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Is the IRS changing how much I’ll have to pay for my health insurance next year?

Q. I saw that the percentage of income I have to pay for my health insurance is going down for 2018, after climbing for 2015, 2016, and 2017.  Is the IRS saying I won’t have to pay as much for my health insurance next year?

A. In general, yes. But if you experience a significant increase in your income, or if you select a plan with richer benefits, that would no longer be the case. Let’s take a look at how it all works:

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, assuming their income doesn’t exceed 400 percent of the poverty level.

Then in July 2014, the IRS released Revenue Procedure 2014-37, in which they explained the changes to the percentage of income that subsidy recipients will have to pay (known as the applicable percentage) if they select the second-lowest-cost Silver plan in the exchange in 2015.

A few months later, in November 2014, the IRS published Revenue Procedure 2014-62, which laid out the changes to the applicable percentage for 2016. And in 2016, they published Revenue Procedure 2016-24, which detailed the changes for 2017.

For 2015, 2016, and again for 2017, there was a slight increase in the applicable percentage numbers. Because the applicable percentage climbed each year, there was often an assumption that everyone who gets subsidies was paying more for their health insurance (after subsidies) in each successive year. But that’s not necessarily the case.

And for 2018, the applicable percentages have decreased slightly when compared with 2017, meaning that the percentage of income that people have to pay (after subsidies) for their coverage is slightly lower at all income levels than it was in 2017 (see Revenue Procedure 2017-36 for 2018 numbers).

Here are the updated applicable percentages for the subsidy-eligible income ranges in 2018. They are all slightly lower than they were for 2017, which means that people have to pay a slightly smaller portion of their income for the second-lowest-cost silver plan than they paid in 2017. (Income is based on how it compares with the federal poverty level, which has increased to $12,060 for a single person in 2017; the 2017 FPL guidelines will be used to determine subsidy eligibility for anyone enrolling in a plan with a 2018 effective date.)

  • Income less than 133% of poverty = 2.01%
  • At least 133%, but less than 150% = 3.02% to 4.03%
  • At least 150%, but less than 200% = 4.03% to 6.34%
  • At least 200%, but less than 250% = 6.34% to 8.1%
  • At least 250%, but less than 300% = 8.1% to 9.56%
  • At least 300%, not more than 400% = 9.56%

Example: Bob

Let’s consider Bob, whose MAGI (modified adjusted gross income as calculated for the ACA’s premium tax credits) is equal to 200 percent of poverty. In 2014, his applicable percentage was 6.3 percent, and for 2018, it will be 6.34 percent, assuming that his MAGI remains at 200 percent of poverty throughout that time frame.

For subsidy purposes, poverty level determinations are based on the year during which open enrollment begins. Since the open enrollment period for 2018 coverage will begin (and end) in 2017, they will use 2017 poverty level guidelines for determining subsidy-eligibility for any plans that have 2018 effective dates.

If Bob was earning 200 percent 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 has 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.

But going into open enrollment for 2018, if Bob is still earning 200 percent of poverty level, his MAGI has increased to $24,120, since the poverty level has increased. His applicable percentage will be 6.34 percent, which equals $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 percent, he’s earning $1,140 additional dollars per year. So while his net premium has increased, his income is 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 povery level, making his net premium just about exactly the same in 2018 as it was in 2017).

But what if he doesn’t get a raise, and his MAGI is still $22,980 as we head into 2018? That means his income is now 191 percent of poverty level, instead of 200 percent, so his applicable percentage will be less than 6.34 percent in 2018.

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

191 – 150 = 41
200 – 150 = 50
41/50 = 0.82

Basically, you look to see what income range you’re in. (Bob is between 150 and 200 percent of poverty range.) Then you just figure out how far along the income range you are.  In this case, Bob’s income is 82 percent of the way along the range that goes from 150 to 200 percent of poverty.

Part 2

6.34 – 4.03 = 2.31
2.31 x 0.82 = 1.89

4.03 + 1.89 = 5.92

The second part of the calculation is to look at the applicable percentage range that corresponds to Bob’s income range (4.03 to 6.34 percent — 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 82 percent of the way along that applicable percentage range. In Bob’s case, it’s 5.92 percent.

His applicable percentage will be 5.92 percent, and his net premium (after his subsidy is applied) will actually be lower in 2018 than it was in 2014. It will be 5.92 percent of $22,980, which is $1,360 in annual premiums. That’s about $88 less than he had to pay in 2014 for the second-lowest-cost Silver plan.

Lower applicable percentage, plus a higher FPL = lower net premiums in 2018

There are a lot of moving parts here. Although the applicable percentages are slightly higher than they were in 2014 when this system was implemented, they’re lower than they were for 2017. And the poverty level is higher for 2018 than it was for 2017. So people whose incomes are not increasing will be at a lower percentage of poverty level than they were the year before, which means their applicable percentage will decrease even more (as illustrated in the example above).

Since poverty level is higher than it was last year, your income will have to increase in order to keep your percentage of poverty level unchanged. In past years, an income that grew enough to keep pace with the increases in the poverty level would have resulted in slightly higher applicable percentages each year (ie, the percentage of income you had to pay for your coverage, after the subsidy). But for 2018, the lower applicable percentage means that even people whose income increases to keep pace with the increase in the poverty level will end up paying a slightly smaller percentage of their income in after subsidy premiums for the second-lowest-cost Silver plan.

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 healthcare costs increase faster than income, we all have to pay a larger chunk of our income for healthcare. 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.

The formula for the adjustment to applicable percentage is just premium growth since 2013 divided by income growth since 2013. Premium growth is based on average per-enrollee premiums for employer-sponsored plans, and they calculate how much those premiums have changed since 2013. Income growth was based on changes in GDP per capita for plan years 2014 through 2016, but HHS finalized a new formula that is used to calculate income growth starting in 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.

Since subsidies are also a function of 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.