Subsidies to pay for health insurance under the Affordable Care Act (ACA) are available under the following criteria:
- Income is no more than 400 percent of the federal poverty level for your household size.
- Insurance is obtained from the health care insurance exchanges.
Do You Qualify?
How do you determine if your income qualifies or not? You will need to estimate your income for 2014. First you have to understand how “income” is defined. In general, ACA income is your adjusted gross income from line 37 or line 38 of your 2012 federal 1040. But remember if your income is expected to be significantly different than in 2012, you need to adjust for that.
The second thing you need to know is the federal poverty level for your household size. The federal poverty level in 2013-2014 for a single individual is $11,490. If you have a spouse and/or children, add $4,020 per person to the $11,490. For example, if you have a household size of four, your federal poverty level is $23,550 ($11,490 + $4,020 X 3). If your income is less than $94,200 (i.e. $23,550 X 400% = $94,200) then you qualify for a subsidy.
You can only get a subsidy if you obtain your insurance from the health insurance marketplace a.k.a “the exchange”. There are a couple of exceptions to this rule. If you can get insurance through your employer but it is deemed unaffordable for your income level and household size, or if the insurance does not provide the minimum value, defined as covering 60 percent of estimated annual healthcare costs. Check with your employer to determine if these exceptions apply to you.
Amount of Subsidy
The amount of your subsidy is based several things.
- The cost of the second cheapest “Silver” plan available in your area. Remember, on the exchange the plans are classified, in level of coverage order, as Bronze, Silver, Gold and Platinum. The second-cheapest Silver plan is the benchmark plan for calculating subsidies.
- The cost of the plan you decide to get from the exchange. You can select a plan from any of the four classifications.
- Your “cap”, which is the limit of what percentage of income you will pay for health insurance. Here’s how it works. If your income is 133 percent (or less) of the federal poverty level for your household, you only have to pay up to 2 percent of your income for health insurance premiums. The cap gradually goes up to 9.5 percent if your income is above 300 percent of the federal poverty level.
- Your available subsidy is the difference between the cost of the second cheapest Silver plan (the benchmark) versus your cap.
Let’s illustrate! In this example, your income is expected to be $35,000 and your household has two people. In your area, the benchmark plan on the exchange is $493 per month ($5,916 per year).
At your income level and household size, you are at 226 percent of the federal poverty level ($11,490 + $4,020 = $15,510; $35,000/$15,510 = 2.26 or 226%)
Your cap is approximately 7.2% of your income, meaning you will pay at least $2,520 per year on health insurance.
You are eligible for a subsidy of up to $3,396 ($5,916 – 2,520) per year, or $283 per month. If you select a more expensive plan than the benchmark plan, you get the same subsidy and have to pay the difference yourself. Say you want a Gold plan that has a premium of $550 per month. You would be responsible for paying $267 per month or $3,204 per year, and the subsidy would cover the rest. If you select a cheaper Bronze plan, you still get the full subsidy and pay a lower amount. In this case, your Bronze plan may cost $400 per month and you pay $117 per month ($1,404 per year). The subsidy only gets reduced if it is higher than the premium.
Actual Subsidy is Based on Actual Income
If you qualify for subsidies based on estimated 2014 income, and your income turns out to be much higher than estimated, your subsidy may be adjusted downward. How does this work?
When you file your 2014 income tax return with your actual income, the actual subsidy you qualified for will be calculated and compared to the subsidy you have received. The difference will either be paid back by you or refunded to you. There are other details regarding the subsidies that are not covered in this blog post, but you will learn more about them as you sign up for health insurance through the exchanges.
I recommend that you do the following:
- If you want to know more about the cost of health insurance in your area and how much subsidy you may qualify for, visit the Kaiser Family Foundation’s subsidy calculator at http://kff.org/interactive/subsidy-calculator.
- If your biggest fear is having to pay back the subsidy because you are not sure what your 2014 income will be, don’t sign up to take all of it during the year. You can elect to take a portion of the subsidy, or none of it, giving yourself a lower risk of claiming too much subsidy and then having to pay it back.
- If you are on Medicare, you don’t need to worry about any of this. The ACA and the health insurance exchanges do not apply to Medicare recipients or to Medicare supplemental insurance.
- Remember that you will have out-of-pocket costs, such as copays and deductibles, in addition to health insurance premiums. Out-of-pocket costs generally increase as the premium cost decreases, so you will have higher out-of-pocket costs with a Bronze plan than with a Silver plan. Keep this in mind when you decide which plan to choose.
- There is a lot of misinformation out there about the ACA and the exchanges. Get your information from reliable sources, like your tax preparation professional.