ACA Healthcare Subsidy – Why Earning $100 More Could Cost You $5,000 or More

The USA healthcare system is a mess. This mess has been created by those we have elected for decades. It isn’t a short term problem, simple problem or small problem. Healthcare costs are a huge burden on the USA economy and the financial costs and extreme burdens (worry, fighting with insurance companies, forgoing needed healthcare…) are huge burdens on all those stuck with the system that is in place.

Update 2021: in 2021 the Biden administration updated the law so that this extreme drop-off no longer occurs. Now it is a much more sensible gradual reduction in the subsidy as you earn more money. The previous subsidy rules, discussed in this post, may return in 2023 (the current changes to the more sensible subsidy amounts only cover 2021 and 2022).

One of the benefits of the Affordable Healthcare Act (ACA) is that health insurance costs are subsidized for those earning less than 400% of poverty level income. The way that this has been designed you could get $5,000 (or more, or less) in subsidies if you earn just below the 400% level and $0 if you earn just above. Most such income limits are phased in so that there is nothing like the huge faced by those earning just a few more dollars.

If you are close to the 400% poverty level income and are paying for an ACA healthcare plan (self employed, retired, entrepreneur…) then it is wise to pay close attention to what your reported income will be.

Here are several examples, using the Kasier Family Foundations’s subsidy tool:

  • 60 year old in Virginia earning $48,200 would receive $7,073 in subsidies (60% of the cost*). Earning $48,300 would mean receiving $0 in subsidies (for this and also examples, the examples shown are for a single individual, you can use the tool to try different scenarios).
  • 60 year old in Virginia earning $38,000 would receive $8,029 in subsidies (69% of the cost).
  • 34 year old in Virginia earning $48,200 would receive $608 in subsidies (12% of the cost).
  • 50 year old in California earning $48,200 would receive $4,255 in subsidies (48% of the cost).
  • 34 year old in North Carolina earning $48,200 would receive $1,636 in subsidies (26% of the cost).
  • 64 year old in Virginia earning $48,200 would receive $8,283 in subsidies (64% of the cost*).
  • Family of 4 (ages 46, 42, 12 and 10) earning $40,000 in Colorado would receive $13,799 in subsidies. I do not believe the subsidy calculator (in the link) is properly calculating the income limits for families. It is showing the same limits for single people when I try it now. I believe for a family of 4 the income level that no longer qualifies for subsidy would be $98,400 (400% of poverty level – the poverty level would be $24,600 according to that link). But I may be wrong about this?

* The subsidy is calculated using the average silver plan costs (this results in a $ subsidy amount for you – based on your income and the silver plan costs in your area). But you can select whatever plan you want. So if you selected a bronze plan it could be your subsidy percentage is higher, or you could select a gold plan and your subsidy percentage would be lower. The subsidy values will differ in the state depending on what health plans are available specifically in your location.

As you can see the subsidy is based on the hardship the health care premiums would place on the individual. If you have a fairly low cost plan and earn $48,200 your subsidy will be low. Since the costs are largely based on age (smokers also face an increased cost) this means that the subsidy increases a great deal as the costs skyrocket for those aged 50 to 64 (at 65 you can qualify for medicare and escape the huge costs of health insurance at that age.

I think many people would be surprised at how high your income can be and yet you still qualify for a subsidy, especially if you are a family.

The subsidy levels for those with very high health insurance costs (especially those over 50 years old, or with a family) are very large. If you are close to the subsidy cutoff level the costs of going over can be huge, costing you $5,000 or even over $10,000 just by making an extra $100.

To ways to cut your reported income are to add to your Healthcare Savings Account (HSA) or a regular IRA (a regular IRA will reduce your reported income for calculating if you qualify for the subsidy or not; a Roth IRA does not reduce your income). A HSA is an incredibly valuable personal finance resource, you should look into adding to your HSA no matter what. With HSA and IRA contributions you can reduce your income by over $10,000 ($3,450 HSA + $5,500 IRA = $8,950 – each allows an extra $1,000 (50 years old and up for an IRA and 55 for and HSA), bringing the possible total to $10,950).

The Affordable Healthcare Act is substantial improvement on what existed previously (most notably in dealing with the pre-existing condition mess and also providing for subsidized rates). It leaves huge problems still in place. It is a significant improvement but not even close to sufficient. Maybe it does 10% of what is needed to fix decades of failures by the USA political parties to address the health care mess they have created and sustained for decades (and that we have allowed to continue by repeatedly voting into office those who have failed decade after decade to deal with the problem).

The large subsidies are obviously a big cost to the government. You can see why politicians that are not interested in improving the health care system are seeking to removing millions of people benefiting from ACA health plans to reduce these costs and use the money for tax cuts for the rich and other benefits for those they would rather help. I believe we need to reduce the burden of health care costs on the USA economy but this should not be done by eliminating health care for the non-rich.

The extremely poor healthcare system that those we have elected have created which costs more than twice as much as other rich countries with no better health outcomes (and many huge problems for our economy as well as incredible hardship for people) needs to be systematically improved year after year. There is no reason the USA has to pay twice as much to get the same results as every other rich country. This is only due to our electing the same people that have failed for decades to even just make our system mediocre compared to other countries. The goal at this point isn’t even being good, it is just about getting to mediocre which would effectively give us about 7% of our GDP (that would still have us pay more than anyone else – it is just the savings from taking us down to the next most expensive healthcare system in the world) that is currently wasted by the poor system we continue to tolerate.

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