5 Must-Fix Items in the Affordable Care Act: The Disappearing Subsidy (or, How Government Budgeting Invaded Your Checking Account)

Affordable Care Act supporters promise health insurance will become more affordable.  This promise is largely based on help paying premiums for people whose incomes fall between 100% and 400% of the Federal Poverty Level (“FPL”). However, lurking within the more than 2,700 pages of the Affordable Care Act are several significant surprises for families who take advantage of this aid.


Required Fix #3 – Revise the premium subsidy methodology.Affordable Care Act, ACA

Many people are excited about tax credits that can reduce their health insurance premium.  However, it isn’t as easy as it might seem.  For many families, their premium help could disappear after it has already been used.  In other cases, they might not actually get the help they need.  

The Marriage Penalty

The Affordable Care Act’s premium assistance plan creates a new penalty for married couples.  Here’s an example:

John and Jennifer are each single.  John’s $37,000 annual income is just over 330% of the 2013 Federal Poverty Level Guideline (“FPL”).  Jennifer earns $40,000, roughly 360% of FPL.  Because each income is under 400% of FPL, each of them  would receive premium assistance toward insurance purchased through a health insurance exchange. 

However, if John and Jennifer are married, their joint income of $77,000 is well above 400% of FPL for a two-person family.  Consequently, they would not be eligible for premium assistance.  It gets even more interesting if John and Jennifer marry during the year.  In that case, they could lose their subsidy for the entire year.

The Independent Child Penalty

Most people know the Affordable Care Act allows children up to age 26 to remain on a parent’s health insurance policy, regardless of dependent status.  However, that’s not true when calculating premium assistance.  The ACA defines family size as the number of deductions for personal exemption allowed by Internal Revenue Code.  As a result, a family may have more people covered by insurance than for whom they receive premium credit.   An example illustrates one such case.

Doug and Ann Able have two children, age 24 and 26.  The children cannot be claimed as dependents on the Able’s tax return.  The Ables earn $72,000 a year.

Here’s where the ACA’s math gets interesting.  The insurance premium is based on the family of four.  However, for premium assistance purposes they are a two person family.

If the ACA considered the four people insured, Doug and Ann would be eligible for a premium subsidy of approximately $10,100 toward their estimated health premium of $18,000.  However, with a $72,000 income, they make more than  400% of FPL for a two person family, so their premium subsidy disappears.

The Compensation Penalty

The ACA premium assistance plan creates some significant penalties for families whose annual income increases.  In fact, a family member could get a salary or wage increase, even a bonus from his or her employer, and see a reduction in at-home funds.  Few people knew about that when the ACA was passed, including many of the law’s supporters.

The Affordable Care Act builds premium help on a sliding scale.  As income increases, the amount of premium assistance available decreases.  If someone crosses one of the income thresholds during a year, his or her premium subsidy decreases, sometimes to zero.  Here’s an example using the Health Reform Subsidy Calculator from the Kaiser Family Foundation (http://bit.ly/OHJxOx):

Scott and Sally O’Malley are each 50 years old.  They have two children, Alison, 18; and Jack, 20.  Scott and Sally earn a joint income of $90,000.  The O’Malley family is eligible for a premium subsidy of $8,308 toward their $16.858 annual premium. 

In October, Scott received a $4,000 performance bonus.  Now the family income for the year will be $94,000, more than 400% of FPL.  The O’Malley’s premium assistance amount now drops to zero, leaving them responsible for the full premium for the entire year.  Even worse, they might not feel the effect until filing their tax return the next year.

It’s not just at the upper level where premium assistance shrinks.  At certain points in the sliding scale, the out-of-pocket premium paid by families can increase by hundreds of dollars with relatively small wage increases. 

However, that’s not the worst of the impact.  You might have to pay back what you already received.

How might the disappearing premium subsidy impact your family?

Next in the series: The Affordable Care Act’s Premium Subsidy Repayment Tax

For more information on how the Affordable Care Act will affect your family or business, contact us at www.soterhealth.com or 855-54-SOTER.


4 responses to “5 Must-Fix Items in the Affordable Care Act: The Disappearing Subsidy (or, How Government Budgeting Invaded Your Checking Account)”

  1. George Burns Avatar
    George Burns

    This is certainly a great find by the author. Although I have been reading extensively I have not seen anyone else spotting this in this manner.

    I note that it only applies to those who purchase through an Exchange, so perhaps this is meant as a way to discourage employers and employees from dropping employer provided or sponsored coverage.

    But even if that is the case, there does seem to be unintended consequences and there needs to be a fix.

  2. Marlin Oldenburg Avatar
    Marlin Oldenburg

    This is awesome! I don’t think I’ve read this before, and it’s nice to find someone who is analyzing the law and not the political spin.

  3. Robin Benton Avatar
    Robin Benton

    Great info and I’m sure most people don’t understand how this will work, including the IRS. I also wonder what happens when millions of people are looking for the subsidy and there isn’t enough money to pay any subsidy? With the stroke of a pen the government can end the subsidy, then what happens to all those who would be reliant on it for their health insurance?

  4. Lee Doble Avatar
    Lee Doble

    The writer of this series of articles has certainly found the soft underbelly of this animal known as Health Care Reform. The Patient Protection and Affordable Care Act was always misnamed as it is certainly not affordable. Like the dinosaurs it emulates, this animal should become extinct.

What do you think?