In mid-2015, there were 8.3 million people receiving premium subsidies through the exchanges. For enrollees in the 37 states that used HealthCare.gov in 2015, those subsidies pay an average of 72 percent of the full premium cost, leaving subsidized insureds responsible for just $105 per month in premiums.
In short, the subsidies are a significant part of the “affordable” in Affordable Care Act. And as we head into Obamacare’s third open enrollment period, awareness of the law’s premium tax credits (subsidies) continues to grow. But many Americans may still be wondering, “Am I eligible to receive a premium subsidy – and if so, what should I expect?”
Subsidies based on the cost of Silver plans
Middle-income as well as low-income people buying coverage in the exchanges are eligible for government subsidies that come in the form of tax credits. Most eligible enrollees take those tax credits in advance, paid directly to their health insurance carrier each month to offset the amount of premiums due.
But you can also pay full price throughout the year and then claim your subsidy as a lump sum when you file your taxes. (Subsidy reconciliation is completed when you file taxes, using form 8962. If the subsidy you receive during the year is too high, you’ll pay back some or all of it when you file taxes; if it was too low – or if you didn’t receive an advance subsidy at all during the year – you’ll get the balance of the tax credit when your return is processed).
Premium subsidies are available to exchange enrollees if their income is between 100 percent and 400 percent of the federal poverty level. (Off-exchange enrollments are not eligible for subsidies, regardless of income). In states that have expanded Medicaid under the ACA, Medicaid is available to enrollees with incomes up to 138 percent of the poverty level, and subsidies are not available below that threshold.
In all states, the upper limit for subsidy eligibility is 400 percent of the poverty level. For plans purchased during the 2016 open enrollment period, that upper subsidy threshold is $97,000/year for a family of four; subsidy availability extends well into the middle class. (Some people with incomes under 400 percent of the poverty level don’t receive subsidies simply because the unsubsidized cost of coverage in their area is under the threshold established by the ACA).
Subsides are tied to the cost of the second-least expensive Silver plan in your area (ie, the benchmark plan). The architects of the Affordable Care Act (ACA) wanted to make sure that people who must buy their own insurance can afford that benchmark Silver plan, even in regions where health care is extremely expensive. So knowing the price of a Silver plan in your region is key to calculating the size of your subsidy.
Kaiser Family Foundation has collected data on 2016 benchmark plan premiums for a 40-year-old in 14 metropolitan areas across the US, which will give you an idea of how premiums vary by location. It’s also important to note that overall, the average price of a benchmark plan across those 14 areas is 4.4 percent higher than in 2015, which means that subsidies in many areas will be slightly higher in 2016 than they were in 2015.
The enrollment software will automatically calculate your subsidy, but many enrollees are curious about how the subsidy amount is determined, so here are the details:
What exactly is a Silver plan?
In the exchanges, insurers offer Bronze, Silver, Gold and Platinum plans. (Catastrophic plans are also available to young adults and people with hardship exemptions, although subsidies are not available on catastrophic plans). All must cover the ten benefits that Congress decided are “essential” (outpatient care, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse disorder services, behavioral health treatment, prescription drugs, rehabilitative services, laboratory services, preventative care and pediatric services, including oral and vision care for children.)
All plans also must offer free preventive care, and they cannot refuse to cover you or charge you more because you suffer from a pre-existing condition.
The only major difference between the four tiers is that Bronze and Silver plans have lower premiums, with higher co-pays and deductibles – up to a maximum of $6,850 in out-of-pocket costs in 2016. After that, the insurer pays for all essential benefits.
Gold and Platinum plans’ premiums are higher, but total out-of-pocket exposure on those plans is lower. Silver plans pay roughly 70 percent of enrollees’ expected healthcare costs, and have premiums that are higher than Bronze plans, but lower than Gold plans (note that “expected healthcare costs” is in relation to the average costs for the entire population covered by the plan, including those with very high healthcare costs; it does not apply to each individual insured).
Who is eligible for a subsidy?
If your employer offers “affordable” comprehensive insurance, you’re not eligible to receive a subsidy in the exchange. Note that the affordability test only applies to coverage for the employee; the cost to add dependents to the plan is not taken into consideration. But if the employee’s coverage is considered affordable, the dependents are not eligible for premium subsidies in the exchange – this is known as the family glitch.
If your employer offers affordable coverage that provides minimum value, you already are receiving a subsidy from your employer in the form of pre-tax health insurance benefits and an employer contribution to your premiums. The exchanges offer subsidized health insurance benefits to the self-employed, the unemployed, and employees who work for a company that does not offer affordable health benefits.
How to calculate your subsidy in four easy steps
The size of your subsidy is based on your income, the number of people in your household, and the price of the benchmark Silver plan in your region.
To calculate the size of your subsidy:
1) Use this table to find out whether your income and household size makes you eligible for a subsidy in 2016 (these numbers are based on the 2015 federal poverty guidelines. Since open enrollment for 2016 begins in 2015, these numbers will be used during open enrollment and throughout 2016).
For instance, as the table indicates, a family of three with household income up to $80,360, and a family of five with income up to $113,640, would be eligible to receive a tax credit, depending on the cost of a Silver plan in their area.
|Percent of Federal Poverty Level (FPL)|
|For each additional person, add||$4,160||$5,533||$6,240||$8,320||$12,480||$16,640|
2) Find out how much the Affordable Care Act expects you to contribute to the cost of your insurance by consulting Table 2. The expected contribution is adjusted slightly each year – these percentages are for 2016 (If you decide not to buy insurance, you won’t have to make a contribution, but you will have to pay a penalty that ratchets up to $695 per uninsured adult in 2016, or 2.5 percent of taxable household income above the filing threshold, whichever is higher.)
|If you earn||Your expected contribution is|
|Up to 133% of FPL||2.03% of your income|
|133%-150% of FPL||3.05%-4.07% of your income|
|150%-200% of FPL||4.07%-6.41% of your income|
|200%-250% of FPL||6.41%-8.18% of your income|
|250%-300% of FPL||8.18%-9.66% of your income|
|300%-400% of FPL||9.66% of your income|
The subsidy will make up the difference between the amount an individual is expected to contribute (based on income) and the actual cost of the area’s second-lowest-cost silver plan.
3) Determine out how much a benchmark Silver plan costs in the area where you live. You can scroll through the available quotes in your state’s exchange and see what the second-lowest-cost silver plan’s premium would be for you and your family, or you can call the exchange. It’s important to note that the benchmark plan changes from one year to another; carrier A might have the second-lowest-cost Silver plan one year, but due to premium fluctuations, carrier B might take over that spot the following year.
4) See Table 2. Subtract the amount that you are expected to contribute (based on your income) from the cost of your benchmark silver plan. For instance, let’s say your silver plan costs $3000 a year, and you are expected to contribute $1000. You will receive a subsidy of $2,000
In Los Angeles, California in 2016, the benchmark Silver plan will cost a 40 year-old $245 a month, or $2,942 annually.
If Rick earns $23,540 (or 200 percent of FPL) he would be expected to kick in 6.41 percent of his income, or $1,509 toward his insurance. (0.0641 x $23,540 = $1,509)
To calculate his subsidy, he just needs to subtract $1,509 (the amount he kicks in) from $2,942 (the cost of the plan). His subsidy will be $1,433.
[Note that you can also calculate your expected contribution percentage if your income is somewhere in the middle of one of the ranges shown in Table 2. Here’s how it works].
If Rick’s 40-year-old cousin Alice, lives in Burlington, Vermont – where health care is more expensive – she can look forward to a larger tax credit. In Burlington, the benchmark plans’ pre-subsidy premium for a 40-year-old in 2016 is $468 a month, or $5,616 a year.
If Alice also earned $23,540 (200 percent of the FPL) the government would expect her to spend 6.41 percent of her income on coverage, just like her cousin in California (remember, the expected contribution is tied to income, not the underlying cost of the plan). So she, too, would contribute $1,509. But because the benchmark plan in Burlington costs $5,616, her subsidy would be $4,107. ($5,616 – $1,509 = $4,107).
If Rick and Alice were younger, the silver plan would be less expensive and their subsidies would be smaller. If they were older, the Silver plan would be more expensive, and their subsidies would be higher.
The idea behind the subsidies is to level the playing field and bring average premiums to a middle ground for everyone who has the same general level of income. So at the same income level, an older person will receive a higher subsidy than a younger person, but they’ll both ultimately pay the same price for the benchmark plan.