Ever since the health insurance marketplaces/exchanges debuted for 2014 coverage, the premium subsidy (premium tax credit) eligibility range has been capped at household incomes of 400% of the federal poverty level (FPL). People with incomes above 400% of FPL have been on their own when it comes to paying for health insurance. (Note that California has its own premium subsidies that extend to 600 percent of the poverty level.) But that has changed for 2021 and 2022, thanks to the American Rescue Plan’s provision that eliminates the subsidy cliff.
The initial assumption, when the ACA was being drafted in the late aughts, was that when incomes are above that level, health insurance would be affordable (as a percentage of household income) without the need for a subsidy. But that has not proven to be the case in many areas of the country, particularly for older enrollees.
American Rescue Plan: No subsidy cliff in 2021 or 2022
For 2021 and 2022, Section 9661 of the American Rescue Plan simply caps marketplace health insurance premiums (for the benchmark plan) at no more than 8.5% of household income. This applies to people with household incomes of 400% of the poverty level or higher; for people with lower incomes, the normal percentage of income that has to be paid for the benchmark premium has been reduced across the board.
If your household income is more than 400% of the poverty level and the benchmark plan’s premium would already be no more than 8.5% of your income in 2021 or 2022, you won’t qualify for a premium subsidy (ie, the American Rescue Plan wouldn’t change anything about your situation). This is more likely to be the case for younger enrollees in areas of the country where health insurance is less costly than average.
But if the full-price cost of the benchmark plan would be more than 8.5% of your income, you’re eligible for a premium subsidy in 2021 and 2022 (assuming you’re otherwise eligible, meaning that you’re lawfully present in the U.S. and not eligible for employer-sponsored coverage that’s considered affordable and provides minimum value). For some people, especially older enrollees in areas of the country where health insurance is particularly costly, subsidy eligibility in 2021 and 2022 will extend well above 400% of the poverty level.
How the subsidy cliff normally works
Before the American Rescue Plan (ARP) was enacted, eliminating the income cap for subsidy eligibility in 2021 and 2022, subsidies were available in the continental US for a single person with an income of up to $51,040. For a household of two, the income limit was $68,960, and for a household of four, it was $104,800 (Alaska and Hawaii had 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 to determine subsidy amounts 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.)
An example: Prior to the American Rescue Plan (older enrollees, expensive area)
Consider a couple, ages 60 and 63, living in Charleston, West Virginia. We’ll consider their pre-ARP coverage options if they earn $68,900, versus an income of $69,000, and then we’ll take a look at how the ARP dramatically changes the picture.
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). Prior to the American Rescue Plan, if their projected household income for 2021 was $68,900, the subsidies were structured so that they kept this couple’s premiums for the benchmark plan to no more than 9.83 percent of their income in 2021. That’s $6,773 for the year, or $564/month. The full-price cost of the benchmark plan in their area is a whopping $3,273 for this couple, so their premium subsidy would be $2,709/month — a grand total of more than $32,500 in subsidies over the course of the year. And the lowest-cost plan available to them would be just $297/month in after-subsidy premiums. (In a moment, we’ll take a look at how much lower their premiums will be under the ARP, even at this income level that already made them eligible for subsidies under the normal rules.)
But if their income was $69,000 — just $100 higher — they would not have qualified for a premium subsidy at all pre-ARP. In that case, the cheapest health plan they could get was $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.
So for this couple, an income increase of just $100 would have resulted in the loss of more than $32,000 in premium tax credits, and almost certainly made 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 when a household’s income went above 400% 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% of the poverty level, the subsidies are designed in a way that results in gradual increases in after-subsidy premiums as income increases. But before the ARP was enacted, if income exceeded 400% of the poverty level, the subsidies ended abruptly. And if the subsidies were particularly large (as is the case for the West Virginia couple in this example), the results were 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 have been about 23% 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 have been paying for the cheapest available plan if they were earning $69,000. And it would have left them with $119,000 remaining for other expenses, as opposed to just $33,000.
The American Rescue Plan’s impact
Now let’s take a look at how the American Rescue Plan changes things for this couple. If they’re earning $68,900 in 2021, that’s a little over 399% of the poverty level. We’ll round to 400%, which means they’ll be expected to pay 8.5% of their income for benchmark premium — as opposed to 9.83% under the normal rules (note that if they had a lower household income, the ARP’s sliding scale would have them pay as little as 0% of their income for the benchmark plan; it ranges from 0% to 8.5%, depending on income).
So they would only have to pay $5,857 in annual premiums for the benchmark plan, or $488 per month (as opposed to having to pay $564/month for the benchmark plan under normal rules). That would increase their premium subsidy by $76 per month, and the subsidy can be applied to any metal-level plan available in their area. So the cheapest plan’s premium would drop to $221/month, instead of $297/month under the normal rules.
This is obviously beneficial, but the ARP has a much more significant impact if this couple was otherwise hit by the subsidy cliff. If their income is $69,000 in 2021, they were not subsidy-eligible at all pre-ARP. But under the ARP, they only have to pay 8.5% of their income for the benchmark plan. That’s $5,866 in annual premiums, or $489 per month. That would make them eligible for a premium subsidy of $2,784/month (as opposed to $0/month under the normal rules), and the cheapest available plan would cost them just $222/month.
As you can see, under the ARP, this couple’s premium subsidy only drops by $1/month when their annual income increases by $100. This is a much more reasonable approach, and it results in a smooth curve where subsidies eventually disappear, but not suddenly and not leaving people with health insurance premiums that amount to a substantial portion of their income.
With an income of $155,000, this couple would still have to pay 8.5% of their income for the benchmark plan, but that would amount to $13,175 in annual premiums. They would still qualify for a substantial subsidy of $2,175/month. Because this couple is older and in an area where health insurance is much more expensive than average, they would have to earn an income of $462,000 in order to become ineligible for subsidies under the ARP. That’s because the benchmark plan in their area has a full-price premium of $39,276, and you need a very high income for that to be no more than 8.5% of it.
Subsidy cliff less burdensome for younger enrollees, but ARP still beneficial
If the couple in Charleston were younger – say 30 and 33 – but had the same $68,900 household income, they would have qualified for a premium tax credit of $784/month prior to the American Rescue Plan. This would have brought down the prices on the available plans to a range of $454/month to $1,043/month. If their income was just $100 higher, at $69,000, they didn’t qualify for a premium tax credit. In that case, the premiums for the available plans would have ranged from $1,238/month to $1,827/month.
Although the subsidy cliff wasn’t as harsh for younger enrollees — since their full-price premiums are lower — this couple would have still missed out on $9,408 in annual premium subsidies just because their income increased by $100. Both couples faced a “subsidy cliff” but it was a much more substantial cliff for the older couple.
Under the ARP, the younger couple will also see a reduction in their premiums regardless of which income level they have, but it will be much more pronounced if their income was just over 400% of the poverty level. At an income of $68,900 (which puts them at more than 399% of the poverty level, so we’ll round up and say they have to pay 8.5% of their income for the benchmark plan), they have to pay the same $488 in monthly premiums for the benchmark plan as the older couple, and their subsidy would increase to $860/month — an increase of $76/month (the same as the older couple, since they have the same income).
And at an income of $69,000, the younger couple would have to spend $489/month for the benchmark plan, reducing their subsidy by just one dollar per month, to $859/month. Just like the older couple, the younger couple would see a gradual decrease in subsidy amounts as their income increased.
But subsidies for the younger couple under the ARP would cease by the time their income reached a little more than $190,000 (as opposed to more than $462,000 for the older couple), because the full-price cost of the benchmark plan for the younger couple is $16,176… still substantial, but the 8.5% of income threshold would be reached at a much lower income level than it would be for the older couple with a benchmark plan price of more than $39,000.
Location, location, location
We used West Virginia as the example here because individual/family health insurance premiums in West Virginia are much higher than the national average. As you can see in this comparison sheet, people in some areas with income a little above 400% of the poverty level will see little or no difference in their premiums under the ARP, because the benchmark plan is already priced at a level that’s considered affordable under the new rules (ie, no more than 8.5% of household income).
If the couples in our example above were living in Bismark, North Dakota, they would have still faced a subsidy cliff at an income of $69,000 in 2021 prior to the ARP, but it would have been much less harsh: The older couple would have missed out on about $16,000 in premium subsidies over the course of the year, and the younger couple would have missed 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; in both cases, they now qualify for lower-cost coverage under the ARP).
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 has been a problem nationwide, particularly for older enrollees.
ARP fix is a welcome, albeit temporary, relief
The subsidy cliff is part of the ACA, but the ARP has eliminated it for 2021 and 2022. The ARP has also eliminated excess subsidy repayments for the 2020 plan year, meaning that people whose 2020 income ended up being over 400% of the poverty level — and who were facing the prospect of having to pay back the entire subsidy to the IRS — no longer have to repay any subsidies that were paid on their behalf in 2020 (based on an initially projected income that was subsidy-eligible).
Unless additional legislation is enacted, however, the subsidy cliff will be back in effect in 2023. Democrats have been trying for years to eliminate the subsidy cliff, and it’s possible that permanent legislation could be enacted. Capping premiums at 8.5% of income was part of Hillary Clinton’s health care plan in the 2016 election and Joe Biden’s health care plan in the 2020 election, and it’s been proposed as part of the various health care reform plans that Democrats have put forward in Congress since then.
COVID-related enrollment window gives people an opportunity to take advantage of new subsidies
For now, however, marketplace enrollees are no longer facing a subsidy cliff in 2021 or 2022. And there’s a COVID-related enrollment window, through May 15, 2021 in most states, during which people can enroll in a marketplace plan. In most states, the new subsidy amounts will be displayed on the exchange website by April 1, but some of the state-run exchanges will take longer to get this up and running.
The new subsidies are retroactively available back to January 1, 2021 however (or when the enrollee’s coverage begins, if they sign up later in the year). So if you enroll before the new subsidies are showing up on the marketplace, you’ll be able to claim your tax credit on your 2021 tax return. And you’ll also have the option to return to the marketplace later in the year and activate your subsidies to be paid to your insurer in real-time, which will make coverage much more affordable for people who would otherwise have been facing the subsidy cliff.
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.