With a little over a month until open enrollment for health insurance starts in the U.S., it’s time to start thinking about your coverage for next year. You might have heard that you can save money using a premium tax credit or “subsidy.”
It’s true. A premium subsidy can help lower the cost of health insurance for most people.
But what is it, exactly? And is it something you have to pay back, or is it really free money from the government?
For starters, let’s talk about what a subsidy actually does.
Officially called “advance premium tax credits,” or APTCs, premium subsidies under the Affordable Care Act bring down the price of health insurance by letting you apply a tax credit to your monthly premium.
It’s a tax credit based on your income.
The reason it’s called an “advance” tax credit is that you can use the credit right away. You tell the government how much money you make, it calculates your credit and gives you the option to apply it to your health insurance premium for the year.
But you don’t have to take the credit.
If you can afford health insurance without one but qualify for a credit anyway, you can either apply the credit to your premium up front or save it for when you file your taxes the following year.
In that case, it would be applied to your tax return as any other credit, which could mean you get a bigger refund (or owe less, if you owe money to the IRS).
Some people might benefit from waiting to apply a premium tax credit, including:
- Those without a regular, consistent income (e.g. freelancers, contract workers and self-employed business owners)
- People who can afford to pay the full premium for health insurance and may need a bigger tax break at the end of the year
- Those who expect a lot of changes to their income for the year due to various circumstances, such as a move, a new baby or other life changes
But if you do decide to take the subsidy up front, just remember to report your income correctly and update it as needed throughout the year. It’ll save you a headache during tax time.
That’s because your subsidy is based on income.
And if your income is higher than expected, you may owe some of your subsidy back to the IRS when you file your taxes.
Once you qualify and enroll in a health plan — and assuming you opt to apply the subsidy to your premium — the government pays that amount directly to your insurance company, so you don’t need to worry about it. All you’ll pay is the reduced rate to your insurer.
Does everyone get a subsidy?
Short answer: no. Not everyone qualifies for a premium subsidy.
But most do.
In fact, nearly 9 out of 10 people (87%) who bought health insurance on the federal exchange qualified for a tax credit to reduce their monthly premiums. Of course, the amount of a subsidy depends on a person’s income.
People making more money get less of a tax credit while those who earn less qualify for a bigger break.
Under the ACA, people earning between 100% and 400% of the federal poverty level (FPL) qualify for a premium subsidy. That’s the basic requirement. Your income needs to hit the poverty level or up to 4x that amount in order to save money on ACA health insurance.
The marketplace uses FPL numbers from the year before in calculating subsidies. That means that for the plan year starting 2021, they’ll use the rates for 2020:
- Individual: $12,760
- A household with two people: $17,240
- Household with three people: $21,720
- Household with four people: $26,200
Basically, for each additional person, add $4,480 to the rate for an individual. So a family with five people would be at the poverty level (100%) with an income of $30,680.
Once you know the poverty level, you can multiply it by 4 to get the upper limit for premium subsidy eligibility. That makes the income ranges for an ACA subsidy:
- $12,760 to $51,040 for individuals
- $17,240 to $68,960 for households with two people
- $21,720 to $86,880 for households with three people
- $26,200 to $104,800 for households with four people
For larger families, add $17,920 for each individual to find out the upper limit for premium subsidies.
As you can see, your household size matters. A single person earning $75,000 makes too much money to get a premium subsidy under Obamacare. But if that same person had a spouse and kid, the family would qualify for a subsidy.
Note: Alaska and Hawaii have different poverty levels in each state due to different costs of living. If you live in one of these states, your eligibility for a premium subsidy will be based on your state’s poverty level guidelines. But the percentage stays the same. Eligibility still depends on income between 100% and 400% of the poverty level.
Who can’t get a subsidy?
There are groups of people who won’t qualify for an advance premium tax credit. Generally, these are people who have access to other kinds of health insurance and wouldn’t be enrolling in a marketplace plan anyway.
Here’s who does not qualify for a premium subsidy under the ACA:
- People who earn less than 100% of the federal poverty level or more than 400% of the FPL. Even if your income is just $1 over (or under) the line, you don’t qualify.
- Those with access to an employer-sponsored plan. You don’t have to enroll in the plan for it to disqualify you from a premium subsidy. It just has to be available and affordable (by government standards).
- People who have public health insurance options, like Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE and other programs in this category.
- Married couples who file separate tax returns (with some exceptions).
- People who can be claimed as dependents on someone else’s tax return.
If you can’t get a subsidy and health insurance on the marketplace is too expensive, you may have other options for getting covered. For instance, you could buy a short term health insurance plan.
These plans are not the same as major medical coverage offered under Obamacare. But they do provide some coverage in case of emergencies or unexpected illnesses. To learn more about short term health insurance, check out an overview from our sister site here.
How much can a subsidy save me?
Subsidies vary based on your income, household size, the kind of plan you get and what’s available to you where you live. In short, there’s no one-size-fits-all answer for how much a premium subsidy can save you on health insurance.
But you can get an idea using a subsidy calculator.
We’ve got one here.
As an example, a 40-year old man living in Tennessee and earning $28,000 a year could save $313 off the cost of his premiums each month. That’s a total of $3,756 in savings (premium subsidies) for the year.
You can apply a premium subsidy to any of the metal tier plans. There are four: bronze, silver, gold and platinum.
Each metal tier plan comes with different cost sharing amounts, so a bronze plan is going to cover less of the cost of your care while a platinum will cover the most. In other words, you’ll pay less out of pocket up front for a bronze plan but more when you actually receive care.
The lower the monthly premium, the higher your share of your medical bills will be.
Bronze plans have the lowest premiums but tend to have higher copays, coinsurance and deductibles. As a reminder, a “deductible” is what you pay on your own before your health plan covers any portion of your care for the year.
According to a report from the Centers for Medicare and Medicaid Services (CMS), which oversees the marketplace, average deductibles for individuals who bought a plan on the federal marketplace in 2020 were:
- Bronze: $6,446
- Silver: $4,181
- Gold: $1,319
- Platinum: $101
The same report highlighted average premiums across all plans for 2020.
- Before applying any subsidies, the average monthly premium across all plan types in 2020 was $606 a month for people who qualified for the subsidies.
- The average subsidy was $517 a month.
- That brought the average for an individual — again, those who qualify for the tax credit — to just $89 a month in 2020.
Premium subsidies reduced the average premium by just under 85% — that’s quite a savings, for those who qualify.
There’s also some variation in the silver plan, which we’ll talk about in the next section. Silver plans, the most popular on the marketplace, tend to have an “actuarial value” of 70%. That means they cover about 70% of the cost of your medical care in a year.
It’s not exact. You may pay more than that for an individual doctor’s visit, for example. But overall, the value of the plan is that you’ll only be on the hook for approximately 30% of the total cost of care.
Some people can save even more.
Premium subsidies are available to anyone who meets the income requirement and isn’t disqualified for one of the reasons outlined above.
But there’s extra help available to people with very low incomes, those earning between 100% and 250% of the federal poverty level.
It’s called a cost-sharing reduction subsidy.
Let’s go back to our guy in Tennessee earning $28,000 a year. That puts his income at about 219% of the poverty level. Not only would he qualify for premium subsidies to reduce his monthly premium, but he could also buy a plan that saves him even more.
To get a cost-sharing reduction subsidy (CSR), our Tennessean would need to buy a silver plan. These are the only plans that qualify for the extra savings. It’s calculated automatically, meaning he doesn’t need to do any extra work to get the savings. And unlike the premium subsidies, which he can take right away or not, CSRs get applied up front to the plan he buys.
Example:
- Our Tennessee man finds a silver plan on the marketplace that costs $600 a month before any tax credits.
- Since he qualifies for a premium subsidy, that plan could be reduced down to $287 a month (after applying his $313 subsidy).
- In addition to that subsidy, the CSR he qualifies for lowers what he pays out of pocket for care during the year. So instead of a $30 copay to see his doctor, for example, he might only have to pay $10.
CSRs lower out-of-pocket costs.
They can do this in different ways, either by lowering the plan’s deductible, coinsurance or copays, or some combination of the three. Plans have flexibility in how they apply CSRs to policies, but they must offer them to people who qualify.
And, again, it’s all done automatically, so you, as the consumer, don’t need to worry about the math yourself.
How do I get one?
You might have heard that you can only get a subsidy if you shop on the federal marketplace (or your state’s individual exchange, if it has one). That’s true, but it doesn’t mean you have to literally shop using the marketplace.
Some private marketplaces, like the partner site we use to help people find coverage, are approved to offer subsidies via HealthCare.gov, the federal marketplace. So you can shop, compare and enroll in plans using a private marketplace and still have access to the same subsidies you’d get if you enrolled on the government website.
Ready to start saving money on health insurance? Hold your horses.
Unless you qualify for a special enrollment period, you’ll have to wait until the open enrollment period to buy health insurance. That runs from November 1st through December 15th for most of the country.
But since that’s right around the corner, it’s time to start thinking about your health insurance needs for 2021. Consider the kind of coverage you need and want, and what you can afford. Most people qualify for premium subsidies that can lower the cost of health insurance. Keep that in mind as you think about health insurance for the coming year.
