Overview of the Premium Tax Credit

The health insurance premium tax credit is part of the Affordable Care Act (the ACA, which is also known as Obamacare). It's often referred to as a premium subsidy, and it's designed to help make health insurance premiums more affordable for middle and low-income people.

But the terms "low-income" and "middle class" are subjective. To clarify, premium tax credits are normally available for people with household incomes as high as 400% of the poverty level—that amounted to $103,000 for a family of four in the Continental U.S. in 2020. But for 2021 and 2022, the American Rescue Plan has removed the upper income cap for subsidy eligibility, meaning that some households with income well above 400% of the poverty level can qualify for premium subsidies.

The premium subsidy is often referred to as "the ACA subsidy," but there's another ACA subsidy that applies to cost-sharing and shouldn't be confused with the premium tax credit.

The ACA's Premium Tax Credit

Most people who are eligible for the premium tax credit subsidy choose to have it paid in advance directly to their health insurance company each month. This lowers the amount they have to pay for premiums each month. When enrollees choose this option, the subsidy is referred to as an advance premium tax credit, or APTC.

But enrollees also have the option to pay full price for a plan purchased through the health insurance exchange, and then receive the full amount of their premium tax credit from the IRS when they file their tax return. When tax filers take this option, the subsidy is simply called a premium tax credit, or PTC.

APTC and PTC both refer to the same thing—a premium subsidy to offset the cost of health insurance obtained in the exchange. And either way, it's a refundable tax credit, which means you get it even if it exceeds the amount you owe in federal taxes.

And regardless of whether you receive APTC or PTC, you have to complete Form 8962 with your tax return. This is how you reconcile the amount that was paid on your behalf during the year or claim the credit in full after the year is over.

Who Qualifies?

The premium subsidy is only available for those buying health insurance through the government-run health insurance exchange in each state. And it's only available if the enrollee is not eligible for Medicaid, CHIP, premium-free Medicare Part A, or an employer-sponsored plan that provides minimum value and is considered affordable.

In addition, the subsidy is only available to people with modified adjusted gross incomes of at least 100% of the poverty level (for a single individual in the Continental U.S., that's $12,760 in 2021). And in 36 states and DC where Medicaid has been expanded under the ACA, the lower eligibility threshold for the premium tax credit is 139% of the poverty level, because Medicaid covers people below that level (anyone eligible for Medicaid is not eligible for a premium subsidy).

Prior to 2021, a household could only qualify for a premium subsidy with income up to 400% of the poverty level; above that, subsidies ended abruptly. But thanks to the American Rescue Plan, a household earning more than 400% of the poverty level in 2021 and 2022 can qualify for premium subsidies if the benchmark plan would otherwise cost more than 8.5% of the household's income (additional legislation would be necessary in order to keep this benefit in place after 2022). Depending on the applicant's age and location, that can mean that subsidies are available to individuals with income well above 400% of the poverty level. (The prior year's poverty level numbers are used to determine subsidy eligibility, so 2021 subsidy eligibility is based on 2021 income relative to 2020 poverty guidelines).

[Note that the premium tax credit is available for recent immigrants who are lawfully present in the US but who have an income below the poverty level. This provision was included in the ACA because recent immigrants are not eligible for Medicaid until they've been in the US for at least five years.]

For people with income below 400% of the poverty level, the percentage of income they have to pay out of their own pockets for the benchmark plan is less than 8.5% in 2021 and 2022. It ranges from 0% on the lower end up the income spectrum, up to 8.5% on the higher end. But across the board, it's a smaller percentage than it was before the American Rescue Plan was enacted.

The federal poverty level changes every year and the exact number depends on the number of people in the household. The previous year's FPL figures are used to determine eligibility for the premium tax credit. So for example, the 2020 FPL numbers are used to determine subsidy eligibility for anyone applying for 2021 coverage. This is true regardless of whether they enrolled in November 2020 (before the 2021 FPL numbers were published) or are enrolling during the COVID/ARP enrollment window that runs through August 15, 2021 in most states.

In order to figure out how much your premium tax credit will be, the exchange will calculate:

1. Your expected contribution toward the cost of your health insurance. Your expected contribution depends on your income.
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 premium tax credit (aka premium subsidy) amount is the difference between your expected contribution and the cost of the benchmark plan in your area. The exchange will make this calculation for you. The software determines whether you qualify for a premium subsidy, and if so, how much it will be. If your income ends up being different from what you projected when you enrolled, you will reconcile the difference with the IRS when you file your taxes. That can result in you having to pay back some (or all) of your subsidy if it was too big, or receiving a lump-sum payment from the IRS if the subsidy that was paid on your behalf during the year was too small.