One of the key features of the Affordable Care Act (ACA), also known as ObamaCare, is that it provides financial assistance for Americans with qualifying income who purchase private health insurance through the Marketplace. To Americans using the Marketplace, the assistance, sometimes called a subsidy, is invisible – they simply pay lower monthly payments to the insurance company, with the government paying the rest. However, it’s important to know that the assistance is actually a tax credit. If there’s a change in income during the year that affects how much you should receive, there will be a correction when you file your taxes.
Understanding Healthcare Subsidies
A subsidy is defined as “direct aid provided by the government to support a private undertaking.” While the financial assistance that the government provides to uninsured Americans to purchase private insurance is often called a subsidy, it was actually written into the law as a tax credit.
The financial assistance for the purchase of private health insurance is made available to eligible citizens by reducing the taxes they otherwise owe. But, rather than waiting until the end of the year to give you a large sum, the government divides the tax credit into monthly amounts and pays it directly to the insurance company from which you decide to purchase insurance. You are then responsible for the remainder of the monthly payment to the insurance company. This system allows Americans who could not normally afford health insurance to be able to purchase it at a reduced price, dramatically improving their health care situation.
How much of a subsidy you receive from the government is based on your estimated income for the year. Most Americans earn a specific hourly wage or salary, and therefore they will know fairly accurately what their actual income will be. However, some Americans have a variable income, or aren’t quite sure how many hours they will be able to get at their job. In these cases, you would need to estimate as closely as you can, and realize that there will probably be an adjustment when you file your taxes the following year. Any changes in income should be reported to the Marketplace from which you purchased health insurance so that your monthly payments may be adjusted to accurately reflect your new income.
For those whose income turns out differently than the estimate, they may owe the government money (if they earned more than expected) or get an additional refund when they file their taxes.
For more detailed information about how credits are calculated, this federal Health Care Q&A is helpful.
Who is Eligible for ACA Subsidies?
Not all Americans can receive financial assistance when purchasing private insurance through the Marketplace. Eligible Americans are those who earn between 100% – 400% of the federal poverty level. In 2014, the federal poverty level is $23,850 for a family of four. Those who make between 100% – 250% of the poverty level will receive subsidies to help with cost-sharing, such as copayments and deductibles, in addition to the monthly premium subsidies.
Many Americans are eligible to purchase health insurance through their jobs. If this job-based coverage is affordable (meaning that self-only coverage is no greater than 9.5% of the household income) and meets the minimum coverage requirements of the ACA, you are encouraged to purchase it. If you choose to purchase private insurance instead, you will not be eligible for a subsidy.
Subsidies can only be used for insurance purchased through the health insurance Marketplace. Your state may have a specific Marketplace, or it may use the federal site. Regardless, all plans sold in the Marketplace meet certain minimum requirements. The patient protections and essential coverage benefits offered in Marketplace plans are considered to be key for maintaining patient rights, cost efficiency, and optimum health care. For more information about Marketplace insurance, this overview is very helpful.
ACA subsidies are a very important part of the health care law. These subsidies help Americans purchase health insurance that they would not have been able to afford in the past. Knowing what subsidies you are eligible for and how to take advantage of them will allow you to make excellent health care decisions for yourself and your family — both now and into the future.