Affordable Care Act
What if a relatively small change to your income could result in a huge increase in your annual health insurance costs?
Well, it can.
The Affordable Care Act provides subsidies for lots of American consumers purchasing coverage on their own, but not for everyone. Individuals and families earning just too much to qualify for government help may find themselves in what we like to call the “subsidy cliff.”
Let’s take a quick look at how subsidies are supposed to work, then we’ll explain the Obamacare subsidy cliff and provide a few tips to help you avoid falling into it.
The Affordable Care Act (otherwise known as the ACA or Obamacare) provides premium tax credits — subsidies — to help qualified consumers buy individual or family health insurance plans on their own.
To qualify for Affordable Care Act subsidies, your household income cannot exceed 400% of the federal poverty level, which is about $46,000 per year for a single person or $95,000 per year for a family of four.
Such ACA subsidies are generally applied toward your monthly health insurance premiums on an up-front basis. If you qualify for a subsidy and enroll in a subsidy-eligible health plan, your subsidy is paid by the government directly to the insurance company. The check you write for your monthly premium is reduced by a corresponding amount.
The dollar value of your health insurance subsidy will depend on where your income falls below 400% of the federal poverty level (and also on the cost of the benchmark health plan in your area). Subsidies work by limiting your monthly health insurance premium to a defined percentage of your income.
So, for example, someone with a household income of 133-155% of the federal poverty may qualify for a subsidy that limits their annual health insurance premiums to no more than 3-4% of their income. People earning between 300-400% of the federal poverty level may qualify for a subsidy that limits their annual health insurance premiums to no more than 9.5% of their income.
When we talk about the Obamacare subsidy cliff, we’re talking about the difference in what you’ll have to pay for health insurance premiums if you earn just too much to qualify for subsidies vs. what you might have had to pay if you earned a little bit less.
If your salary puts your annual income at just over 400% of the federal poverty level (and hence you’re ineligible for subsidies), you may already be in the cliff. It’s possible, however, to fall into the subsidy cliff unexpectedly.
Since the amount of Affordable Care Act subsidy help you receive is based on your estimated income for the current year rather than your actual income for the past year, it’s possible to fall into the ACA subsidy cliff by underestimating your income for 2014. A little extra money that comes your way in December, for example, could push you over the edge. You may be required to pay back any subsidies you received.
To illustrate what the Obamacare subsidy cliff can mean in terms of dollars, eHealth published an infographic showing what health insurance costs could look like for a family of three earning 400% of FPL vs. a family of three in the subsidy cliff earning 401% of the federal poverty level. We assumed, of course, that they bought the same health insurance plan.
The final result?
A difference of only $195 in annual household income can result in a difference of over $1,500 in annual health insurance premiums.
So, what can you do to avoid the dreaded subsidy cliff? Here are a few tips:
Look beyond government exchanges: Government health insurance exchanges are primarily intended to match ACA subsidy-eligible consumers with plans eligible for purchase with a subsidy. Not all plans are. In fact, some major insurers don’t offer plans on government exchanges. These plans can still meet your coverage requirements under the health reform law.
So don’t limit yourself to government exchanges. Work with licensed agents and private online exchanges like eHealth to get the broadest view of the plans available to you. You may find plans better suited to your needs and budget away from the government exchange.
Delay taking your subsidy dollars until you do your taxes: If you expect your 2014 household income to come in at just under 400% of the federal poverty level and the government says you qualify for ACA subsidies, consider applying those subsidies at the end of the year on your federal tax return, rather than having them applied up front to your monthly premiums.
That way, if your income fluctuates unexpectedly, you won’t have to pay anything back – and if you do you fall under 400% of the federal poverty level at year’s end, you may get a nice break on your taxes. You should also know that if you do accept up-front subsidies, you can alter your subsidies mid-year, if your income changes.
Consider creative ways to lower your modified adjusted gross income: Technically, your subsidy eligibility is based on your “modified adjusted gross income” — a figure reported on your taxes. If your income is just over 400% of the federal poverty, making you ineligible for ACA subsidies, you may be able to qualify for subsidies by lowering you modified adjusted gross income very slightly.
For example, you may be able to do this by making a donation to a non-profit charity of your choice or by opening a Health Savings Account (with a qualified health plan) and depositing funds into your account on a tax-deductible basis. Talk with a tax professional to learn more.