ACA Subsidy Cliff May Incentivize Some To Earn Less

The introduction of ACA subsidies to help people buy insurance on the individual market creates a number of economic incentives when it comes to income. In particular is the phase-out of all subsidies for households once their income surpasses 400% of the Federal Poverty Level (FPL). Getting a raise or putting in more hours beyond the FPL threshold may actually result in less take-home income for the household.

Who will this impact?

Since the subsidies are only available to those purchasing insurance through the state exchange, the issues with the cliff will apply only to that same group. Within this group, it will take effect for households with incomes near 400% of FPL.

Household Size 400% FPL Premium Cap
1 (Single) $45,960 $4,366
2 (Couple) $62,040 $5,893
3 $78,120 $7,421
4 $94,200 $8,949

If your income is at or below the above 400% FPL figure for your household size, the government will subsidize your healthcare so that you spend no more than 9.5% of your income. Earn a dollar above the 400% FPL threshold and the subsidies disappear completely. This obviously creates a problem! If insurance costs substantially more than the capped premium for your family, that extra dollar may actually cost your household a huge amount in actual dollars.

Some Scenarios Using Actual State Exchange Data

With the rollout of exchange plan pricing we can illustrate how actual scenarios will play out. In general, the higher the cost of insurance for your household, the more the cliff will penalize you for passing these thresholds. 

A family of three in New York

One interesting fact about New York State is that insurance operates under a community rating. Individuals of all ages pay the same amount for insurance. On the New York individual exchange, couples will pay 2x the individual rate, and families of all sizes will pay 2.7x the individual rate. Using insurance premium data released by the state, lets calculate the pre and post 400% FPL impact on health insurance expenses for a family of three in New York, NY.

From the premium data we can see that the second lowest silver plan (this is the plan used to determine subsidies) available on the exchange from Freelancers costs $394.58 for an individual and will cost $1,065 for a family monthly. On an annual basis, this plan would cost $12,784 before subsidies. As we stated above, if the family above earns less than $78,120 they will only be required to spend $7,421, with the government subsidizing the rest. That's a total savings of $5,363! 

$78,120 - $7,421 = $70,699 of take-home income after health insurance.

What happens if the family earns $78,121 dollars? Suddenly they lose the entire amount of the savings and are actually worse off than they were before. 

$78,121 - $12,784 = $65,337 of take-home income after health insurance.

Since the subsidies come in the form of tax credits, any dollar amount a household receives is essentially after taxes. Therefore to regain the $5,363 dollars in post tax dollars, the family's income would actually have to rise greater than that amount once you account for state, federal and payroll taxes. To illustrate: For a family in this income bracket, they would be responsible for 25% in federal taxes, 6.2% in FICA and 1.45% for Medicare. This family would need to earn $7,962 additional dollars or $86,083 to end up where they were before. For the self-employed because who contribute double to FICA and Medicare they would need to earn $8,983 additional dollars.

Note: In the above and following tax calculations we've ignored state and local income taxes and the potential deductions to simplify our examples

Working more can actually leave you worse off.

27 Year Old Single Individual in Connecticut

Meanwhile in states where there is pricing discretion between ages, younger people will generally pay significantly less than older individuals. In cases such as these it's likely that such policyholders will see little to no effect in the subsidy cliff. Using our Connecticut Health Insurance Exchange plans we price the second cheapest silver plan at $303 a month or $3,636 annually. Since this figure is under the $4,366 figure used for a single person's responsibility, someone earning $45,960 will not benefit from subsidies and will feel no economic incentives either way.

The circumstances for a 50 year old couple in the same state, however, are dramatically different.

Couple, Both 50 Years Old in Connecticut

The monthly premium for the silver policy for two 50 year olds living in Connecticut is $1,039, or $12,468 dollars annually. Under the ACA, if this couple makes under $62,040, they would benefit from having their premiums capped at $5,893, yielding a savings of $6,575 (subsidized federally).

$62,040 - $5,893 = $56,147 post health insurance income

If this same couple earns more than the $62,040 amount, then they would lose the $6,575 of federal subsidies and find themselves that much worse off. 

To regain that post tax subsidy, this couple would need to earn at least an additional $9,762 or have a total income of $71,802. Self employed couples in this scenario would need to earn at least an additional $11,013 or $73,053 in total income.

Single 50 Year Old in Ohio

Looking at the state of Ohio the monthly premium would be $389 for a 50 Year old policyholder. The $4,668 dollars of annual premium would be slightly over the 9.5% annual cap ($4,366 dollars)for someone making at or below $45,960. This individual would receive only $302 dollars in tax credits towards their insurance if they are under the subsidy income limit. 

$45,960 - $4,366 =  $41,594 post health insurance income

Pushing herself over the income limit with a pay raise would only cost her 302 dollars in tax credits which in comparison to other scenarios is small. 

Couple, Both 50 in Ohio

Meanwhile for a 50 year old couple in Ohio we see this scenario play out differently. At the 400% FPL income level of $62,040 they would find their premiums capped at $5,894 annually. The silver policy for this couple in the state of Ohio is priced at $778 monthly or $9,346 annually. The ACA subsidies would account for tax credits amounting to $3,452 for the couple. 

$62,040 - $5,893 = $56,147 post health insurance income

Again, once the couple makes past the limit they will no longer qualify for tax subsidies and instead will be paying the full amount of their insurance premiums. That extra income would come at a cost of the additional $3,452. 

$62,041 - $9,346 = $52,639 post health insurance income

Accounting for the effects of taxes this family would need to make $5,125 additional dollars or $67,165 to have the same effective take home pay. If the couple is self employed this would rise further to $5,782

Conclusion

Americans benefiting most from subsidies, generally those facing higher insurance costs due to state regulations or age ratings, will find themselves facing peculiar economic incentives as they reach 400% of the FPL. Extra hours, a raise, or even investment income, may end up pushing a household into having less disposable income than they did when they were earning less. 

While this will not affect most Americans, for those that this does affect the monetary impact could be significant. The magnitude of the impact will depend on how expensive pre-subsidized insurance costs are for the household. The higher these costs, the more of a subsidy cliff the household will face. Since all Americans will be required to purchase insurance of some form, it is especially important for those people earning at or around the 400% of the FPL mark to be aware of how their income and potential subsidies may impact their actual take-home pay.

Correction Note: In the original version of the article we failed to include the impact of payroll taxes as well as state and federal income taxes when discussing the additional income necessary to compensate for the lost subsidies. While the original version of the article was directionally correct, it did not accurately portray the magnitude of the disincentive. We would like to thank our reader Jonathan Weinberg for pointing out our oversight and helping us to keep our readers informed.