Beware Obamacare’s ‘subsidy cliff’

How an extra $100 on one couple's paycheck could cost them $13,140 in Affordable Care Act premium subsidies for the year

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  • March 15, 2014

Throughout open enrollment – and for many months leading up to it – there has been a lot of focus on the subsidy eligibility range that extends up to 400 percent of federal poverty level (FPL). People with incomes above 400 percent of FPL are on their own when it comes to paying for health insurance, but the idea behind this threshold was that when incomes are above that level, health insurance is already affordable.

This is true for people whose income is well above 400 percent of FPL, but for some people who don’t qualify for subsidies, insurance can be very expensive.

Losing $13,000 in subsidies

Consider a couple, ages 60 and 63, living in the town of Rifle, in the Colorado mountains. (Rifle is a regular town, not a resort community. The median household income is under $59,000, and the median home value is about $256,000 – far below the nearly $700,000 median home value in Aspen. In short, Rifle is not Aspen.) Health insurance is expensive in all Colorado mountain towns.

For our Rifle couple, the second lowest-cost Silver plan available through the state-run exchange, Connect for Health Colorado, is $1,587 per month. If our Rifle couple earns $62,100 per year, they qualify for a subsidy of $1,095 per month. But if they earn $62,200, they get no subsidy at all.

(Even though this amount is several hundred dollars less than 400 percent of 2014 poverty level, all calculations for the current open enrollment are based on 2013 poverty level, since open enrollment began in 2013. For the 2015 open enrollment that begins November 15, 2014, calculations will be based on 2014 poverty level numbers). An increase of $100 per year in income means the loss of $13,140 in subsidies for the year.

If they purchase the second lowest-cost Silver plan, they’ll pay $19,039 per year in premiums – which works out to just over 30 percent of their income. That’s not what most people would consider affordable, but since their income puts them slightly above 400 percent of FPL, they do not qualify for a subsidy, and must pay the full cost of coverage on their own.

Even the least expensive Bronze plan available to them in the exchange has a premium of $1,368 per month, which is still 26 percent of their income. (They would qualify for a hardship exemption from the individual mandate, because the lowest priced plan available to them would cost more than 8 percent of their income. But that’s little comfort to people who want to purchase coverage.)

Of course, if that same couple were earning $124,000 per year (about 800 percent of poverty level), a $19,039 annual health insurance premium would be about 15 percent of their annual income, and the least expensive Bronze plan would be 13 percent of their income – still high by ACA standards, but much more manageable than 30 percent.

If the couple were younger – say 30 and 33 – but had the same $62,200 household income, their total premium would be $654 per month (12.6 percent of their income) for the second lowest-cost Silver plan. The least expensive Bronze plan would be $563 per month (10.8 percent of their income). If the younger couple’s income was $62,100 per year, their subsidy would be about $162 per month, bringing their cost for health insurance down to 9.5 percent of their income.

Losing $1,944 in subsidies

Although they lose their entire subsidy just like the older couple if their income increases by $100 annually, they are losing $162 per month, while the older couple – with the exact same change in income – would be losing $1,095 per month. Both couples face a “subsidy cliff” but it’s a much more substantial cliff for the older couple.

If the younger couple were living at the foot of the mountains – in Denver instead of Rifle – their subsidy eligibility would end at about $58,000 in annual income, since premiums are significantly lower in Denver than they are in Rifle, and subsidy eligibility depends on the cost of the plans available to you. In Denver, with an income of $57,000/year, they would qualify for a subsidy of about six dollars per month.

An income increase to $57,500 would lower their subsidy to about two dollars per month, and it would phase out entirely if their income reached $58,000 a year. In this case, a thousand-dollar increase in income means the loss of $36 per year in subsidies – not a cliff at all.

How steep is your cliff?

Essentially, the “subsidy cliff” is real – depending on your circumstances. For some people, the difference in subsidy between 400 percent and 401 percent (or in some cases, a lower percentage) of FPL is just a few dollars. For others, it’s a significant amount of money.

It depends on where you live, since premiums fluctuate considerably based on location. It also depends on your age, since older people pay up to three times as much as younger people.

That means that even though their incomes might be identical, older applicants who earn more than 400 percent of FPL will pay a much larger percentage of their income for health insurance than younger applicants. (For incomes under 400 percent of FPL, the maximum amount that a person pays is capped as a standardized percentage of their income, regardless of their age).

You can play around with a subsidy calculator to see whether a small fluctuation in income significantly changes your subsidy amount. If you’re facing a subsidy cliff, you may want to talk with an accountant to see if there’s anything you can do to lower your modified adjusted gross income and avoid the cliff.