live in an area where health insurance premiums are lower than average, subsidies still might not be available with incomes much over 400% of the poverty level. But for people who are older and/or live in an area where premiums are expensive, subsidy eligibility under the new rules could extend well above 400% of the poverty level.

Examples of Elimination of the Subsidy Cliff

Some examples help to illustrate what to expect with the elimination of the subsidy cliff in 2021 and 2022:

Avery is 24 and lives in Santa Fe, New Mexico. According to HealthCare.gov’s plan comparison tool, the unsubsidized price of Avery’s benchmark plan is about $273/month in 2021 or $3,276 for the year.

Without the ARP, premium subsidy eligibility ended at 400% of the poverty level, which is $51,040 for a single person in the continental United States in 2021 (that’s based on the 2020 poverty level numbers, as the prior year’s levels are always used).

So let’s say that Avery earns $52,000 in 2021. That means the benchmark plan’s cost ($3,276 for the year) is 6.3% of her annual income.

Under normal rules, Avery is not eligible for a premium subsidy. But even after we account for the American Rescue Plan, Avery still won’t qualify for a premium subsidy due to the low cost of the benchmark plan (unsubsidized) relative to her income.

With an income of $52,000 (just a little above 400% of the poverty level), Avery is expected to pay no more than 8.5% of her income for the benchmark plan. But since we’ve already seen that it’s only 6.3% of her income, a subsidy is still not necessary for Avery.

Now let’s consider Xavier. He’s 62 and lives in Cheyenne, Wyoming. To make the comparison easier, we’ll say that he’s also earning $52,000 in 2021. But in Xavier’s case, the benchmark plan, according to HealthCare.gov, is $1,644/month, or $19,728 for the whole year.

That’s 38% of Xavier’s income. Without the American Rescue Plan, he’d be facing the subsidy cliff, with no subsidy available at all (since his income is over 400% of the poverty level). Even though his premiums would use up 38% of his income, he wouldn’t be eligible for any financial assistance with that cost.

This is where the ARP’s elimination of the subsidy cliff makes a big difference. It caps Xavier’s cost for the benchmark plan at 8.5% of his income, which amounts to $4,420 for the year. The other $15,308 will be covered by the new premium subsidy provided under the American Rescue Plan.

These examples represent extreme opposite ends of the spectrum. Avery is young and lives in an area where health insurance is much less expensive than average. In contrast, Xavier is in an area where health insurance is much more expensive than average, and his age means that he pays nearly three times as much as Avery would if she lived in Cheyenne.

These examples help illustrate how the elimination of the subsidy cliff provides targeted assistance where it’s needed the most. A person who earns more than 400% of the poverty level will not start receiving premium subsidies if the cost of the benchmark plan is already less than 8.5% of their income.

But a person who would otherwise be paying far more than 8.5% of their income for health insurance could be newly eligible for premium subsidies under the ARP, despite having an income above 400% of the poverty level.

Enhanced Premium Tax Credits in 2021 and 2022

In addition to capping benchmark plan premiums at no more than 8.5% of household income, the American Rescue Plan also reduces, for enrollees at all income levels, the percentage of income people have to pay for the benchmark plan.

Ever since the marketplaces and premium subsidies debuted in 2014, a sliding scale was used to determine the percentage of income an enrollee has to pay for the benchmark plan. The person’s subsidy will then pick up the remaining cost of the benchmark plan, or it can be applied to any other metal-level (bronze, silver, gold, platinum) plan.

If the person picks a plan that’s less expensive than the benchmark, their after-subsidy premiums will amount to a smaller percentage of their income. In contrast, if they pick a more expensive plan, their after-subsidy premiums will amount to a larger percentage of their income.

In 2014, the scale ranged from 2% of income to 9.5% of income for people who were subsidy-eligible (again, nobody was subsidy-eligible with an income above 400% of the poverty level).

The exact percentages are adjusted slightly each year, but before the American Rescue Plan, they ranged from 2.07% of income to 9.83% of income in 2021, depending on an applicant’s income.

Under Section 9661 of the American Rescue Plan, however, the percentage of income people have to pay for the benchmark plan has been adjusted. For 2021 and 2022, the range is now 0% of income to 8.5% of income.

This means that people on the lower end of the income scale (up to 150% of the poverty level, or $19,140 for a single person in the continental United States) can enroll in the benchmark plan with no premium at all.

As incomes increase, enrollees have to pay a portion of their income for the benchmark plan, but it’s a smaller portion at all income levels than it would have been without the ARP.

Examples of Enhanced Subsidies

Let’s consider Valentina and her husband Akio. They are both 35 and live in Atlanta. Their household income is $34,480, which puts them right at 200% of the poverty level for a household of two. Under the pre-ARP rules for 2021 coverage, Valentina and Akio had to pay 6.52% of their household income for the benchmark plan.

Under Section 9661 of the ARP, however, they only have to pay 2% of their income for the benchmark plan.

According to HealthCare.gov’s plan comparison tool, the unsubsidized benchmark plan premium for Valentina and Akio is $852/month. Under the pre-ARP rules, they qualify for a premium subsidy of $663/month, which brings their premiums down to an annual total equal to 6.52% of their income.

But under the ARP, they only have to spend 2% of their income for that plan, which amounts to $690 for the year, or a monthly premium of about $58. Since the benchmark plan still has a full-price premium of $852/month, their subsidy will grow to $794/month (an increase of $131/month) to cover all but $58 of the monthly premium.

Valentina and Akio can apply that $794/month subsidy to any metal-level plan available in their area. However, they’ll want to consider the silver options strongly, as those will have built-in cost-sharing reductions since their household income is under 250% of the poverty level.

But let’s say Valentina and Akio decide to enroll in the benchmark plan (which is always a silver plan): Their monthly after-subsidy premiums will drop from about $189/month to about $58/month, thanks to the American Rescue Plan.

People Receiving Unemployment in 2021

The American Rescue Plan includes a provision designed to ensure that people receiving unemployment compensation in 2021 can enroll in robust health insurance without worrying about affording the premiums.

Under ARP Section 9663, if a marketplace enrollee is receiving unemployment compensation at any point during 2021, their total annual income for the year will be counted at no more than 133% of the poverty level to determine subsidy eligibility.

As we saw above, ARP Section 9661 results in a premium-free benchmark plan for applicants with a household income of up to 150% of the poverty level, so this provision ensures that a person receiving unemployment compensation will be eligible for the benchmark plan without having to pay any premiums.

The enrollee’s countable income is also capped at 133% of the poverty level for determining eligibility for cost-sharing reductions.

This means that a person receiving unemployment compensation will be eligible for a premium-free silver plan that includes the strongest level of cost-sharing reductions (making the plan better than a normal platinum plan thanks to increased actuarial value and reduced out-of-pocket limits).

If a person or family receiving unemployment compensation is in the Medicaid coverage gap because their total income is under the poverty level and they live in a state that hasn’t expanded Medicaid, ARP Section 9663(a)(1)(A) clarifies that they are indeed eligible for premium subsidies.

The provisions in ARP Section 9663 continue throughout 2021 (and are retroactive to January 2021), but nothing has changed about the rule that eliminates subsidy eligibility if a person is eligible for an affordable employer-sponsored plan that provides minimum value.

So if a person is receiving unemployment compensation and is eligible for the enhanced premium subsidies and cost-sharing reductions, that would end if and when they again become eligible for an employer-sponsored plan (subsidy eligibility would also likely end for their family members, regardless of whether the employer’s coverage is affordable for the rest of the family).

Taking Advantage of Enhanced Premium Tax Credits

There is a COVID-related enrollment window underway in every state as of March 2021; in nearly every state, it continues through May 15, 2021.

If you’re uninsured, this window is an opportunity to enroll in coverage through the marketplace and take advantage of the newly available additional premium tax credits.

In most states, this window is also an opportunity for people to switch from one plan to another or switch from off-exchange coverage to on-exchange coverage. (If you’re in a state that runs its own exchange instead of using HealthCare.gov, the rules may be more restrictive.)

All of the enhanced premium tax credits described above are available retroactively to January 2021. So if you’ve been enrolled in a marketplace plan since the start of the year, you’ll be able to claim the additional premium tax credits for the first few months of 2021 when you file your 2021 tax return.

If you’re enrolling in an exchange plan during the COVID-related enrollment period, be aware that the new subsidies created by the ARP won’t show up on HealthCare.gov until April 1, and it could be later than that in some of the states that run their own exchanges.

If you enroll before the new subsidies are displayed, your initial subsidy amount (or lack thereof) will reflect the pre-ARP rules. But again, you’ll be able to claim any additional premium subsidies owed to you when you file your 2021 taxes.

The new subsidy amounts will ultimately apply for any month that you have on-exchange coverage in 2021 (or 2022, depending on the circumstances).

You’ll then be able to log back into your exchange account after the new subsidies have been programmed into the system and follow the instructions to activate them so that the exchange starts sending them to your insurer on your behalf.

If you’re already enrolled in an off-exchange plan (i.e., directly through an insurer instead of through the exchange), you’re not eligible for any premium subsidies at all.

In most states, you can switch to an on-exchange plan during the COVID-related enrollment window, but be aware that this will generally mean starting over with a new deductible and out-of-pocket maximum for the year.

If you’re switching to the on-exchange version of the plan you already have, your insurer might allow for a carryover credit of the amount you’ve already spent in out-of-pocket costs, but this is not required (unless a state implements emergency rules to require it) and is not the norm.

Six Months of COBRA Subsidies

The American Rescue Plan also makes it easier for people to hold onto coverage that they had through an employer if they involuntarily lose their job or have their hours reduced to a level that results in a loss of health insurance coverage.

Section 9501 of the ARP creates a new federal subsidy that fully covers the cost of COBRA coverage from April 1 through September 30, 2021 (and according to Section 9501(a)(9)(B), this also includes state continuation coverage, often referred to as mini-COBRA).

Although COBRA itself continues to be available to people who voluntarily leave their jobs or reduce their hours, the COBRA subsidy is only available if the job loss or reduction of hours was involuntary.

The new law also gives people a chance to opt back into COBRA if they had an opportunity to be covered under COBRA but either declined it initially or dropped it at some point.

This only applies for people whose COBRA coverage window would still have been ongoing, so in most cases, that means the COBRA coverage would have started or been scheduled to start within the last 18 months. (Mini-COBRA coverage windows are often shorter, however, with rules that vary by state.)

Under normal rules, there’s only one two-month window during which a person can elect COBRA. Then there’s no opportunity to reinstate it if you decide to cancel it before the scheduled termination date. But the ARP is providing some flexibility on this to give more people an opportunity to take advantage of the federal COBRA subsidies.

The COBRA subsidy ends on the earliest of:

  • September 30, 2021
  • The date that COBRA or mini-COBRA coverage is exhausted
  • The date that the person becomes eligible for another employer-sponsored health plan

The federal COBRA subsidy is available to people who are already covered under COBRA, as well as those who transition to COBRA during the subsidy window. It does not extend a person’s COBRA eligibility, however. If your COBRA coverage is scheduled to terminate at the end of July, that will still happen, and you’ll only get a subsidy through July.

No Repayment of 2020 Excess Premium Subsidies

Premium tax credits are the key to keeping individual/family coverage affordable. Ever since the marketplaces debuted for 2014 coverage, a large majority of enrollees (around 85%) have been eligible for premium tax credits.

Unlike other tax credits, you don’t have to wait to claim the premium tax credits on your tax return. You can do that if you like, but most people who are subsidy-eligible cannot afford to pay full price for their coverage throughout the year and then claim the full tax credit on their tax return.

Instead, most people take the tax credit in advance: The marketplace calculates it based on projected income and then sends it to the person’s insurance company each month, offsetting the amount that the enrollee has to pay themselves.

This works well, except it all has to be reconciled with the IRS after the year is over. If a premium tax credit was paid on your behalf during the year, you have to complete Form 8962 when you file your taxes. By then, you’ll be using your actual income, as opposed to your projected income.

Depending on whether your income ended up being more or less than you projected, you might get additional money from the IRS at tax time—or you might have to repay some or all of the tax credit that was paid on your behalf.

This can be problematic in any year, but accurately projecting total income for 2020 was particularly challenging. The additional federal unemployment compensation, provided as part of the early rounds of COVID relief legislation, pushed income higher than some enrollees had projected.

Others got new jobs later in the year, but if their total income for 2020 ended up above 400% of the poverty level, they were facing the prospect of having to repay every penny of their premium tax credit to the IRS, regardless of how low their income was during the time they were enrolled in marketplace coverage.

In late 2020, insurance commissioners from several states sent a letter to incoming President Biden, asking him to address this issue (along with various other provisions to keep health coverage affordable) and ensure that people would not have to repay excess premium tax credits from 2020.

Section 9662 of the American Rescue Plan does just that. Under that section, excess premium tax credits from 2020 do not have to be repaid to the IRS. People who are due additional premium tax credits can still claim them on their 2020 tax return, but people who would otherwise have to repay some or all of their tax credit do not have to do so.

The IRS is working with tax software companies to get this updated. And they’ve noted that they are also working on a solution for people who already filed their 2020 tax return and repaid some or all of their premium tax credit for 2020.

For now, the IRS is advising taxpayers that they should not file an amended return to recoup the money; this IRS page will be updated with additional instructions once they sort out the details.

A Word From Verywell

The health insurance provisions in the American Rescue Plan will help to make health coverage much more affordable for people who rely on individual/family coverage or COBRA. It’s important to understand, however, that the provisions are all temporary:

  • The COBRA subsidy lasts through September 2021.
  • The provision that eliminates excess premium subsidy repayments is for 2020 only.
  • The adjusted subsidy eligibility rules for people receiving unemployment compensation are only for 2021.
  • The enhanced premium subsidies and elimination of the subsidy cliff are for 2021 and 2022.

But for the time being, millions of Americans will have more realistic access to high-quality health coverage due to this legislation.

Some of the provisions, such as the COBRA subsidies and not having to repay excess premium subsidies from 2020, are specific to the circumstances surrounding the COVID pandemic.

Additional legislation may be enacted at a later date that might make enhanced premium subsidies available in future years as well, as increased affordability is something that consumer advocates have long pushed for in the individual/family health insurance market.

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Article Sources
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  1. Congress.gov. H.R.1319 — American Rescue Plan Act of 2021. Enacted March 11, 2021.

  2. Centers for Medicare and Medicaid Services. Effectuated enrollment for the first half of 2020. September 2020.

  3. Healthinsurance.org. Obamacare’s “subsidy cliff” eliminated for 2021 and 2022. March 17, 2021.

  4. Internal Revenue Service. Revenue procedure 2020-36. Updated July 21, 2020.

  5. Congress.gov. H.R.1319 — The American Rescue Plan Act of 2021, Section 9661. Enacted March 11, 2021.

  6. Centers for Medicare and Medicaid Services. American Rescue Plan and the marketplace. March 12, 2021.

  7. Internal Revenue Service. Instructions for form 8962 (2020). Updated January 12, 2021.

  8. Internal Revenue Service. Reconciling your advance payments of the premium tax credit. Updated March 15, 2021.