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For people who buy health insurance through the exchanges, the premium subsidy (premium tax credit) eligibility range extends to household incomes of 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 original idea behind this threshold was that when incomes are above that level, health insurance is already affordable. [Note that California has its own premium subsidies that extend to 600 percent of the poverty level.]
This is true for people whose income is well above 400 percent of FPL, but for some people who don’t qualify for premium subsidies, insurance can amount to an entirely unaffordable percentage of income. And this situation became much more pronounced with the sharp rate increases that we saw in the individual market from 2016-2018 (rates have been very stable since then, but are still much higher than they were in 2014). For people with income between 400 and 600 percent of the poverty level, and particularly for older enrollees in areas of the country where health insurance is most expensive, the “subsidy cliff” is very real.
For 2021 health coverage in the continental US, the income cap for subsidy eligibility is $51,040 for a single person, $68,960 for a household of two, and $104,800 for a household of four (Alaska and Hawaii have higher limits, as the poverty level is higher there).
[Note that these numbers are based on the 2020 poverty level; the prior year’s numbers are used because open enrollment takes place before the coming year’s poverty level numbers are published. Also, note that household income means an ACA-specific calculation of modified adjusted gross income.]
Older enrollees losing more than $32,000 in subsidies
Consider a couple, ages 60 and 63, living in Charleston, West Virginia. We’ll consider their coverage options if they earn $68,900, versus an income of $69,000.
For 2021 coverage for this couple, there are 17 plan options available through the health insurance exchange (HealthCare.gov is the exchange in West Virginia). If their projected household income for 2021 is $68,900, they’ll qualify for a whopping $2,676/month in premium subsidies, amounting to more than $32,000 in financial assistance over the course of the year. Assuming their income is at that level, the 17 available health plans would have after-subsidy premiums that range from $330/month to $1,726/month. The subsidies are structured so that they keep this couple’s premiums for the benchmark plan to no more than 9.83 percent of their income in 2021.
But if their income is $69,000 — just $100 higher — they will not qualify for a premium subsidy at all. In that case, the cheapest health plan they can get is $3,006 per month in premiums, amounting to more than $36,000 for the year. That’s more than half of their annual income, for the lowest-priced plan available to them (it has a deductible of $7,700 per person, and a family out-of-pocket maximum of $17,100). The other 16 available plans have premiums that range upward from there, reaching as high as $4,438/month (for the plan that would be $1,726/month in after-subsidy premiums if their income was just slightly lower).
So for this couple, an income increase of just $100 results in the loss of more than $32,000 in premium tax credits, and almost certainly makes health insurance unaffordable — very few people can afford to spend more than half their income on health insurance premiums.
This potentially huge jump in premiums that happens if income goes above 400 percent of the poverty level is referred to as the subsidy cliff. It’s described as a cliff because it’s a sharp and sudden spike. For people with income that doesn’t exceed 400 percent of the poverty level, the subsidies are designed in a way that results in gradual increases in after-subsidy premiums as income increases. But if income exceeds 400 percent of the poverty level, the subsidies end abruptly. And if the subsidies were particularly large (as is the case for the West Virginia couple in this example), the results are particularly harsh.
Now if this couple was earning $155,000 per year (about 900 percent of poverty level), a $36,000 annual health insurance premium would be about 23 percent of their annual income. That’s still very high by most people’s standards, but much more manageable than the 52 percent of their income they’d be paying for the cheapest available plan if they’re earning $69,000. And they would have $119,000 left over for other expenses, as opposed to just $33,000.
Younger enrollees losing more than $9,000 in subsidies
If the couple in Charleston were younger – say 30 and 33 – but had the same $68,900 household income, they would qualify for a premium tax credit of$770/month. This would bring down the prices on the available plans to a range of $468/month to $1,058/month. If their income is just $100 higher, at $69,000, they don’t qualify for a premium tax credit. In that case, the premiums for the available plans would range from $1,238/month to $1,827/month.
Although the subsidy cliff isn’t as harsh for younger enrollees — since their full-price premiums are lower — this couple would still miss out on $9,240 in annual premium subsidies just because their income increased by $100. Both couples face a “subsidy cliff” but it’s a much more substantial cliff for the older couple.
Location, location, location
Although age is a significant factor for the subsidy cliff, location is just as important.
If these couples were living in Bismark, North Dakota, they would still face a subsidy cliff at an income of $69,000 in 2021, but it would be much less harsh: The older couple would miss out on about $16,000 in premium subsidies over the course of the year, and the younger couple would miss out on about $2,600 in premium subsidies (in both cases, that’s in comparison with the situation they’d be in if their income were just slightly lower, at $68,900).
For the older couple in Bismark, an income of $68,900 would result in after-subsidy premiums that range from $0/month (free!) to $1,107/month, whereas they’d have to pay a minimum of $1,030 for the cheapest available plan if their income increased slightly, to $69,000.
And for the younger couple, their lowest-cost plan would be $201/month in after subsidy premiums with an income of $68,900, versus $420/month if their income is $69,000.
West Virginia is a good example of a place where the subsidy cliff is particularly harsh, because full-price premiums there are so much higher than average. But as we can see from the North Dakota example — where premiums are much lower than average — the subsidy cliff is a problem nationwide.
How steep is your cliff?
Essentially, the “subsidy cliff” is very real, but the specifics depend on your circumstances. For some people, the difference in subsidy amounts between 400 percent and 405 percent 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, which is why older enrollees receive larger subsidies than younger enrollees).
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.
How can we fix the subsidy cliff?
The subsidy cliff is part of the ACA. The law was written in a way that abruptly cuts off premium assistance at 400 percent of the poverty level. So unless a state adds its own subsidies — as California has done — the exchanges cannot provide subsidy assistance to people earning more than 400 percent of the poverty level. And the IRS has to recoup the full amount of premium subsidies that were paid on behalf of an enrollee whose income actually ends up going above 400 percent of the poverty level.
Democrats have been trying for years to eliminate the subsidy cliff. It was part of Hillary Clinton’s health care plan in the 2016 election, and it’s been proposed as part of the health care reform plans that Democrats have put forward in Congress since then. In 2020, the House of Representatives passed a comprehensive “ACA 2.0” bill that would have eliminated the subsidy cliff, but it didn’t go anywhere in the GOP-controlled Senate.
The Biden/Harris health care plan also calls for the elimination of the subsidy cliff in much the same way that Clinton and Congressional Democrats have proposed. It would cap a household’s premiums at 8.5 percent of income, and would change the benchmark plan from silver to gold, making the subsidies even more robust.
Let’s take a quick look at the older couple living in Charleston, and see how they’d fare under the Biden proposal (and the bill that the House passed in 2020), assuming their income is $69,000: The full-price second-lowest-cost gold plan for this couple is $4,174/month. In order to bring the after-subsidy cost of that down to 8.5 percent of their income, the subsidy would have to be $3,685/month. They would then be able to apply that subsidy to any of the available plans.
So instead of having to pay more than $36,000 for the cheapest available bronze plan, they would be able to choose from among 13 plans that would have no premium at all, because their subsidy would be more than the price of the plans. They could get a gold plan for $489/month, and a few other more expensive plans would also be options. (In reality, insurers might change their coverage offerings under an ACA 2.0 scenario, but this is a simplified example based on the idea of capping premiums for the second-lowest-cost gold plan at no more than 8.5 percent of income, and comparing that with the plans that are available for this couple for 2021.)
This helps to illustrate how important the elimination of the subsidy cliff would be. This couple would go from having to spend more than half their income for the cheapest available plan, to being able to select from among several free plans (albeit with high out-of-pocket costs), and a gold plan with a $1,600 deductible for less than $500/month.
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 healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.