Obamacare's Premium Subsidies - How Do They Work?

Subsidies are tax credits that make health insurance affordable

Premium subsidies are a tax credit that makes individual health insurance more affordable
Money might not grow on trees. But the ACA's premium tax credits are free money for those who qualify. John Lund/Creative RF/Getty Images

Premium tax credits - aka, subsidies - are a major component of the "affordable" part of the Affordable Care Act. For the most part, they're available to low and middle-income households who buy their own health insurance, as long as they purchase coverage through the exchange (subsidies aren't available off-exchange). The subsidies ensure that premiums are within a range considered affordable.

But in reality, it's a bit more complicated than that.

You can use a general subsidy calculator or the subsidy calculator available on Healthcare.gov or your state's exchange site, but some people want to understand the details of how those calculators come up with the subsidy amounts. If you're one of those people, this post is for you!

All subsidies have to be reconciled when you file your tax return

Premium subsidies are also known as advance premium tax credits (APTC). That's because the subsidy is actually a tax credit, and if it's being paid to your health insurance carrier each month to lower the amount you have to pay in premiums, it's being paid in advance, rather than at tax-filing time the following spring.

Normally tax credits can't be claimed until you file your taxes after the end of the year, but that wouldn't work so well in this case, since many people would find their monthly premiums unaffordable without the APTC.

If an APTC is paid on your behalf during the year, you - and the IRS - will receive Form 1095-A from the exchange in January.

You'll use the information on that form to reconcile your APTC with the premium tax credit to which you're actually entitled, once your income has been finalized for the year. 

If you received a premium subsidy during the year - or if you paid full price for a plan you purchased in the exchange and ended up with an income that's subsidy-eligible - your tax return will need to include Form 8962 in order to reconcile or claim your tax credit.

Eligibility beyond income

Although income is the primary factor in determining eligibility, there are other factors that are taken into consideration. You have to be legally present in the US in order to purchase coverage through the exchange - subsidized or not. 

And in order to qualify for a subsidy, you can't have access to an employer-sponsored health plan that provides minimum value and is considered affordable. In 2016, "affordable" is defined as coverage that doesn't cost more than 9.66% of household income.

But it's important to understand that this affordability test only applies to the employee's premium. If family coverage is available through the employer-sponsored plan, the premium that's payroll deducted for the whole family is NOT taken into consideration when determining whether or not the employer-sponsored plan is affordable.

So if the employee's premium is less than 9.66% of income, and if the employer plan is available to the rest of the family, the whole family is deemed to have access to "affordable" employer-sponsored health insurance (and thus none of them are eligible for subsidies in the exchange), despite the fact that the premium for the whole family might be well above 9.66% of income.

 

Lower threshold for subsidies varies by state

When the ACA was written, the plan was for Medicaid eligibility - in every state - to be increased up to 138% of the poverty level starting in 2014, and for premium subsidies to start at that threshold and extend up to 400% of the poverty level. Essentially, everyone with incomes from zero to 400% of the poverty level would have access to affordable health coverage.

But when the Supreme Court ruled in 2012 that states could opt out of Medicaid expansion, it threw a spanner in the works. There was no provision in the ACA to extend subsidies below 100% of the poverty level, and that is still the case (incidentally, it was essentially a drafting glitch that allowed the lower threshold for subsidy eligibility to be 100% of poverty - instead of 138% of poverty - in states that ultimately didn't expand Medicaid).

There are 20 states where Medicaid expansion has not yet taken effect. Wisconsin provides Medicaid coverage to everyone with incomes up to 100% of poverty, but in the other 19 states, there's a coverage gap for adults with incomes below the poverty level - they only qualify for Medicaid if they're eligible based on their state's existing - generally very strict - guidelines, and they don't qualify for premium subsidies if their household incomes are below the poverty level (expansion is expected to take effect in Louisiana as of July 1, 2016, but prior to that, there's still a coverage gap).

In the states where Medicaid has not been expanded, premium subsidy eligibility begins at the poverty level. In 2016, that's $11,880 for a single individual, and $24,300 for a family of four. People below this income level often have no realistic access to coverage at all. Most are not eligible for Medicaid, since eligibility in states that haven't expanded Medicaid is generally restricted to low income residents who are disabled or pregnant, or extremely low-income parents with dependent children (figure 3 of this Kaiser Family Foundation brief shows income levels that allow parents to enroll in Medicaid in states that haven't expanded Medicaid eligibility under the ACA).

In states where Medicaid has been expanded, premium subsidy eligibility begins with incomes above 138% of the poverty level. In 2016, that's $16,394 for a single individual, and $33,534 for a family of four. People with incomes below this level are eligible for Medicaid.

Which year's poverty guidelines do you use?

Another aspect of the calculation that can be confusing is determining which year's poverty level guidelines should be used. Each year, the federal government updates the poverty level guidelines around the end of January. It's important to note that there are three different tables: one for DC and the 48 contiguous states, another for Alaska, and a third for Hawaii (so subsidy eligibility in Hawaii and Alaska extends to higher incomes than it does in the rest of the country, and Medicaid eligibility also extends to a higher level in those states, as both have expanded Medicaid).

As soon as the new poverty level guidelines come out, they're used for the rest of the year - and until the next year's guidelines are released - to determine Medicaid and CHIP eligibility. 

But for premium subsidy eligibility, we don't start using the new poverty level guidelines until open enrollment begins in the fall. Instead, we continue to use the poverty level guidelines that were in place when open enrollment for the current year began. So for example, plans with 2016 effective dates became available for purchase when open enrollment started on November 1, 2015. At that point, the current poverty level guidelines were for 2015. So they will be used to determine subsidy eligibility for all plans with 2016 effective dates.

That means if you're enrolling in a plan with a 2016 effective date as a result of a qualifying event, your subsidy eligibility will depend on how your income compares with the 2015 poverty level guidelines (ie, subsidies wouldn't be available for a family of three if their income exceeds $80,360 (400% of the 2015 poverty level).

Once open enrollment begins in the fall of 2016 for plans effective in 2017, the exchanges will switch to the 2016 poverty level guidelines that were released in late January 2016. 

Upper income threshold depends on how much your plan costs

Premium subsidies are theoretically available to enrollees who have incomes up to 400% of the poverty level. But that doesn't mean all enrollees with incomes up to that threshold actually qualify for premium subsidies.

That's because premium subsidies are designed to keep the cost of the second-lowest-cost Silver plan at or below a pre-determined percentage of each applicant's income (the percentage varies depending on your income), assuming their income doesn't exceed 400% of the poverty level.

But if the unsubsidized premium of the second-lowest-cost Silver plan available to you is already less than that pre-determined percentage of your income, no subsidy is necessary. This scenario is particularly likely to happen when people live in areas with lower-cost health insurance, and for younger applicants. It's not uncommon for young people to find that they don't qualify for premium subsidies even with incomes that are well under 400% of the poverty level. 

Putting all the details together

You don't have to understand all the stuff in this article in order to get a premium subsidy. All you have to do is make sure you purchase your health plan through the exchange, follow the instructions for determining financial assistance eligibility when you enroll, and answer all the questions about health insurance and premium tax credits when you file your tax return.

The exchange and the IRS will do all the calculations for you. But if you're curious about how it all works, the details above should help, as will the links to explanations of the specifics in terms of how the subsidies are calculated. 

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