ARPA Ends Dreaded Cliff for Health Insurance Premium Tax Credit

If you are self-employed or operate as a Corporation, and you can’t get individual health insurance coverage through your spouse (or through Medicare), you can always obtain it through the premium tax credit (PTC) which comes from the Affordable Care Act.

You simply go to the health insurance marketplace (federal, or state if available) during the open enrollment period and apply. You can’t be turned down.

Costly

But there’s a catch. Premium tax credit coverage can be expensive, especially for older people. The cost depends on your age, your family size, and where you live.

For example, a family of five could have to pay over $40,000 per year for PTC midlevel silver coverage in New York City. A couple in their early 60s must pay over $21,000 for the same coverage in Seattle.

To help defray the cost of health insurance, the Affordable Care Act enabled the PTC. The refundable credit is ordinarily paid directly to your health insurer during the year.

The PTC amount depends on your modified adjusted gross income (MAGI).

Your MAGI is your adjusted gross income plus nontaxable Social Security benefits, tax-exempt interest, and untaxed foreign income. For most people, it’s the same as AGI. There’s no line for MAGI on your tax return.

Before 2021

Until 2021, you were required to pay up to 9.83 percent of your MAGI for PTC coverage (based on the cost of a silver benchmark plan), and the PTC would pay for the rest.

But the PTC was available only for enrollees whose MAGI was 100 percent to 400 percent of the federal poverty level (FPL). If your MAGI was one dollar over 400 percent of the FPL for a family your size, you get no tax credit — instead, you suffer a “subsidy cliff”.

As you can see in the following chart, 400 percent of the FPL is a modest income:

Household Size 400 Percent of Federal Poverty Level (2021)
1  $                                     51,040
2                                         68,960
3                                         86,880
4                                       104,800
5  $                                   122,720
For each additional person, add  $                                     17,920

For example, a family of four would not qualify for any PTC if their MAGI was $104,801 or more. If the family obtained the PTC coverage, they would have to pay the full amount out of their own pocket, even if it amounted to far more than 9.83 percent of the income.

An estimated 1.4 million people pay full price for PTC coverage because they fall off the subsidy cliff. Another 3.4 million are uninsured because they refuse to pay the full cost. Another 3.3 million buy their individual health insurance outside the Insurance Health Marketplace.

New Law

With the passage of the American Rescue Plan Act of 2021 (ARPA), Congress has temporarily abolished the PTC subsidy cliff.

For 2021 and 2022, Americans who earn over 400 percent of the FPL are required to pay no more than 8.5 percent of their MAGI for PTC health insurance. Regardless how high their income, they are entitled to a PTC to the extent the cost of the silver benchmark plan exceeds 8,5 percent of MAGI.

Example

Al and Alice are a self-employed, married couple who live in Seattle. Both are 62 years old. The annual cost of the benchmark silver plan in their area for them is $21,000. Their MAGI is $150,000.

For 2021 and 2022, they are required to pay no more than $12,750 for PTC health insurance (8,5 percent X $150,000 = $12,750). Thus, they are entitled to a PTC of $8,500 ($21,000-$12,500=$8500).

If their MAGI was $200,000, they would have to pay $17,000 for PTC coverage and would still be entitled to a $4,000 tax credit ($21,000 –  $17,000 =  $4,000).

Under the rules in effect for 2020 and earlier, they were entitled to no PTC because their income was more than 400 percent of the FPL.

Paying Less, or Even Nothing

If your MAGI is less than 400 percent of the FPL, you are required to pay less than 8.5 percent of MAGI for PTC coverage, based on a sliding scale.

Those with MAGI of 150 percent or less of the FPL pay nothing for their coverage.

Biggest Beneficiaries

The biggest beneficiaries of this change are older people who must pay up to three times more for PTC coverage than younger enrollees.

Those with incomes just above 400 percent of the FPL will get the largest subsidies. The benefit gradually phases out at higher incomes, as the benchmark silver premiums no longer cross the 8.5 percent-of-income thresholds.

Example. If the benchmark silver premium for a family is $21,250 per year, the family would be entitled to no PTC if their MAGI exceeds $250,000 (8.5 percent X $250,000 = $21,250).

Estimating Your Credit

You can get an estimate of the PTC you qualify for under the new rules at the online Health Insurance Marketplace Calculator maintained by the Kaiser Family Foundation.

To obtain the premium subsidies, you must obtain your health insurance through the health insurance marketplace. If you’re married, you must file a joint tax return to obtain the subsidies.

A majority of states use the federal health insurance exchange. At www.healthcare.gov the government will direct you to the proper place (federal marketplace or state exchange).

Enrollment Open through August 15, 2021

Ordinarily, you must apply for PTC during the open enrollment period, which occurs during the last several weeks of the year.

But due to the COVID-19 pandemic, the government established a special open enrollment period through August 15, 2021. Some states with their own marketplaces have adopted a slightly different special open enrollment period.

If you already have PTC coverage, you may be able to update it if you now qualify for the PTC or a larger credit.

There are four levels of coverage: bronze, silver, gold, and platinum. Bronze plans have the lowest monthly premiums but have the highest deductibles, copayments, and other cost-sharing. Although the premium subsidies are based on the cost of silver plan, you can choose any of the plan levels.

Note. Not all states are allowing upgrades during the special enrollment period.

Takeaways

Here are five takeaways from this article:

  1. ARPA temporarily abolishes the PTC health insurance subsidy cliff.
  2. During 2021 and 2022, self-employed individuals, business owners, and others who can’t obtain health coverage through an employer are required to pay no more than 8.5 percent of their household income for PTC coverage.
  3. The government will pay PTCs to all PTC enrollees during 2021-2022 to the extent midlevel silver PTC coverage exceeds 8.5 percent of their income.
  4. To obtain the premium subsidies, you must obtain your health insurance through the health insurance marketplace (federal marketplace or state exchange).
  5. The health insurance marketplace (federal marketplace or state exchange) has established a special enrollment period through August 15, 2021, for individuals to enroll and take advantage of the PTC.
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