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Does the IRS change how much I’ll have to pay for my health insurance each year?

Does the IRS change how much I’ll have to pay for my health insurance each year?

Q. I’ve seen that the percentage of income I have to pay for my health insurance seems to change each year, based on IRS guidance. Does this change the actual amount that I pay for my coverage each year? How has the American Rescue Plan (ARP) affected this? And what about the Inflation Reduction Act (IRA)?

A. From 2015 through 2021, the IRS did make an annual change — usually quite small — to the percentage of income that you have to pay for self-purchased (individual/family) health coverage. But there’s a lot more to it than just the percentage of income that the IRS says you have to pay for the benchmark plan (which has been significantly reduced through 2025 as a result of the American Rescue Plan and Inflation Reduction Act). It also depends on:

Let’s take a look at how it all works, both in terms of the normal rules and the temporary changes under the American Rescue Plan and Inflation Reduction Act.

The ACA has a lot of moving parts. Various aspects of the regulations have to be updated annually, including the affordability rules. Initially, the IRS laid out guidelines detailing the percentage of tax filers’ income that they would be expected to contribute towards their own premiums. This is referred to as the “applicable percentage.” (For premium subsidy purposes, income means an ACA-specific version of modified adjusted gross income, and subsidy eligibility is based on how that income compares with the prior year’s FPL.)

(Note that although there is usually an income cap of 400% of the poverty level in order to qualify for premium subsidies, that has been temporarily removed through 2025 under the ARP and IRA. Through 2025, nobody purchasing coverage in the marketplace has to pay more than 8.5% of their income for the benchmark plan, regardless of their income level.)

How the applicable percentages have changed over time

The IRS has adjusted the applicable percentage each year from 2015 through 2021, although the American Rescue Plan resulted in a mid-year adjustment for 2021 and eliminated the need for an adjustment for 2022. Here’s a summary of how the applicable percentage has changed over time:

  • 2015: A small increase (Revenue Procedure 2014-37)
  • 2016: A small increase (Revenue Procedure 2014-62)
  • 2017: A small increase (Revenue Procedure 2016-24)
  • 2018: A small decrease (Revenue Procedure 2017-36) So people with the same income paid slightly less for their coverage.
  • 2019: An increase to a record high (Revenue Procedure 2018-34)
  • 2020: Another decrease (Revenue Procedure 2019-29)
  • 2021: Initially an increase (Revenue Procedure 2020-36) and then a significant decrease as a result of the American Rescue Plan.
  • 2021 through 2025: Under the ARP, and extended by the IRA, the applicable percentage numbers will remain fixed through 2025. They vary from 0% to 8.5%, depending on income, and are detailed below. (Note that just before the IRA was enacted, the IRS published a chart with the inflation-adjusted applicable percentages for 2023, ranging from 1.92% to 9.12% of income; those are no longer applicable now that the IRA has been enacted. However, that document does set the limit for affordability of employer-sponsored coverage at 9.12% of household income for 2023, and that is still applicable as the IRA didn’t change anything about the affordability of employer-sponsored plans.)

Applicable percentages increased for 2021, but the ARP then sharply reduced them

When 2021 began, the applicable percentages were higher than they had been in 2020, meaning that at each income level, people would have to pay a slightly larger percentage of their income for the benchmark plan. But Section 9661 the American Rescue Plan made some very significant reductions to the applicable percentage table for 2021 and 2022. And the Inflation Reduction Act maintains those lower levels through 2025.

(Even before the applicable percentages were reduced by the ARP, it’s important to remember that the poverty level also increased for 2021, meaning that you would have had to get a raise in order to remain at the same percentage of the poverty level; the 2020 poverty level numbers were used for 2021 subsidy eligibility determinations. If you didn’t get a raise, your income as a percentage of the poverty level would have been lower in 2021, resulting in a smaller amount that you’d have to pay for your health coverage after the subsidy is applied.)

The applicable percentages for 2021 were initially posted in Revenue Procedure 2020-36, requiring subsidy-eligible enrollees to pay between 2.07% and 9.83% of their income for the benchmark plan, with no limit on how high premiums could be if a household’s income was over 400% of the poverty level. But the American Rescue plan reduced this range for both 2021 and 2022, and the Inflation Reduction Act maintains the new lower levels through 2025. So the range is now 0% to 8.5%, with no income cap for subsidy eligibility.

With income above 400% of the poverty level, a subsidy is not available if the benchmark plan would cost less than 8.5% of your income without a subsidy. So people with very high incomes will still not qualify for a subsidy, as their coverage would not exceed 8.5% of their income. But subsidy eligibility can now extend well above 400% of the poverty level for some enrollees, particularly those who are older and live in areas where health insurance is particularly expensive. Here are some examples of how the ARP enhanced premium subsidies.

For coverage effective anytime from 2021 through 2025, under the modified rules implemented by the American Rescue Plan and extended by the Inflation Reduction Act, subsidy-eligible enrollees who buy a plan in the exchange have to pay the following percentages of their income, after the subsidy is applied, for the benchmark plan:

  • Income up to 150% of poverty = 0% (ie, the subsidy is enough to make the benchmark plan premium-free)
  • 150% to 200% of poverty = 0% to 2%
  • 200% to 250% of poverty  = 2% to 4%
  • 250% to 300% of poverty = 4% to 6%
  • 300% to 400% of poverty = 6% to 8.5%
  • 400% of poverty or higher = 8.5%

All of these percentages were retroactive back to the start of 2021, and people who had marketplace coverage for all of 2021 were able to claim the additional subsidy for the first few months of 2021 when they filed their 2021 tax return (the additional subsidies debuted in the marketplace in the spring of 2021, so most enrollees received the additional subsidies in real-time for more than half of 2021).

Making sense of applicable percentages

Those numbers might make your eyes glaze over. But the following examples will show how they actually affect premiums from one year to the next. The first set of examples show how Bob’s premiums changed from 2014 to 2022, if his income increased each year to keep pace with increases in the federal poverty level. Below that, you’ll see what happens if Bob’s income hasn’t increased since 2014. And in both cases, we’ll show how the American Rescue Plan reduced the amount that Bob has to pay for his health coverage, making coverage more affordable than it’s been in any of the previous years. Yes, there’s math involved, but never fear — it’s pretty straightforward.

Example: Bob’s premium changes from 2014 to 2023, if he gets annual raises that keep his income at 200% of the poverty level

Bob’s MAGI (modified adjusted gross income as calculated for the ACA’s premium tax credits) is equal to 200% of poverty. In this example, we’re going to assume he’s received a pay raise each year in order to keep his income at 200% of the poverty level. In 2014, his applicable percentage was 6.3%, for 2018, it was 6.34%, for 2019, it was 6.54%, for 2020 it was 6.49%. For 2021, it was initially 6.52%, but the ARP has reduced it to just 2%, and the IRA keeps that in place through 2025. That means he only has to pay 2% of his income for the benchmark plan instead of 6.52%, and his subsidy amount will be larger to make up the difference.

For subsidy purposes, poverty level determinations are based on the year during which open enrollment begins. Since the open enrollment period for 2022 coverage took place in 2021, the government used 2021 poverty level guidelines for determining subsidy-eligibility for any plans with 2022 effective dates. (poverty level numbers are published by HHS in mid-January each year, but that’s after open enrollment for that year’s coverage has already ended or is about to end; open enrollment runs through January 15 in most states).

2014: $1,448 in premiums, with an income of $22,980

If Bob was earning 200% of poverty level when he got his 2014 plan, his MAGI was $22,980 (based on the 2013 poverty level) and his applicable percentage (the amount he had to pay for the second-lowest-cost silver plan) was 6.3 percent. So he had to pay $1,448 in annual premiums in 2014 ($22,980 x 0.063). His subsidy paid the rest of the premium, assuming he selected the second-lowest-cost silver plan (ie, the benchmark plan).

2018: $1,529 in premiums, with an income of $24,120

But for 2018, if Bob was still earning 200% of poverty level, his MAGI had increased to $24,120, since the poverty level has increased. His applicable percentage was 6.34%, which equaled $1,529 in annual premiums ($24,120 x 0.0634). That’s about $81 more in annual premiums than he had to pay in 2014. But in order to maintain his percentage of poverty level at 200%, he was earning $1,140 additional dollars per year.

So while his net premium had increased, his income was also increasing (and note that this is comparing his premiums in 2014 with his premiums in 2018; if we just look at 2017 versus 2018, the slight decrease in the applicable percentage for 2018 nearly exactly offsets the increase in the poverty level, making his net premium just about exactly the same in 2018 as it was in 2017).

2019: $1,588 in premiums, with an income of $24,280

For 2019, the applicable percentage increased again, and the poverty level also increased. (2018 poverty levels were higher than they were for 2017.) If Bob was still earning 200% of the poverty level when he signed up for 2019 coverage, it meant his income had grown to $24,280. He had to pay 6.54% of that for the second-lowest-cost Silver plan, which amounted to $1,588 in annual premiums ($24,280 x 0.0654). So Bob was paying $140 more in annual premiums in 2019 than he was paying in 2014 — but his income was $1,300 higher than it was in 2014, since we’re assuming he’s stayed at 200% of the poverty level.

2020: $1,621 in premiums, with an income of $24,980

For 2020, the applicable percentage decreased, but the poverty level continued to increase. To keep Bob at 200% of the poverty level, his income had to grow to $24,980 for 2020 (based on 2019 poverty level numbers, since that’s what’s used for the 2020 coverage year). He had to pay 6.49% of his income for the benchmark Silver plan, which amounted to $1,621 in annual net premiums. That’s $33 more in annual premiums than he paid in 2018, and $173 more than he paid in 2014. But his income in 2019 was $2,000 higher than it was in 2014.

2021: Pre-ARP: $1,664 in premiums. Post-ARP: 510 in premiums, with an income of $25,520

For 2021 coverage, the poverty level is higher than it was for 2020 coverage. But although the applicable percentage was initially higher as well, it’s been drastically reduced by the American Rescue Plan. In Bob’s case, with an income of 200% of the poverty level, his new applicable percentage in 2021 is only 2%. For Bob’s income to stay at 200% of the poverty level, it had to increase to $25,520 in 2021. But instead of having to pay $1,664 in after-subsidy premiums for the benchmark silver plan (the amount he would have paid under the normal applicable percentage for 2021), he only has to pay $510, which is 2% of his income.

This is a total annual savings of about $1,154 over what he was paying before the American Rescue Act, and it’s also significantly lower than the amount he’s had to pay for his coverage in any year since the ACA was implemented.

2022: $515 in premiums, with an income of $25,760

To remain at 200% of the poverty level, Bob’s income grows to $25,760 for 2022. The applicable percentage is still 2% at that income level,  thanks to the American Rescue Plan. So Bob has to pay $515 in total premiums if he buys the benchmark plan in 2022.

Bob needed to be aware, however, that there was a significant influx of new insurers offering plans in the marketplaces for 2022, and a lot of fluctuation in the benchmark plans as a result. Bob may have had to switch plans in order to get the best value from his coverage in 2022.

2023: $544 in premiums, with an income of $27,180

To remain at 200% of the poverty level, Bob’s income increases to $27,180 in 2023. The applicable percentage is still 2% at that income level (the Inflation Reduction Act has locked that in through 2025). So Bob will have to pay $544 in total premiums if he buys the benchmark plan in 2023.

What if Bob doesn’t get a raise?

But what if he doesn’t get a raise, and his MAGI is still $22,980 in 2023? That means his income will be 169% of the poverty level, instead of 200%, so his applicable percentage will be less than the 2% that would have applied if his income had grown to keep pace with the increases in the poverty level ($22,980 divided by $13,590 is 1.69; that means Bob’s income is 169% of the 2022 federal poverty level, which we use to calculate 2023 subsidy eligibility).

The calculation

To calculate applicable percentages for incomes that are somewhere within each range on the chart, you can use the formula that’s explained in CFR 1.36B-3. (Scroll down to just underneath the applicable percentage chart, and look at example 2.) In the case of Bob, it looks like this:

Part 1

169 – 150 = 19
200 – 150 = 50
19/50 = 0.38

Basically, you look to see what income range you’re in. (Bob is in the 150 to 200% of poverty range.) Then you just figure out how far along the income range you are.  In this case, Bob’s income is 38% of the way along the range that goes from 150% to 200% of poverty.

Part 2

2 – 0 = 2
2 x 0.38 = 0.76

0 + 0.76 = 0.76

The second part of the calculation is to look at the applicable percentage range for 2023 coverage that corresponds to Bob’s income range (0% to 2% — meaning that the percentage of income he’ll have to pay for the second-lowest-cost silver plan is somewhere between those two percentages). And then you just figure out what number is 38% of the way along that applicable percentage range. In Bob’s case, it’s 0.76%.

His applicable percentage for 2023 is 0.76% (note that it would have been 5.57% in 2021 without the American Rescue Plan, and something closer to that in 2023 if the ARP and IRA hadn’t been enacted), and his net premium, after his subsidy is applied, is just $175 in annual premiums (without the American Rescue Plan it would have been $1,280 in 2021; this was less than it was in 2014, but still much higher than it is now that the ARP has been enacted).

Because Bob’s income hasn’t kept pace with the poverty level, the amount he has to pay in net premiums is declining over time (and as we’ve seen in these examples, the ARP and IRA have reduced Bob’s after-subsidy premium to much lower levels than it had ever been before).

Applicable percentages increased for 2019 and again for 2021, but so did the poverty level – and you have to consider them together

There are a lot of moving parts here. Although the applicable percentages for 2019 were the highest they had been since this system was implemented (and initially increased from 2020 to 2021, albeit not quite to 2019 levels) the poverty level has continued to increase each year. So people whose incomes have not increased in several years could have found that they were paying less in total premiums in 2021 than they were paying a few years earlier, even before the American Rescue Plan boosted subsidies across the board.

How the applicable percentage is calculated — it changed a bit in recent years, even before the ARP/IRA

The general idea behind the adjustment to the applicable percentage table is to keep up with changes in premium growth as they relate to changes in income. If health care costs increase faster than income, we all have to pay a larger chunk of our income for health care. But if the economy does well and the ACA’s efforts to curb healthcare spending are successful, it’s also possible for the applicable percentage to decrease — as was the case for 2018 and for 2020.

The formula for the adjustment to applicable percentage is just premium growth since 2013 divided by income growth since 2013. But the methodology for calculating each of those numbers has changed over time. And as noted above, the American Rescue Plan has fixed the applicable percentages at a set level for 2021 and 2022, with no indexing. The Build Back Better Act would extend this through 2025.

But here’s how it worked prior to the American Rescue Plan:

Premium growth used to be based on average per-enrollee premiums for employer-sponsored plans, in terms of how much those premiums had changed since 2013. But for 2020, HHS finalized a methodology change that incorporates premium changes in the individual market, as well as premium changes for employer-sponsored plans.

This was widely expected to result in an increase in applicable percentages for 2020, but when the numbers were published in July 2019, the applicable percentages for 2020 were lower than they had been for 2019 (without the methodology change, applicable percentages would likely have decreased even more for 2020, as the estimation was that they would be 2.7% higher in 2020 with the new calculations that incorporate premium changes in the individual market).

Income growth was based on changes in GDP per capita for plan years 2014 through 2016, but HHS finalized a new formula that has been used to calculate income growth since 2017. The new formula calculates income growth based on per-capita personal income (PI) rather than per-capita GDP. The two methods would likely generate similar numbers, but HHS considers per-capita PI changes to be a more accurate reflection of how per-capita income changes from one year to the next.

The IRS also added a provision that allows for an additional adjustment for years after 2018 to reflect the premium growth rate relative to the growth in the consumer price index. (The additional adjustment is described in §36B(b)(3)(A)(ii)(II).) But the next section in that code — §36B(b)(3)(A)(ii)(III) — says that the additional adjustment is only needed if the total amount the government spent on premium subsidies and cost-sharing reductions in the previous year was more than 0.504% of the previous year’s gross domestic product. For 2019, 2020, and again for 2021, the IRS determined that the additional adjustment was not necessary.

Since subsidies are also a function of the poverty level — which generally adjusts upward each year — there’s a built-in factor that essentially ensures that people who are impacted by a higher applicable percentage are also enjoying at least a modest increase in income that outweighs the additional premiums.

Average benchmark premiums dropped in 2019, 2020, and 2021, resulting in smaller subsidies. But the ARP dramatically increased subsidies for 2021 and 2022, and the IRA extends that through 2025

Premium subsidy amounts are based on the relationship between an applicant’s income and the federal poverty level, but they’re also highly dependent on the premium that the applicant would have to pay for the benchmark plan. The formula described above is how subsidy amounts are determined in every state (keeping in mind that Alaska and Hawaii have their own poverty level numbers).

But what if you don’t buy the benchmark plan? Many areas have dozens of plans available for sale in the exchange, and only one of them is the benchmark plan (it changes from year to year, but it’s always the second-lowest-cost silver plan). If you buy a plan that’s not the benchmark plan and you’re eligible for a subsidy, you still get the same subsidy amount that you’d have received if you had purchased the benchmark plan, but it’s applied to the price of the plan you select instead.

Nationwide, overall average premiums in the individual market increased slightly in 2019, decreased slightly in 2020, increased slightly in 2021, increased modestly for 2022, and are increasingly more significantly — but still by a single-digit percentage — for 2023 (overall, premiums are much more stable than they were in 2017 and 2018, when they grew rapidly in most areas). But average benchmark premiums decreased from 2019 through 2022. The decrease in benchmark premiums happened in some areas because an existing insurer lowered their rates, but in other areas, it was because a new insurer joined the market and began offering lower-priced silver plans than the ones that were already available. This has been an ongoing trend ever since 2019, although it has cooled somewhat for 2023 (for 2023, in some markets, insurers are exiting or joining the market; but in the majority of the country, insurer participation in the marketplaces is roughly the same for 2023 as it was for 2022).

Since premium subsidy amounts are based on the cost of the benchmark plan’s premium in each area, it’s not surprising that premium subsidy amounts have been dropping over the last few years. Across all enrollees who are receiving premium subsidies, the average subsidy amount was $550/month in 2018, dropped to $539/month in 2019, and dropped again, to about $492/month in 2020. It had dropped again in 2021, to $486/month, but the American Rescue Plan boosted subsidies mid-year in 2021, resulting in most affordable coverage for most enrollees. For 2022, the average subsidy amount for subsidized enrollees was $524/month; the larger subsidy was due to the American Rescue Plan.

As we saw above, the whole point of premium subsidies is to cover the difference between the actual cost of the benchmark plan and the amount the enrollee is expected to pay for that plan based on a specific percentage of their income. So even if the amount the enrollee is expected to pay remains unchanged, the premium subsidy amount will go down if the full-price cost of the benchmark plan goes down.

The best course of action is to actively shop for your coverage each year during open enrollment. Never let your plan automatically renew without checking first to make sure that it’s still the best option. And if you become eligible for a special enrollment period mid-year due to a  qualifying event, make sure you actively compare all of the plans available to you before making a decision about whether to keep your existing coverage or make a change.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.

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