What is the Obamacare Subsidy Cliff? Find out about this health insurance phenomena and what it could mean for your wallet.
The term “Subsidy Cliff” refers to the steep drop off of health insurance subsidies for those with an annual income just above 400% of the Federal Poverty Line (FPL).
It’s not always easy to tell if your income is going to send you over the cliff, or not. Keep reading to fully understand the subsidy cliff, and make sure you have a good idea of whether or not you’ll receive financial help for the year.
How do subsidies work?
Those who do not receive their health insurance coverage through an employers or other government programs, may be eligible for Affordable Care Act (ACA) subsidies to help them afford their monthly premiums. The most common kind of subsidies are called advanced premium tax credits and are usually available to those with an annual income from 100% to 400% of the FPL.
Every year the government benchmarks the FPL at a particular income. Your eligibility for government assistance – such as ACA subsidies – is based on how much your income is above or below the FPL.
Source: 2018 HHS poverty guidelines
The above numbers are from 2018, which is what eligibility for ACA subsidies for the 2019 coverage year is based on.
Other factors such as age, location, and household size can seriously affect your eligibility for ACA subsidies.
The cut off for ACA subsidies is 400% of the FPL (which for the 2019 coverage year is $48,560 for an individual, and $100,400 for a family of 4).
Where does the Subsidy Cliff come in?
Once an individual or household’s annual income is 401% or more of the FPL they are likely no longer eligible for subsidies. Those who are not eligible for ACA premium tax credits must front the entire bill for their health insurance
There is currently no phase out of subsidies for those who make just over the FPL. This means that a slight change in income (1% change in income for the 2019 coverage year is $121.40) can cost a household thousands of dollars in subsidies.
Your subsidy cliff may be steeper depending on factors like where you live, how many people are in your family, and your age.
Data found by the Kaiser Family Foundation (KFF), shows that since Rhode Island has the lowest average premiums for middle-class people who are ineligible for subsidies, the subsidy cliff is less steep for those living in this area. Without premiums, a 40-year-old with an annual income of $50,000 would pay about 5% of their income in premiums for the cheapest plan, on average.
While, for older people living in counties with high-premiums the subsidy cliff is much steeper. In Nebraska counties with the highest premiums, a 60-year-old making $50,000 per year would pay about 32% of their income for the cheapest plan, on average. While a 60-year-old living in the same county with an income of $45,000 per year would pay nothing for the same plan as they would qualify for subsidies that would completely cover their premiums.
In all, data from the KFF shows that the subsidy cliff is the steepest for older people making just above the 400% subsidy cut off who live in rural areas where premiums tend to be the highest.
The chart below shows the average percentage of yearly income a 60-year-old making 412% above the FPL would pay for the lowest-cost plan premium in their area. The darker the area, the steeper the subsidy cliff.
Affordability of Individual Market Premiums (2019)
Report income changes as soon as possible
If you experience any income changes throughout the year, make sure you report them as soon as possible. You may become eligible for subsidies if you experience a drop in income or become ineligible if your income increases.
If you qualify for ACA subsidies, you report your expected income at the beginning of the year. If you end up making more than you originally reported, you may end up owing money back on your taxes. So, make sure you report any changes in income to avoid having an unexpectedly large tax bill at the end of the year.