An Affordable Care Act subsidy is a percentage of your health insurance premium which the federal government pays. Other names for it are Obamacare subsidy and premium tax credit. 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, the requirement is that an individual or household income must fall between less than 100% and 400% of the federal poverty level to qualify for a subsidy. The requirements are different though in states which provide Medicaid at higher levels of income. An example is a state in which Medicaid is available for incomes up to 133% of the federal poverty line.
The federal poverty line, also called the federal poverty level, is the set minimal amount of gross income that a family 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 family.
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.
Premium tax credits are available to individuals and families on a sliding scale. The ranking of a person’s income on the federal poverty line is what determines the percentage of the premium he or she is responsible for paying.
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. The percentages vary depending on federal poverty guidelines – the percentages and ranges of federal poverty levels used to calculate the subsidies. The table below shows the current guidelines for the U.S. and 48 contiguous states. The numbers vary in the states of Alaska and Hawaii.
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 annual premium of the benchmark plan divided by the annual gross adjusted income of the recipient of the subsidy. It is in the right column of the table below.
Here is an example. A household with 5 members has an income of $83,500 which is just above 300% of the federal poverty line. Thus, the maximum amount it has to pay in premiums annually is 9.5% of $83,500 or $7932.50. It purchases a silver-level health plan with an annual premium of $13,000. The subsidy would be $13,000 – $7932.50 or $5067.50, the balance of the annual premium. The monthly premium the family would pay is $7932.50 ÷ 12 or $661.04.
You can avoid having to go through a manual calculation though by using the premium tax 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.