Health insurance is an essential protection, often saving people from complete financial devastation when a major illness or injury occurs. But it can be costly, sometimes adding up to thousands of dollars just to keep coverage. On average in 2020, a single person who is 40 years old is paying $462 per month, or $5,544 per year, in premiums for the silver plan with the second-lowest cost.1
But under the Affordable Care Act — sometimes referred to as Obamacare — you may qualify for help paying for your coverage. When you apply for a policy through the Health Insurance Marketplace, you may be eligible for subsidies that reduce your cost.
What are the subsidies?
The Affordable Care Act includes two subsidies from the federal government that can make health insurance more manageable:
- Advanced Premium Tax Credit: If you have a lower income, you may qualify for this tax credit. When you enroll in a health plan through the Health Insurance Marketplace, you can use the credit to reduce your monthly premiums. Or, you can opt to receive it when you file your tax return for the year.2
- Cost Sharing Reduction: With the cost-sharing reduction, your out-of-pocket costs are lower. You could qualify for reduced copays, deductibles, and a smaller out-of-pocket maximum.3
Depending on your income and family size, you could receive one or both of these subsidies.
Who qualifies for subsidies?
As a rule, your household income must be 100 to 400% of the federal poverty line (FPL) to qualify for the premium tax credit.4 However, there are some exceptions for people whose income falls under the 100% threshold.
For the cost-sharing reduction, your household income must be 100 to 250 % of the FPL for your family size.5
2020 Poverty Guidelines for the 48 contiguous states and the District of Columbia
The Health Insurance Marketplace uses the previous year’s Federal Poverty Line (FPL) to determine subsidies.6
|Family Size||100% of Poverty Guideline||250% of the Poverty Guideline||400% of Poverty Guideline|
How do subsidies work?
How you are able to use your subsidies depends on the type of assistance you qualify for when you apply for health insurance.
Using the premium tax credit
If eligible for the premium tax credit, you can apply it to any of the four tiers of coverage available on the Health Insurance Marketplace: Bronze, Silver, Gold, and Platinum. You cannot use the credit to purchase catastrophic coverage, which is a low-cost option available for those eligible for a hardship exemption or individuals under the age of 30.
The amount of a premium tax credit is based on the cost of the second-lowest silver plan, minus what you would be required to pay towards the premium. This credit is then applied to any plan you choose – to help you pay for the premiums.
Another type of subsidy you may qualify for is the cost-sharing reduction. Unlike the premium tax credit, you can only use the cost-sharing reduction toward a silver plan. It doesn’t help with premiums, rather it reduces your out-of-pocket costs whenever you use health services.
With the cost-sharing subsidy, your out-of-pocket maximum can’t exceed $8,150 for individuals and $16,300 for two or more people in 2020.
When you enroll in a silver plan, the insurer will automatically enroll you in coverage and apply the subsidy to it. Unlike the premium tax credit, you can’t defer the subsidy or receive it directly.7
How are subsidies calculated?
The government determines subsidies based on your adjusted gross income (AGI), family size and directly.8 Your AGI is your gross income minus specific deductions, such as the student loan interest tax deduction and deductions for IRA contributions you may have made over the year.9
For example, if you live in Pennsylvania, are married, have no children, and have a household income of $30,000 per year, you earn 177% of the FPL. At that level, you would be eligible for subsidies. You could get up to $344 in financial assistance per month as a premium tax credit, which would cover 72% of your cost.10
What happens when you under or overestimate your income?
If you underestimate your adjusted gross income for the year and receive more subsidies than you should have, you may have to pay some or all of it back when you file your taxes. How much you repay depends on your income. If it’s under 400% of the poverty guideline for your family size, you may only have to pay back a portion of it. If your income exceeds that amount, you’ll have to repay the entire value of the subsidy.
If you overestimate your income and get a smaller subsidy than you deserve, the government will retroactively adjust your subsidy when you file your tax return. If you don’t have a tax bill, you’ll get the remaining value as part of your tax refund.11
How to apply for subsidies?
To apply for a subsidy, fill out an application for coverage through the Health Insurance Marketplace. When you submit your information, the marketplace will let you know if you qualify for the premium tax credit or cost-sharing reduction.
Getting health insurance
If your household income is above 400% of the FPL, you won’t qualify for Obamacare subsidies. However, you may find other cost-effective insurance plans with HealthCare.com. The site offers many different options, including short-term health plans and individual plans.