<img src="//bat.bing.com/action/0?ti=5067266&amp;Ver=2" height="0" width="0" style="display:none; visibility: hidden;">
Request Demo

Small Business Employee Benefits and HR Blog

Individual Health Insurance Premium Subsidies in State Exchanges

The Patient Protection and Affordable Care Act (PPACA) includes provisions to lower individual health insurance premiums for Americans with household incomes below 400% of the federal poverty line, or FPL (that’s the majority of Americans).  

The purpose of this article is to describe the massive health insurance subsidies provided under PPACA for people purchasing individual health insurance coverage through new public health insurance exchangescheap family health insurance

What types of tax subsidies does PPACA provide to people buying coverage in the public exchange?

New rules give states the option of extending coverage in Medicaid to most people with incomes under 133% of poverty. For households with higher incomes (up to 400% of poverty), PPACA provides tax subsidies that reduce premium costs. The premium tax subsidies will begin in 2014.

Who is eligible for premium tax subsidies?

Households with income between 100% and 400% of FPL who purchase coverage through a state (individual) health insurance exchange are eligible for a premium tax subsidy to reduce the cost of coverage. In states without expanded Medicaid coverage, people with incomes less than 100% of poverty will not be eligible for exchange subsidies, while those with incomes at or above the FPL will be. 

Households offered coverage through an employer are also not eligible for premium tax subsidies unless the employer plan does not have an actuarial value of at least 60% (i.e. the employer does not offer “qualified” coverage) or unless a household’s share of the premium for their employer’s group health insurance plan exceeds 9.5% of income (i.e. the employer does not offer “affordable” coverage).

What are the amounts of the premium tax subsidies available in the individual health insurance exchange?

The amount of the premium tax subsidy that a household will receive is based on the premium for the second lowest cost “silver plan” in the individual state health insurance exchange. The silver plan provides the essential benefits and has an actuarial value of 70%.

The amount of the tax subsidy varies with income such that the premium a household would have to pay for the second lowest cost silver plan is capped as a percentage of their income (adjusted for household size), as follows:

Income Level Premium as a Percent of Income

Min Income
(% of FPL)
Max Income
(% of FPL)
Min Premium Cap
(% of Income)
Max Premium Cap
(% of Income)
0% 133% 0% 2%
133% 150% 3% 4%
150% 200% 4% 6.3%
200% 250% 6.3% 8.05%
250% 300% 8.05% 9.5%
300% 400% 9.5% 9.5%

Note: The Federal Poverty Level (FPL) was $11,170 for an individual and $23,050 for a family of four through early 2012.

For a single person, here’s the actual income levels and actual premiums based on the 2012 FPL:

Min Income
(annual)
Max Income
(annual)
Min Premium Cap
(monthly)
Max Premium Cap
(monthly)
$11,170.00 $14,856.10 $0.00 $24.76
$14,856.10 $16,755.00 $37.14 $55.85
$16,755.00 $22,340.00 $55.85 $117.29
$22,340.00 $27,925.00 $117.29 $187.33
$27,925.00 $33,510.00 $187.33 $265.29
$33,510.00 $44,680.00 $265.29 $353.72

For a family of 4, here’s the actual income levels and actual premiums based on the 2012 FPL:

Min Income
(annual)
Max Income
(annual)
Min Premium Cap
(monthly)
Max Premium Cap
(monthly)
$23,050.00 $30,656.50 $0.00 $51.09
$30,656.50 $34,575.00 $76.64 $115.25
$34,575.00 $46,100.00 $115.25 $242.03
$46,100.00 $57,625.00 $242.03 $386.57
$57,625.00 $69,150.00 $386.57 $547.44
$69,150.00 $92,200.00 $547.44 $729.92

Note: A person or household who wants to purchase a plan that is more expensive (than the second lowest cost silver plan) would have to pay the full difference between the cost of the second lowest cost silver plan and the plan that they wish to purchase.

Example - Steve, a 45-Year-Old Single Adult

Steve is 45 years old and has an annual income that is 250% of the FPL ($27,925 in 2012).

Let’s assume the cost of the second lowest cost silver plan in Steve's state individual health insurance exchange is $5,733 per year (or $477.75 per month).

Since Steve is purchasing coverage in the individual health insurance exchange, Steve would not be required to pay more than 8.05% of income, or $2,248 per year (that’s $187.33 per month), to enroll in the second lowest cost silver plan.

The tax subsidy available to Steve would be $3,485 ($5,733 premium minus the $2,248 cap on what Steve is required to pay).  

See more: Individual Health Insurance Tax Subsidy Examples.

How will premium subsidies be provided?  

Premium tax subsidies will be both refundable and advanceable. A refundable tax subsidy is one that is available to a person even if he or she has no tax liability. An advanceable tax subsidy allows a person to receive assistance at the time that they purchase insurance (i.e. in advance) rather than waiting to be reimbursed after they file their annual income tax return. 

What does this mean for businesses?

Experts argue that these massive premium subsidies available on the individual market provide a similarly massive incentive for businesses to drop employer-sponsored coverage and switch to defined contribution health benefits.

Do you agree or disagree?

Image Source: Hubspot

Subscribe to our blog