Making insurance accessible means making it affordable for everybody, particularly those with low to moderate incomes. That’s why the Affordable Care Act (ACA), or Obamacare, includes provisions to lower premiums and out-of-pocket costs.
Obamacare is designed so that people purchasing coverage on their own through health insurance Marketplaces (or exchanges) may potentially save money through:
- Premium tax credits; and
- Cost-sharing subsidies.
It is important to realize that to receive either premium tax credits or cost-sharing subsidies, qualifying individuals and families must enroll in a plan offered through the health insurance marketplaces. Subsidies are not available in private exchanges or marketplaces.
The ACA also gives States the option to strengthen public coverage by expanding their Medicaid programs to cover people with incomes under 138% of the Federal Poverty Level (FPL). Get more information on Medicaid expansion.
Premium tax credit definition
In short, the premium tax credit is an amount that reduces marketplace enrollees’ monthly payments for insurance plans purchased through the Marketplace. If you qualify for the credit (see Premium tax credit eligibility, below), you can opt to get the credit applied in advance to your premiums, or get it back at tax time.
Health insurance plans offered through the Marketplace are grouped into four “metal” levels of coverage: bronze, silver, gold, and platinum. Bronze plans tend to have the lowest premiums but leave the enrollee subject to higher out-of-pocket costs when they receive health care services. Platinum plans tend to have the highest premiums but the lowest out-of-pocket costs. The premium tax credit can be applied to any of these metal levels, but cannot be applied toward the purchase of catastrophic coverage.
Premium tax credit eligibility
In order to receive the premium tax credit for coverage starting in 2015, a marketplace enrollee must meet the following criteria:
- Have a household income from one to four times the Federal Poverty Level (FPL), which for the 2015 benefit year will be determined based on 2014 poverty guidelines. The chart below denotes shows the qualifying income ranges for households of 1 to 8 members.
(Note: For the purposes of the premium tax credit, household income is defined as the Modified Adjusted Gross Income (MAGI) of the taxpayer, spouse, and dependents. The MAGI calculation includes income sources such as wages, salary, foreign income, interest, dividends, and Social Security.
- Not have access to affordable coverage through an employer (including a family member’s employer)
- Not be eligible for coverage through Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), or other forms of public assistance
- Have U.S. citizenship or proof of legal residency
- If married, must file taxes jointly
Please note: Incomes that qualify for tax credits are higher in Alaska and Hawaii.
If your 2015 household income falls in these ranges, you’ll generally qualify for a premium tax credit. The lower your income is within these ranges, the bigger your credit. Source: healthcare.gov.
- $11,670 to $46,680 for individuals
- $15,730 to $62,920 for a family of 2
- $19,790 to $79,160 for a family of 3
- $23,850 to $95,400 for a family of 4
- $27,910 to $111,640 for a family of 5
- $31,970 to $127,880 for a family of 6
- $36,030 to $144,120 for a family of 7
- $40,090 to $160,360 for a family of 8
Please note: Incomes that qualify for tax credits are higher in Alaska and Hawaii.
Premium tax credit amount availability
The premium tax credit works by setting a cap on the amount an individual or family must spend on monthly payments for health insurance if they enroll in a “benchmark” plan. The cap depends on the family’s income. Lower-income families have a lower cap; higher-income families have a higher cap.
The “benchmark” for determining the amount of the subsidy is the second-lowest cost silver plan available to the individual or family through their state’s Marketplace. If the cost of the enrollee’s benchmark silver plan exceeds the premium cap, the federal government will pay any amount over the cap. The amount of the tax credit, therefore, is equal to the difference between the individual or family’s premium cap and the cost of the benchmark silver plan.
As noted above, the premium tax credit can then be applied toward any other plan sold through the Marketplace (with the exception of catastrophic coverage). The amount of the tax credit remains the same, so a person who purchases a plan that is more expensive than the benchmark plan will have to pay the difference in cost. Conversely, a person who buys a less expensive plan, such as a bronze plan, may end up paying as little as zero dollars per month for the premium.
It’s important to realize that the actual amount of the tax credit depends on the exact income, the ages of the household members, and geographical location. The lower the income is within the range, the higher the amount of the tax credit. For estimates of actual premium tax credit amounts for 2015, consult our Health Care Reform Calculator. You will be asked to input your zip code, ages of you and any family members, and estimated 2015 income.
Premium tax credit distribution
During application for Marketplace coverage, enrollees will receive a subsidy determination, letting them know whether they are eligible for a premium tax credit and the amount they may receive. The person or family then has the option to:
- Choose the advanced payment option, in which they receive the tax credit in advance (by applying part or all of it each month to premium payments); or,
- Pay the entire premium costs each month, then wait to receive the credit when they file annual income tax returns the following year.
The advanced payment option allows consumers to receive their tax credit at the time of purchase and choose how much advance credit payments to apply toward their premiums each month. If the enrollee chooses the advanced payment option, then the IRS will pay insurers directly so that the cost of the premium is reduced upfront, and enrollees pay less out-of-pocket costs for monthly premiums. With this option, the enrollee would need to reconcile the premium tax credit at tax time the following year.
If the individual or family had a significant change in income from the time of application for Marketplace coverage, they may be asked to repay some or all of the tax credit; or conversely, they may be owed an additional amount when they do their taxes.
The premium tax credit is available to qualifying enrollees regardless of whether they have federal income tax liability, although an individual is required to file taxes in a given benefit year in order to receive financial assistance.
Cost-sharing subsidy definition
The cost-sharing subsidy is designed to minimize enrollees’ out-of-pocket costs when they see a doctor or have a hospital stay. These subsidies reduce a person or family’s deductibles, copayments and coinsurance.
Unlike the premium tax credit (which can be applied toward any metal level of coverage), cost-sharing subsidies can be applied only toward a silver plan. In essence, the cost-sharing subsidy increases the actuarial value (protectiveness) of a silver plan, in some cases making it like a gold or platinum plan.
To receive the cost-sharing subsidy, people must:
- Be eligible for the premium tax credit
- Have household incomes from 100% to 250% of poverty. The chart below denotes the qualifying income ranges for households of 1 to 8 members. (Note: Cost-sharing subsidies are available only to the lowest-income Marketplace enrollees who meet all of the other criteria for receiving the premium tax credit).
- Purchase silver level plans
If your 2015 household income falls in these ranges, you’ll save on out-of-pocket costs. The lower your income within these ranges, the more you’ll save on out-of-pocket costs. Source: healthcare.gov
- $11,670 to $29,175 for individuals
- $15,730 to $39,325 for a family of 2
- $19,790 to $49,475 for a family of 3
- $23,850 to $59,625 for a family of 4
- $27,910 to $69,775 for a family of 5
- $31,970 to $79,925 for a family of 6
- $36,030 to $90,075 for a family of 7
- $40,090 to $100,225 for a family of 8
Please note: Incomes that qualify for cost-sharing subsidies are higher in Alaska and Hawaii.
Cost-sharing subsidy availability amount
The ACA sets maximum out-of-pocket spending limits, but otherwise does not specify the combination of deductibles, copayments, and coinsurance that plans must use to meet the actuarial value requirements. For example, one insurer may choose to have a relatively high deductible but low copayments for office visits and other services, while another may choose a lower deductible but higher copayments or coinsurance for each service.
Without the cost-sharing subsidy, the 2015 out-of-pocket maximum may be no more than:
- $6,600 for an individual
- $13,200 for two or more people
(This is the highest a plan may set the out-of-pocket max, but plans frequently come with a lower out-of-pocket max).
With the cost-sharing reduction, the out-of-pocket maximum can be no higher than
- $2,250 to $5,200 for an individual
- $4,500 to $10,400 for a family in 2015, depending on income.
Typically, silver plans have an actuarial value of 70%. This means that on average, the plan pays 70% of the cost of covered benefits for a standard population of enrollees, with the remaining 30% of total costs covered by the enrollees in the form of deductibles, copayments, and coinsurance. By lowering an individual or family’s out-of-pocket costs, the cost-sharing subsidies increase the actuarial value of the silver plan (to 73, 87, or 94 percent depending on the enrollee’s income).
How are cost-sharing subsidies distributed?
When enrolling in a silver plan, an eligible enrollee is placed into a plan that has the cost-sharing subsidy automatically applied. This means that the silver plan they choose will already have a lowered out-of-pocket maximum than the same plan would if there is no cost-sharing subsidy.
The federal government pays cost-sharing subsidies directly to the insurer. (Unlike the premium tax credit, there is no option for cost-sharing subsidies to be paid to the enrollee).
This document is for general informational purposes only. While we have attempted to provide current and accurate information, this information is provided “as is” and we make no representations or warranties regarding its accuracy or completeness. The information provided should not be construed as legal or tax advice or as a recommendation of any kind. External users should seek professional advice from their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.
Our Health Care Reform Calculator estimates your 2015 premium tax credit.