How Health Insurance Subsidies Work and How They Are Calculated
Health insurance can be expensive, especially for families and individuals who do not receive coverage through an employer. To make healthcare more affordable, the Affordable Care Act (ACA) introduced subsidies, also known as Premium Tax Credits, which reduce the monthly cost of Marketplace health insurance.
Understanding exactly how subsidies work, how they are calculated, and what factors influence them can help you make informed decisions and potentially save hundreds—or even thousands—of dollars each year.
This guide explains everything in simple, practical terms.
What Are ACA Health Insurance Subsidies?
ACA subsidies are financial assistance provided by the federal government to help eligible individuals and families lower the cost of Marketplace health insurance plans.
There are two types of subsidies:
1. Premium Tax Credit (PTC)
This subsidy reduces your monthly insurance premium. This is the most common type of ACA subsidy.
2. Cost-Sharing Reductions (CSRs)
These lower your deductibles, copayments, and out-of-pocket costs, but only apply if you choose a Silver plan.
Most people referring to “subsidies” are talking about the Premium Tax Credit, which is the focus of this article.
Who Is Eligible for Subsidies?
Eligibility is based on several requirements:
1. Income Level
Your household income must fall within a certain range, generally between 100% and 250% (or sometimes 400% or more) of the Federal Poverty Level (FPL), depending on current regulations.
The Marketplace calculates this using your Modified Adjusted Gross Income (MAGI).
2. Filing a Tax Return
You must file a federal tax return for the year you receive the subsidy.
3. U.S. Residency
You must be:
A U.S. citizen,
A U.S. national, or
A lawfully present immigrant.
4. No Access to Affordable Employer Coverage
If your job offers an “affordable” plan that meets minimum value standards, you may not qualify for ACA subsidies.
How Premium Tax Credits Work
The goal of ACA subsidies is simple:
To cap the amount you pay for health insurance at a reasonable percentage of your income.
Instead of setting one flat discount, the government calculates how much of your income should be spent on premiums. Anything above that is covered by the subsidy.
Formula Overview
Your subsidy is calculated like this:
Benchmark Plan Premium
– Your Expected Contribution
= Your Monthly Subsidy
Key Terms
Benchmark Plan
This is the second-lowest-cost Silver plan available in your area. Your subsidy is tied to this plan even if you choose a different plan.
Expected Contribution
This is the percentage of your income that the government expects you to contribute to your insurance cost. It varies depending on your income level within the FPL.
How Subsidies Are Calculated: Step-by-Step
Let’s break down the process clearly.
1. Determine Your Household Income (MAGI)
MAGI generally includes:
Wages
Self-employment income
Interest and dividends
Social Security benefits (if taxable)
Rental income
Foreign income (if excluded)
This estimated income is crucial because your subsidy depends directly on it.
2. Compare Your Income to the Federal Poverty Level (FPL)
Your income is expressed as a percentage of the FPL for your household size.
Example FPL numbers (these change every year):
100% FPL = approximately $14,580 for an individual
100% FPL = approximately $30,000–$31,000 for a family of four
3. Identify Your Expected Contribution Percentage
The Marketplace uses a sliding scale.
Lower-income households pay a smaller percentage; higher incomes pay more.
For example:
Someone at 150% FPL may need to contribute around 0% of income.
Someone at 300% FPL may contribute around 6–8% of income.
4. Calculate Your Expected Annual Contribution
Example:
If you earn $40,000 per year and the expected contribution is 4%:
$40,000 × 0.04 = $1,600 per year
Monthly = $133.33
This is the amount the government expects you to pay toward monthly premiums.
5. Compare With the Benchmark Plan Premium
If the benchmark Silver plan in your county costs $600 per month:
$600 − $133.33 = $466.67 monthly subsidy
This discount can then be applied to any plan, not just the benchmark.
Why Your Subsidy Might Change During the Year
Subsidies are based on your projected income, not your final income. If things change—even a little—your subsidy may also change.
Factors include:
Income increases or decreases
Changes in household size (marriage, birth of a child, divorce)
Moving to a new ZIP code
Gaining or losing employer coverage eligibility
If your actual income at tax time is higher than estimated, you may need to repay part of the subsidy.
If lower, you may receive additional credit.
This is why reporting life changes promptly is essential.
Common Mistakes to Avoid When Estimating Income
Forgetting to include self-employment profit
Not subtracting qualified business deductions
Excluding taxable Social Security income
Not updating Marketplace info after a raise or job change
Estimating income too low to get a higher subsidy (risky at tax time)
Accurate estimation protects you from unexpected tax bills later.
How Cost-Sharing Reductions (CSRs) Work
Although separate from the Premium Tax Credit, CSRs offer additional savings.
These reductions:
Lower deductibles
Lower copayments
Lower out-of-pocket maximums.
Important:
CSRs only apply to Silver plans, and only if your income is below a specific threshold (usually under 250% FPL).
How to Get the Most Out of Your Subsidy
1. Estimate income realistically
Use last year’s tax return as a baseline.
2. Report changes immediately
Income, address, household size, or job changes must be updated in your Marketplace profile.
3. Compare plans carefully
Sometimes the lowest-cost plan is not the best value.
4. Check eligibility every year
Rules and FPL numbers change annually.
