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A subsidy is financial help getting something. There are two types of Affordable Care Act subsidies. One provides assistance getting insurance coverage. The other helps lower out-of-pocket expenses once the coverage is in place.
Affordable Care Act Subsidies in Perspective
Of the two types of Affordable Care Act subsidies, the one that helps people afford insurance is termed the premium tax credit. To many it is synonymous with health insurance subsidy. The one that helps lower the cost of care is the cost-sharing subsidy.
The Premium Tax Credit and How It Works
Since getting health insurance coverage is the number one priority for most people in need of assistance with medical care, the premium tax credit tends to be the focal point of most discussions about Affordable Care Act subsidies.
Many use the terms Affordable Care Act subsidy, Obamacare subsidy and premium tax credit interchangeably even though they are not true synonyms in the strictest sense of the words. More precise synonyms for premium tax credit are health insurance subsidy and premium subsidy.
A premium tax credit is a portion of the premium for health insurance which the federal government pays an insurance company to lower the monthly cost of health insurance for an individual or family. Its purpose is to help low and moderate-income individuals and families purchase marketplace health insurance.
In order to qualify one’s income must fall within a range. In general, that range is between 100% and 400% of the federal poverty level for an individual or family household. The requirements are different though in states which provide Medicaid. The reason is one does not qualify for Affordable Care Act subsidies if he or she is eligible for Medicaid. An example is a state in which Medicaid is available for incomes up to 133% of the federal poverty line or in states with Medicaid expansion where the threshold is 138%.
The federal poverty line (FPL), also called the federal poverty level, is the set minimal amount of gross income that a household needs for food, clothing, shelter, transportation and other necessities. The Department of Health and Human Services determines it in the United States and makes annual adjustments of it for inflation. It varies depending on the size of a household. Table 1 below depicts the 2018 guidelines for the 48 contiguous states of the U.S.
The guidelines vary in the states of Alaska and Hawaii. (See thumbprint tables 2 and 3 below to the right and left respectively).
The portion of the premium which the government will pay is the difference between the cost of the benchmark plan and the percentage of the premium which the recipient of the subsidy is responsible for paying. The benchmark plan that sets the premium is the second cheapest silver-level insurance plan sold by a state’s health insurance exchange. It and its cost vary from state to state.
The premise of the premium tax credit is that no household should have to spend more than a specified percentage of its income on health insurance premiums. That percentage is in accordance with a sliding scale. In other words, it depends on where the household income ranks as a percentage of the national poverty line. The percentage of the premium that a household has to pay minus the premium tax credit is a calculation based on federal poverty guidelines – income tiers based on ranges of percentages of the federal poverty level. The table below shows the sliding scale for 2018.
Tax subsidy or premium tax credit = (The cost of the second-lowest-price silver plan) – (n% of income).
The n% in the equation is the sliding scale percentage tier of annual gross adjusted income based on the federal poverty guidelines. It is in the right column of the above table.
Here is an example. A household with 5 members has an income of $71,950 which is 250% of the federal poverty line. Thus, the maximum amount the household has to pay in premiums annually is 8.10% of $71,950 or $5,827.95. The family purchases a silver-level health plan with an annual premium of $20,090. The subsidy would be $20,090 – $5,827.95 or $14,262.05, the balance of the annual premium. The monthly subsidy would be $1,188.50. The monthly premium the family would pay is $5,827.95 ÷ 12 or $485.66.
You can avoid having to go through a manual calculation though by using a premium tax credit calculator on one of the health exchange websites.
Although the subsidy is based on the second lowest cost silver-level plan in your state, you have the option of purchasing a higher level plan and paying a higher premium or a lower level plan and saving more since the subsidy will not change.