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Obamacare Subsidy Gap

In order to encourage health insurance enrollment and to help lower-income enrollees afford coverage, the Affordable Care Act stipulated that taxpayers with household incomes between 100% and 400% of the Federal Poverty Level that enroll in marketplace metal plans may qualify for tax credits (subsidies) to help pay for premiums. However many taxpayers, particularly young adults, cannot qualify for subsidies within this entire income range because the cost of the premium of the second least expensive silver plan in their rating area is too low to trigger a subsidy. The Obamacare subsidy gap for a taxpayer is the range between the maximum income at which the taxpayer qualifies for premium subsidies and 400% of the federal poverty level.

Premium subsidy calculation is based on an enrollee’s benchmark silver plan - the second least expensive silver plan on the marketplace in their geographic rating area. The maximum premium cost is a percentage of the enrollee’s household income that starts at 2% for enrollees making up to 133% of the federal poverty level and increases to 9.5% for enrollees making between 300% and 400% of the federal poverty level.

The table below illustrates how the enrollee’s maximum possible premium costs for the benchmark silver plan will vary with household income. If an enrollee smokes, then their benchmark plan’s premium cost is based on the premiums for a non-smoker.

Modified Annual Adjusted Gross IncomePremium After Government Subsidy
Up to 133% FPL2% of income
133% to 150% FPLSliding scale from 3% of income to 4% of income
150% FPL to 200% FPLSliding scale from 4% of income to 6.3% of income
200% FPL to 250% FPLSliding scale from 6.3% of income to 8.05% of income
250% FPL to 300% FPLSliding scale from 8.05% of income to 9.5% of income
300% FPL to 400% FPL9.5% of income
Above 400% FPLNo government subsidy

If the benchmark silver plan’s premium costs $4,000 annually and your income-based cap for benchmark premiums from the table above is $3,000, then the subsidy you would receive is a tax credit worth $1,000 (i.e. $4,000 minus $3,000). If you buy a more expensive plan, then you would still receive the same $1,000 subsidy. If you buy a metal plan with premium costs less than the subsidy amount, then your subsidy would be limited by the premium costs. Thus a bronze plan with premiums that cost $900 per year before subsidies would cost $0 after subsidies if the subsidy for the benchmark silver plan was $1,000. Non-metal plans such as catastrophic plans and off-exchange plans such as short-term plans do not qualify for premium subsidies.

An Obamacare subsidy gap, in which an individual does not qualify for a subsidy, occurs when the income-based cap for benchmark premiums from the table above exceeds the premium costs of the benchmark silver plan. Since premium costs of the benchmark silver plan increase with age, younger individuals have wider subsidy gaps than older individuals at the same income levels. For example in Los Angeles 20-year-olds have a subsidy gap that ranges from a household income of approximately $24,000 to 400% of the individual federal poverty level. However 30-year-olds in Los Angeles have a narrower subsidy gap that ranges from approximately $32,000 to 400% of the federal poverty level.

In addition to premium subsidies, enrollees with household incomes up to 250% of the federal poverty level may also qualify for other income-based cost-sharing reductions on deductibles, co-payments, and maximum out-of-pocket costs if they enroll in a marketplace silver plan. For more information see the article on cost-sharing reduction silver plans.

Sources:

1 The household income is the combined modified adjusted gross income (MAGI) of the enrollee and any of their dependents that make enough to file a tax return. MAGI combines adjusted gross income, tax-exempt Social Security benefits, tax-exempt interest, and tax-exempt foreign income.
2 Center on Budget and Policy Priorities. Premium Tax Credits: Answers to Frequently Asked Questions. (July 2013) http://www.cbpp.org/files/QA-on-Premium-Credits.pdf
3 Obamacare Subsidy Gap

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