How the Health Insurance Subsidy Works

Understanding the Premium Tax Credit Health Insurance Subsidy

Need help paying for health insurance? The health insurance subsidy might be your lifeline. Image © Ascent Xmedia/Getty Images

The Affordable Care Act includes government subsidies to help people pay their health insurance costs. One of these health insurance subsidies is the premium tax credit which helps pay your monthly health insurance premiums.

The premium tax credit subsidy is complicated. In order to get the financial aid and use it correctly, you have to understand how the health insurance subsidy works. If you don't use it correctly, you could end up in a financial pickle.

Here's what you need to know to get the help you qualify for and use that help wisely.

How Do I Apply for the Premium Tax Credit Health Insurance Subsidy?

Apply for the premium tax credit through your state’s health insurance exchange. If you get your health insurance anywhere else, you can’t get the premium tax credit.

If you're uncomfortable applying for health insurance through your state's exchange, most states allow certain health insurance brokers to assist you with buying a health plan through the exchange as well as applying for the health insurance subsidy. If you choose to use a broker rather than doing this yourself, make absolutely sure the broker is enrolling you in your chosen health plan using your state's health insurance exchange so you'll be eligible for the premium tax credit health insurance subsidy.

Will I Qualify for the Subsidy?

People making between 100 and 400 percent of federal poverty level can qualify for the premium tax credit health insurance subsidy.

Federal poverty level changes every year, and is based on your income and family size. You can look up this year’s FPL here.

You'll use this year's FPL figures to apply for next year's health insurance subsidy. For example, if you're applying for a 2016 Obamacare plan during open in the autumn of 2015, you'll use the FPL figures for 2015.

Using 2015 FPL levels, you'll qualify for the health insurance subsidy as an individual with an income range of $11,770-$47,080, a couple with an income of $15,930-$63,720, and a family of three earning $20,090-$80,360.

If you meet the income qualifications, make sure something else doesn't disqualify you from receiving the subsidy. Learn more in, “Why You Don't Qualify for a Health Insurance Subsidy."

How Much Money Will I Get?

In order to figure out how much your premium tax credit will be, you have to know two things:

  1. Your expected contribution toward the cost of your health insurance
    You can look this up in the table at the bottom of the page.
  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 health insurance exchange can tell you which plan this is and how much it costs.

Your subsidy amount is the difference between your expected contribution and the cost of the benchmark plan in your area. See an example of how to calculate your monthly costs and your subsidy amount at the bottom of the page.

Can I Buy a Cheaper Plan To Save Money, or Must I Buy the Benchmark Plan?

Just because the benchmark plan is used to calculate your subsidy doesn’t mean you have to buy the benchmark plan.

You may buy any bronze, silver, gold, or platinum plan listed on your health insurance exchange. You may not use your subsidy to buy a catastrophic plan, though.

If you choose a plan that costs more than the benchmark plan, in addition to your expected contribution, you’ll pay the difference between the cost of the benchmark plan and the cost of your more expensive plan. If you choose a plan that’s cheaper than the benchmark plan, you’ll pay less since the subsidy money will cover a larger portion of the monthly premium. If you choose a plan so cheap that it costs less than your subsidy, you won’t have to pay anything for health insurance.

However, you won’t get the excess subsidy back.

If you’re trying to save money so you choose a plan with a lower value, (like a bronze plan instead of a silver plan), be aware that you’ll likely have higher coinsurance and copays when you use your health insurance.

If you have an income below 250% of FPL, consider choosing a silver-tier plan. There’s a different subsidy that lowers copays, coinsurance, and deductibles for people with incomes below 250% of poverty level. Eligible people can use it in addition to the premium tax credit subsidy. However, it’s only available to people who choose a silver-tier plan.

Do I Have to Wait Until I File My Taxes to Get the Subsidy Since It's a Tax Credit?

You don’t have to wait until you file your taxes. You can get the premium tax credit in advance. However, if you’d rather, you may choose to get your premium tax credit as a tax refund when you file your taxes instead of having it paid in advance.

If your income is so low that you don’t have to file taxes, you can still get the subsidy.

How Do I Get the Money?

If you choose to get the premium tax credit in advance, the government sends the money directly to your health insurance company on your behalf. You'll never actually lay your hands on the money. Your health insurer credits that money toward your cost of health insurance premiums, decreasing how much you'll pay each month.

If you choose to get the premium tax credit as a tax refund, the money will be included in your refund when you file your taxes. This could mean a big tax refund. But, you'll pay more for health insurance each month since you’ll be paying both your share of the premium and the share that would be have been covered by the subsidy if you'd chosen the advanced payment option. It will come out even in the end, but if you're low on cash-in-hand, you might find the advance payment option more user-friendly.

Why Wait Until I File My Taxes To Get the Subsidy?

Most people won’t want to wait; they’ll choose the advance payment option. However, consider opting to get the subsidy along with your tax refund if:

  • Your income is very close to 400 percent of FPL.
  • Your income varies from year to year so you’re not sure how much you’ll make.

When the subsidy is paid in advance, the amount of the subsidy is based on an estimate of your income for the coming year. If the estimate is wrong, the subsidy amount will be incorrect.

If you earn less than estimated, the advanced subsidy will be lower than it should have been. You’ll get the rest as a tax refund.

If you earn more than estimated, the government will send too much subsidy money to your health insurance company. You’ll have to pay back part or all of the excess subsidy money when you file your taxes. Even worse, if your actual income ended up more than 400 percent of FPL, you’ll have to pay back every penny of the subsidy. This could be thousands of dollars.

If you get your subsidy when you file your income taxes rather than in advance, you’ll get the correct subsidy amount because you’ll know exactly how much you earned that year. You won’t have to pay any of it back.

What Else Do I Need To Know About How the Health Insurance Subsidy Works?

If your subsidy is paid in advance, notify your health insurance exchange if your income or family size changes during the year. The exchange can re-calculate your subsidy for the rest of the year based on your new information. Failing to do this could result in getting too big or too small a subsidy.

Example of How To Calculate the Health Insurance Subsidy:

  1. Figure out how your income compares to FPL.
  2. Find your expected contribution rate in the table below.
  3. Calculate the dollar amount you’re expected to contribute.
  4. Find your subsidy amount by subtracting your expected contribution from the cost of the benchmark plan.

Tom is single with an income of $23,000 per year. FPL for 2015 is $11,770 for single people.

  1. To figure out how Tom’s income compares to FPL, use:
    income ÷ FPL x 100.
    $23,000 ÷ $11,670 x 100 = 195.
    Tom’s income is 195 percent of FPL.
  2. Using the table below, Tom is expected to contribute 4-6.34 percent of his income. Since he’s almost at the top of his category in the table, he uses the 6.34 percent figure.
  3. To calculate how much Tom is expected to contribute, use this equation:
    6.34 ÷ 100 x income= Tom's expected contribution.
    6.34 ÷ 100 x $23,000 = $1,458.20.
    Tom is expected to contribute $1,458.20 per year, or $121.52 per month, toward the cost of his health insurance. The premium tax credit subsidy pays the rest of the cost of the benchmark health plan.
  4. The benchmark health plan at Tom’s health insurance exchange costs $3,900 per year or $325 per month. Use this equation to figure out the subsidy amount:
    Cost of the benchmark plan – expected contribution = amount of the subsidy.
    $3,900 - $1,458.20 = $2,441.80.
    Tom’s premium tax credit subsidy will be $2,441.80 per year or $203.48 per month.

If Tom chooses the benchmark plan, or another $325 per month plan, he’ll pay $121.52 per month for his health insurance. If he chooses a plan costing $425 per month, he’ll pay $221.52 monthly for his health insurance. If he chooses a plan costing $225 per month, he’ll only pay $21.52 per month for his health insurance.

Table of Your Expected Contribution Toward Your Health Insurance Premiums

If your income is:Your expected contribution will be:
100%-132% of poverty level2.01% of your income
133%-149% of poverty level3.02%-4.02% of your income
150-%-199% of poverty level4.02%-6.34% of your income
200%-249% of poverty level6.34%-8.10% of your income
250%-299% of poverty level8.10%-9.56% of your income
300%-400% of poverty level9.56% of your income

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