Understanding Health Insurance Subsidies: Benefits and Eligibility

What Is a Health Insurance Subsidy?

A health insurance subsidy is a way to get cost savings established by the Affordable Care Act (ACA) for people who get their plan from the Health Insurance Marketplace. The subsidy can help pay for your monthly health insurance premiums and out-of-pocket costs. However, if you get insurance from work, Medicare, or Medicaid, you may not be eligible for a health insurance subsidy.

Learn more about which health insurance plans are eligible for a subsidy, and how they can help you save on healthcare costs.

Subsidies Can Help Make Healthcare More Accessible

The ACA was enacted in 2010 to help make health insurance more affordable, especially for low-income households. Its goal is to help people with incomes between 100% to 400% of the federal poverty level get medical coverage. 

Health insurance subsidies in particular allow those without employer-sponsored health insurance plans to still get health coverage by offering sliding scale tax credits or cost sharing reductions. These can lower monthly premiums as well as reduce out-of-pocket costs like deductibles and coinsurance rates. As subsidies are not available on every health insurance plan, it is important to understand eligibility criteria and how these savings work.

How Does a Health Insurance Subsidy Work?

You must have coverage from the Health Insurance Marketplace to be eligible for health insurance subsidies. These subsidies work on a sliding scale, which means exact savings for people with low incomes vary depending on where they live, the number of people in the household, and their annual household income. There are two main types of health insurance subsidies:

• Advanced Premium Tax Credits (APTC)
• Cost-sharing Reductions (CSR)

Depending on your health insurance plan’s metal tier, you may be eligible for one or both subsidy types. Note that each tier does not denote the plan’s quality, but instead indicates its coverage and costs. The metal tiers for plans within the Health Insurance Marketplace are:

• Bronze: Lower monthly premiums and higher costs when you need care
• Silver: Moderate monthly premiums and moderate costs when you need care
• Gold: Higher monthly premiums and lower costs when you need care
• Platinum: High monthly premiums and low costs when you need care

All tiers are eligible for the APTC, but only those who have a Silver plan could be eligible for a CSR.

Types of Health Insurance Subsidies

There are two main types of subsidies: advanced premium tax credits and cost-sharing reductions. Both of these subsidies are based on income, but each has its own eligibility criteria and lowers the overall cost of health insurance in different ways.

Premium Tax Credit (PTC)

The PTC helps lower your monthly premium bill by giving you an income-based credit. Typically, the lower a person’s income, the higher the estimated credit. Your annual income is used to automatically estimate the PTC when you enroll in a health insurance plan from the Health Insurance Marketplace.

The Health Insurance Marketplace pays the PTC amount to the insurance company on your behalf. In turn, the insurer provides a lower premium to make coverage more affordable on your income.

You can use the tax credit to lower your monthly premium or take the tax credit as a lump sum at the of the year. You also do not have to take the full offered credit. If you take less than you may be eligible for, you could get the difference back at the end of the year. Likewise, if you earn more income than you were expecting and so used more PTCs than you may have been eligible for, you may be required to pay back the excess on your tax return.

Eligibility Criteria For Premium Tax Credits

• Income: Your annual household income must fall within 100% to 400% of the federal poverty level (FPL). However, those whose household income is above 400% of the FPL may still be eligible for this subsidy due to temporary eligibility expansions, which extend until 2025. For 2023, the federal poverty level for individuals was $14,580, meaning your income must be at least that amount. This number changes based on household size. For example, the FPL for a family of 5 is $35,140.
• Residency: You must be a U.S. citizen, national, or have legal residency in the U.S.
• Tax return: You must not be filing as married-filing-separately status on your tax return, or be claimed as a dependent by another person on their tax return.
• Other insurance options: You must not be eligible for employer-sponsored health insurance, Medicare, Medicaid, CHIP, or TRICARE.
• Eligible plan: You must have health insurance through the Health Insurance Marketplace.

You may also be eligible for the PTC if you are collecting unemployment. Income received through unemployment is considered no more than 133% of the FPL, so it meets the requirements for this subsidy.

How Are PTC Amounts Calculated?

Generally, the amount of the PTC is the difference of the second-lowest cost Silver plan’s premium after a certain percentage of your income is subtracted from it because annual health insurance premiums cannot be more than 8.5% of your income.

Something to note is that the PTC only considers the premium amounts for non-smokers. Insurers can charge higher premiums for smokers, so if you use tobacco and are charged a higher premium as a result, your PTC will still only cover the cost of a standard non-smoker’s premium.

See It In Action

Here is an example of the PTC in action. Consider the following:

• Annual income: $30,000
• Premium maximum: 8.5% of annual income, which is $2,550 per year or $212.50 per month
• Second-lowest cost Silver plan in area: $500 per month

In this example, the second-lowest cost Silver plan in your area is $500 per month, but the most you could pay for your maximum is $212.50 per month based on your annual income.

In this case, you would be responsible for paying $212.50 per month and your PTC would cover the remaining $287.50 per month.

Advanced Premium Tax Credits (APTC)

The APTC functions generally the same as the PTC and shares the same eligibility criteria and calculation method. The difference between the two is that the APTC is based on your estimated income for the coming year while the PTC is based on your actual income for the year.

As such, the APTC can be over- or underestimated based on what your actual income turns out to be. For example, if you end up earning more income than your estimate, you may have received an excess of APTC, which you will have to pay back when you file your tax return. In contrast, if you earned less income than your estimate, you may not have received as much APTC as you should have, so you may get a refundable tax credit.

Those utilizing an APTC receive a Form 1095-A from the Health Insurance Marketplace detailing the amount of APTC received and the premium paid. You would use this information to reconcile your APTC and actual income on your tax return.

Cost-Sharing Reduction (CSR)

CSRs can give people who enroll in a Silver plan from the Health Insurance Marketplace lower out-of-pocket costs, such as:

• Lower deductible: This is the amount you have to pay before your coverage kicks in. For example, if your procedure will cost $1,000 and you have a $800 deductible, you will pay $800 before your insurance will cover the remaining $200. CSRs lower that initial amount.
• Lower coinsurance rate: This is the portion of the medical bills you pay. Typically, this is expressed as a percentage, where you might pay 20% and your health insurance might pay 80%.
• Lower out-of-pocket maximum: This is the total amount of money you’d have to pay to your insurance company before your insurer covers the remainder of your medical expenses. For example, the maximum out-of-pocket limit for someone with a CSR ranges between $3,000-$7,250, compared to a maximum of $9,100 for health insurance plans in general.

Eligibility Criteria For Cost-sharing Reductions

• Income: Your annual household income must fall within 100% to 250% of the federal poverty level (FPL). For 2023, the federal poverty level for individuals was $14,580, meaning your income must be between $14,580 and $36,450. This number changes based on household size. For example, the FPL for a family of 5 is $35,140.
• Residency: You must be a U.S. citizen, national, or have legal residency in the U.S.
• Eligible plan: You must have a Silver-tier health insurance plan through the Health Insurance Marketplace.

How Are CSR Amounts Calculated?

Income Level Compared With FPL	Actuarial Value	Out-of-pocket Maximum
100%-150% FPL	94%	$3,000 individual; $6,000 family
151%-200% FPL	87%	$3,000 individual; $6,000 family
201%-250% FPL	73%	$7,250 individual; $14,500 family

Source: 2023 PAPI Parameters Guidance; accessed April 2023

CSRs are primarily based on income level, and each income level has a set cost-sharing limit that plans must follow. For example, individuals with an annual income of 100% to 200% of the FPL have an out-of-pocket maximum of $3,000.

While there’s no specific formula for calculating CSRs, they do need to increase the actuarial value (AV) of a plan by a certain amount as incomes change. The AV of a plan is the total average costs your insurance company covers. For example, if you have a plan with an AV of 73%, that means your insurer typically covers 73% of your overall healthcare costs.

How to Apply for Health Insurance Subsidies

For both premium tax credits and cost-sharing reductions, applications are submitted automatically on your behalf when you sign up for an eligible health insurance plan from the Marketplace. This occurs when you supply your estimated annual income during the enrollment process. Generally, these are the application steps:

1. Determine whether you are eligible for a health insurance subsidy. If you would like a health insurance subsidy, first determine whether you are eligible. Look over residency, plan, and income criteria to see if you should expect to receive subsidies.
2. Create an account on the Health Insurance Marketplace. Create an account on the Health Insurance Marketplace so you can begin to browse the plans available in your area. If you are working with a trusted insurance agent, they can do this and the next steps on your behalf.
3. See which subsidies you are eligible to receive. You will need to supply your income information, which in turn will help the Health Insurance Marketplace determine which subsidies you may be eligible to receive.
4. Choose a health insurance plan and enroll. Browse the health insurance plans available and compare the networks, plan types, coverages, and costs to make your selection. Remember that if you would would like to receive the cost-sharing reduction health insurance subsidy, you must enroll in a Silver-level plan.

Generally, you must apply for health insurance subsidies at the same time as applying for a new health insurance plan during the Open Enrollment Period. This runs from November 1 to January 15 every year in most states. However, you may be eligible for a Special Enrollment Period outside of that window if you experience a qualifying life event.

What This Means For You

Healthcare can be expensive, and many struggle to afford it. Health insurance subsidies can help lower the cost of health insurance for those who need it. If you’re eligible for these subsidies — whether premium tax credits and/or cost-sharing reductions — it can make a difference in your health care affordability. It is critical to look into it and see if you’re eligible, as subsidies can lower your monthly premiums, reduce your out-of-pocket health insurance costs like copays and deductibles, and make health insurance more accessible overall.