Table of Contents
- Introduction
- Health Insurance Marketplace Subsidies
- Premium Tax Credit
- Who is eligible for the premium tax credit?
- Income
- Employer Coverage
- Eligibility for Medicaid
- Amount of Premium Tax Credit
- Receiving the Premium Tax Credit
- Cost Sharing Reduction
- Who is eligible for the cost sharing reduction?
- How are cost sharing reductions provided?
- Amount of Cost Sharing Reductions
- Conclusion
Introduction
Health insurance can be expensive, especially for individuals with lower or moderate incomes. Recognizing this issue, the Affordable Care Act (ACA) provides financial assistance in the form of sliding-scale subsidies to help make health insurance more affordable for eligible individuals. In this article, we will provide an overview of the financial assistance available under the ACA for individuals purchasing coverage through health insurance Marketplaces, also known as exchanges.
Health Insurance Marketplace Subsidies
There are two types of financial assistance available to individuals who enroll in health insurance Marketplaces. The first type is called the premium tax credit, which helps reduce monthly insurance payments. The second type is the cost sharing reduction (CSR), which helps lower deductibles and other out-of-pocket costs when seeking medical care. To be eligible for these subsidies, individuals and families must enroll in a health insurance plan offered through a Marketplace.
Premium Tax Credit
The premium tax credit can be applied to Marketplace plans in four different coverage levels: bronze, silver, gold, and platinum. Bronze plans typically have the lowest premiums but the highest deductibles and cost sharing, meaning individuals will have to pay more out-of-pocket when receiving covered healthcare services. On the other hand, platinum plans have the highest premiums but very low out-of-pocket costs.
Catastrophic health plans, which have even lower premiums and higher cost sharing compared to bronze plans, are also available on the Marketplace. However, these plans are generally only available to individuals under the age of 30, and premium tax credits cannot be applied to them.
Who is eligible for the premium tax credit?
To be eligible for the premium tax credit starting in 2024, individuals must meet the following criteria:
- Have a household income that is at least equal to the Federal Poverty Level (FPL) for the 2024 benefit year, which will be determined based on the 2023 poverty guidelines.
- Not have access to affordable coverage through an employer, including coverage offered by a family member’s employer.
- Not be eligible for coverage through Medicare, Medicaid, or the Children’s Health Insurance Program (CHIP).
- Be a U.S. citizen or have proof of legal residency. Lawfully present immigrants with a household income below 100 percent of the FPL can also be eligible for tax subsidies if they meet all other eligibility requirements.
- If married, must file taxes jointly.
Income
For the purposes of the premium tax credit, household income is defined as the Modified Adjusted Gross Income (MAGI) of the taxpayer, their spouse, and any dependents. MAGI includes income from sources such as wages, salary, foreign income, interest, dividends, and Social Security.
Employer Coverage
Employer coverage is considered affordable if the required premium contribution is no more than 8.39 percent of the household income in 2024. The Marketplace considers both the required employee contribution for self-only coverage and, if applicable, for family coverage. If the required employee contribution for self-only coverage is affordable but the required employee contribution for family coverage is more than 8.39 percent of the household income, dependents can purchase subsidized exchange coverage while the employee remains on employer coverage.
The employer’s coverage must also meet a minimum value standard, which requires the plan to provide substantial coverage for physician services and inpatient hospital care with an actuarial value of at least 60 percent. The plan must also have an annual out-of-pocket limit on cost sharing that does not exceed $9,450 for self-only coverage and $18,900 for family coverage in 2024.
Individuals who are offered employer-sponsored coverage that does not meet the affordability threshold or minimum value requirements can qualify for Marketplace subsidies if they meet the other eligibility criteria.
Eligibility for Medicaid
In states that have expanded Medicaid under the ACA, adults with income up to 138 percent of the FPL are generally eligible for Medicaid and therefore ineligible for Marketplace subsidies. However, in states that have not expanded Medicaid, adults with income as low as 100 percent of the FPL can qualify for Marketplace subsidies but are generally not eligible for Medicaid unless they meet other state eligibility criteria. It is estimated that 1.9 million Americans living in non-expansion states fall into this coverage gap.
Certain lawfully present immigrants are an exception to the rule that restricts tax credit eligibility for adults with income below the poverty level. Other federal rules limit Medicaid eligibility for lawfully present immigrants, except for pregnant women, refugees, and asylees, until they have resided in the U.S. for at least five years. Lawfully present immigrants who would otherwise be eligible for Medicaid but have not yet completed their five-year waiting period may instead qualify for tax credits through the Marketplace. If an individual in this circumstance has an income below 100 percent of the poverty level, their income will be treated as equal to the poverty level for the purposes of tax credit eligibility. Immigrants who are not lawfully present are ineligible for health insurance enrollment through the Marketplace, tax credits, and non-emergency Medicaid and CHIP.
Amount of Premium Tax Credit
The premium tax credit works by limiting the amount individuals need to contribute toward the premium for the “benchmark” plan, which is the second-lowest cost silver plan available to them on the Marketplace. This “required individual contribution” is based on a sliding income scale. In 2024, individuals with income up to 150 percent of the FPL have a required contribution of zero, while individuals with an income of 400 percent of the FPL or above have a required contribution of 8.5 percent of their household income.
The amount of the premium tax credit is calculated by subtracting the required contribution from the actual cost of the benchmark plan. For example, if the benchmark plan costs $6,000 annually and an individual’s income is at 150 percent of the FPL, their required contribution is zero, resulting in a premium tax credit of $6,000. If the individual’s income is at 250 percent of the FPL, their required contribution is four percent of $36,450 (the income threshold for 250 percent of the FPL in 2024), resulting in a premium tax credit of $4,542.
The premium tax credit can be applied to any other plan sold through the Marketplace, except catastrophic coverage. The amount of the tax credit remains the same, so if an individual chooses a more expensive plan than the benchmark plan, they will have to pay the difference in cost. Conversely, if an individual chooses a less expensive plan, such as the lowest-cost silver plan or a bronze plan, the tax credit will cover a greater share of that plan’s premium, and potentially even cover the entire cost, resulting in a zero-premium plan. When the tax credit exceeds the cost of a plan, it lowers the premium to zero, and any remaining tax credit amount is unused.
There are certain components of a Marketplace plan premium to which the premium tax credit does not apply. The tax credit cannot be applied to the portion of the premium attributable to covered benefits that are not considered essential health benefits (EHB). For example, if a plan offers adult dental benefits, which are not included in the definition of EHB, the individual would have to pay the portion of the premium attributable to adult dental benefits without financial assistance. Additionally, the ACA requires that premium tax credits cannot be applied to the portion of the premium attributable to “non-Hyde” abortion benefits. Marketplace plans that cover abortion are required to charge a separate $1 monthly premium to cover the cost of this benefit. Therefore, even if an individual is otherwise eligible for a fully subsidized, zero-premium policy, they would still need to pay $1 per month for a policy that covers abortion benefits. Finally, if an individual smokes cigarettes and is charged a higher premium due to smoking, the premium tax credit is not applied to the portion of the premium that is the tobacco surcharge.
Receiving the Premium Tax Credit
To receive the premium tax credit, individuals must apply for coverage through the Marketplace and provide information about their age, address, household size, citizenship status, and estimated income for the upcoming year. After submitting the application, individuals will receive a determination of the amount of premium tax credit they qualify for. They then have the option to have the tax credit paid in advance, claim it later when filing their tax return, or choose a combination of the two options.
The advanced premium tax credit (APTC) option allows individuals to have 1/12 of their tax credit paid directly to their Marketplace plan insurer each month, reducing the monthly amount they owe. However, because the APTC eligibility determination is based on estimated income, individuals are required to reconcile their APTC at tax time the following year, once they know their actual income. For individuals receiving an advanced payment of the premium tax credit in 2024, the reconciliation would occur when they file their 2024 tax return in 2025. If an individual overestimated their income when applying, they can receive the unclaimed premium tax credit as a refundable tax credit when they file. If an individual underestimated their income at the time of application and excess APTC was paid on their behalf during the year, they would have to repay some or all of the excess tax credit when they file. There are maximum repayment limits that vary depending on income.
Alternatively, individuals can choose to pay their entire premium costs each month and wait to receive their tax credit until they file their annual income tax return the following year. However, this option is often not feasible for most Marketplace participants. It’s important to note that the premium tax credit is refundable, meaning it is available to qualifying enrollees regardless of whether they owe any federal income tax. Everyone who receives an APTC in a tax year is required to file a tax return for that year in order to continue receiving financial assistance in the future.
Cost Sharing Reduction
The second form of financial assistance available to Marketplace enrollees is the cost sharing reduction (CSR). Cost sharing reductions help lower out-of-pocket costs, including deductibles, copayments, and coinsurance, when individuals use covered healthcare services.
Who is eligible for the cost sharing reduction?
Individuals who are eligible to receive a premium tax credit and have a household income between 100 and 250 percent of the FPL are eligible for cost sharing reductions.
How are cost sharing reductions provided?
Unlike the premium tax credit, which can be applied to any metal level of coverage, cost sharing reductions are only offered through silver plans. For eligible individuals, cost sharing reductions are applied to a silver plan, making deductibles and other cost sharing under that plan more similar to those under a gold or platinum plan. Individuals with income between 100 and 250 percent of the FPL can continue to apply their premium tax credit to any metal level plan, but they can only receive the cost sharing subsidies if they choose a silver-level plan.
Amount of Cost Sharing Reductions
Cost sharing reductions are determined on a sliding scale based on income. The most generous cost sharing reductions are available for individuals with income between 100 and 150 percent of the FPL. For these enrollees, silver plans are modified to be more similar to platinum plans by substantially reducing deductibles, copays, and other cost sharing. These plans, sometimes referred to as CSR 94 silver plans, have an actuarial value of 94 percent, meaning the plan pays for an average of at least 94 percent of all enrollees’ combined healthcare spending.
Somewhat less generous cost sharing reductions are available for individuals with income between 150 and 200 percent of the FPL. These cost sharing reductions reduce cost sharing under silver plans to an actuarial value of 87 percent (CSR 87 plans). In 2023, the average annual deductible under a CSR 87 silver plan was approximately $800.
For individuals with income between 200 and 250 percent of the FPL, cost sharing reductions are available to modestly reduce deductibles and copays to an actuarial value of 73 percent (CSR 73 plans). In 2023, the average annual deductible under a CSR 73 silver plan was approximately $4,200.
Insurers have flexibility in how they set deductibles and copays to achieve the actuarial value under Marketplace plans, including CSR plans, so actual deductibles may vary from these averages.
The ACA also requires maximum annual out-of-pocket spending limits on cost sharing under Marketplace plans, with lower limits permitted for cost sharing reduction plans. In 2024, the maximum out-of-pocket limit will be $9,450 for self-only coverage and $18,900 for family coverage, with lower limits for CSR plans.
Conclusion
The financial assistance provided under the ACA through premium tax credits and cost sharing reductions helps make health insurance more affordable for individuals and families purchasing coverage through Marketplaces. These subsidies are based on income and eligibility criteria, providing sliding-scale assistance to individuals with lower or moderate incomes. By reducing premiums and out-of-pocket costs, the ACA aims to ensure that more people have access to quality healthcare coverage.