Health Insurance

Understanding Health Insurance Subsidies

Health insurance subsidies can help alleviate the stress of monthly health insurance costs.

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A health insurance subsidy is a way to get help paying for your monthly health insurance premiums and out-of-pocket costs. These cost savings are established by the Affordable Care Act (ACA), meaning they apply to people who get their insurance from the Health Insurance Marketplace.

The ACA was enacted in March 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. If you get insurance from work, Medicare, or Medicaid, you may not be eligible for a health insurance subsidy.

How Does a Health Insurance Subsidy Work?

Exact savings from health insurance subsidies for people with low incomes vary depending on location, the number of people in the household, and the annual household income. Getting a health insurance subsidy also requires you to have coverage from the Health Insurance Marketplace.

The Health Insurance Marketplace is an online portal offering the ability to browse and compare health insurance plans before purchasing. There are 4 main categories for plans within the Marketplace, and they offer slightly varying levels of coverage for different prices:

  • 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

These 4 tiers may let you take advantage of a health insurance subsidy called an advance premium tax credit (APTC), while those who have a Silver plan could be eligible for a cost-sharing reduction (CSR).

How Does the Advanced Premium Tax Credit (APTC) Work?

The APTC 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. When you sign up for insurance on the Marketplace, the website asks for your estimated annual income. It then uses your annual income amount to automatically estimate the APTC.

Rather than cutting you a check, Marketplace pays this amount to the insurance company on your behalf. In turn, the insurer provides a lower premium to make coverage more affordable on your income. Understanding exactly how Marketplace calculates the APTC, as well as eligibility for the APTC, can help you see how you might personally benefit.

How Are APTC Amounts Calculated?

Generally, the amount of the APTC is the difference of the second-lowest cost Silver plan’s premium after a certain percentage of your income is subtracted from it. That income percentage used to be based on how far someone was below the poverty level. However, the American Rescue Plan Act of 2021 changed that determination. Now, annual health insurance premiums cannot be more than 8.5% of your income.

For example, if you earn $30,000 in annual income, 8.5% of that would be $2,550 each year, or $212.50 each month. If the second-lowest cost Silver plan in the area is $500 per month, then you would be responsible for paying $212.50 and your APTC would provide the remaining $287.50 each month.

Another factor that can affect the APTC calculation is whether or not you’re a smoker. Insurers can charge higher premiums for smokers, but the APTC only considers the premium amounts for non-smokers. This means if you are a smoker and are charged a higher premium, the APTC would still only cover the cost of a standard non-smoker’s premium.

You don’t have to take the full APTC 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 APTCs than you may have been eligible for, you may be required to pay back the excess on your tax return.

Who Is Eligible for the APTC?

To be eligible for the APTC, your annual household income must fall within 100% to 400% of the federal poverty level. For 2022, the federal poverty level for individuals was $13,590, meaning your income must be between $13,590 and $54,360. For a family of 4, the numbers jump up to $26,500 to $106,000 in total household income.

Other criteria for eligibility include:

  • Have health insurance coverage through the Health Insurance Marketplace.
  • Not be filing a married-filing-separately status on your tax return. 
  • Not be claimed as a dependent by another person on their tax return.
  • Not be offered health insurance through an employer or other government program.

You may also be eligible for the APTC if you are collecting unemployment. Income received through unemployment is considered no more than 133% of the federal poverty line, so it meets the requirements for the APTC.

How Do Cost-Sharing Reductions (CSRs) Work?

CSRs can give people who enroll in a Silver plan from the Marketplace a lower deductible, which 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 could lower that initial amount.

They can also help to ease your coinsurance burden, which 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%.

Finally, CSRs can lower your 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 range between $2,900-$6,950, compared to a maximum of $8,700 for Silver plans in general.

Like the APTC, CSRs are income-based, so they can vary depending on your specific needs. They also have specific eligibility criteria.

How Are CSR Amounts Calculated?

CSRs are primarily based on income level, and each income level has a set cost-sharing limit that plans must follow. For example, people with a household income of 100% to 200% of the federal poverty level have an out-of-pocket maximum of $2,900. If your income is 200% to 250% of the federal poverty level, that jumps up to $6,950.

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. 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 70%, that means your company typically covers 70% of your overall healthcare costs.

Those with an income between 200% and 250% of the federal poverty level can get CSRs that bring their plans’ AV to 73%, while those with incomes between 150% and 200% of the federal poverty level can get their plans’ AV to 87%. Individuals with incomes between 100% to 150% of the federal poverty level can get an AV of 94%.

Who Is Eligible for CSRs?

Participants must purchase a Silver plan from the Marketplace to be eligible for CSRs, as no other tiers qualify for these reductions. In addition, your annual household income must fall within 100% to 250% of the federal poverty level. For 2022, individuals earning $13,590 to $33,975 annually would be eligible. If there are more people in your household, these income thresholds increase. For example, eligible families of 2 must earn $45,775 of combined income or less. Some other examples include:

  • Family of 3: Maximum household income of $57,575
  • Family of 4: Maximum household income of $69,375
  • Family of 5: Maximum household income of $81,175
  • Family of 6: Maximum household income of $92,975

How Much of a Health Insurance Subsidy Can You Get?

Unfortunately, there is no set or standard formula to use when calculating APTCs or CSRs, as amounts vary based on individual incomes, family sizes, selected plan, and other Marketplace options. However, you can calculate the approximate amounts you may be eligible to receive.

To estimate the APTC amount, find the second lowest cost Silver plan in your area. If you can’t find this on your own, the Marketplace sends this information out on Form 1095-A early in the year. For this calculation, note the monthly premium for this plan.

Next, determine the maximum health insurance income cap for your income bracket. As of 2021, the government is using 8.5% of your income as a maximum limit for what you should pay for healthcare premiums each year, though your actual percentage may be less. Take 8.5% of your yearly income, and then divide that number by 12 to get what you should be spending each month. Finally, subtract that from the Silver plan premium you had identified as the second lowest cost option. The resulting formula looks something like this:

Second Lowest Cost Silver Plan’s monthly premium – (Your Annual Income x 0.085 / 12) = Your Estimated APTC

Because CSRs are less of a credit and more of a discount on insurance services, these vary even more. To best estimate the amount you may receive, refer to where your household income fits into the poverty level.

How to Apply for Health Insurance Subsidies

The Marketplace automatically checks to see if you may be eligible for any subsidies during your application for health insurance. When you apply for health insurance in the Marketplace, you must provide an estimate of your annual income. The Marketplace automatically checks to see if you may be eligible for any subsidies during your application based on that figure.

Generally, you must apply for health insurance subsidies during Open Enrollment. This is typically from November 1 to January 15 every year. However, you may be eligible for a Special Enrollment Period if your annual household income is low enough.