The Affordable Care Act caps the amount that individuals who are eligible for advance premium tax credits must pay toward obtaining “benchmark” coverage through the Marketplace; benchmark coverage is defined as the second-lowest cost silver plan available in the Marketplace to that individual. Individuals with family incomes between 100 percent (133 percent in states that have chosen to expand their Medicaid programs) and 400 percent of the FPL must pay only a specified percentage of their income for benchmark coverage. This maximum percentage increases with income, so lower-income individuals receive a larger tax credit toward their purchase of Marketplace coverage.
While the second-lowest cost silver plan is designated as the benchmark for determining the amount of the tax credit, an individual may apply her tax credit toward a Marketplace plan from any metal level (excluding catastrophic). In some cases, the tax credit amount may even exceed a plan’s price, resulting in a plan that costs the enrollee $0 after tax credits.
To calculate the premium tax credit amount, the Affordable Care Act specifies that an individual or family with a particular income will pay a fixed percentage of their income for the second-lowest cost silver plan available in the Marketplace in their local area (see Table 1). This is a fixed percentage, expressed as a percentage of the federal poverty level (FPL), without regard to age or the actual premiums in the Marketplace. For example, the law specifies that a single individual earning 150 percent of the FPL, or $17, 235 per year, will pay no more than 4 percent of her income ($57 per month) for the second-lowest cost silver plan. Her tax credit will cover the difference between $57 and the monthly cost of the second-lowest cost silver plan available to her. Table 1 shows the percent of income and maximum payment associated with various incomes for single individuals.
For example, the amount that a 27-year-old woman with an income of $25,000 (218 percent of the FPL) would pay for the second-lowest cost silver plan is capped at $145 per month. If she lived in Jackson, Mississippi, the premiums for the second-lowest cost silver plan available would cost her $336 per month before tax credits. Therefore, the amount of the premium tax credit would be $191 per month—the difference between specified contribution to the benchmark plan and the actual cost of the benchmark plan. Her use of the tax credit would not be restricted to the second-lowest cost silver plan. She could apply the $191 per month tax credit toward any plan of her choosing in any metal level. By applying her tax credit to the lowest-cost bronze plan in Jackson, which is priced at $199 per month, she could obtain Marketplace coverage for just $8 per month after tax credits.
TABLE 1 Examples of Maximum Monthly Health Insurance Premiums for the Second-Lowest Cost Silver Plan for a Single Adult, by Income9
|Single Adult Income10||Percent of the Federal Poverty Level||Maximum Percent ofIncome Paid toward Second-Lowest Cost Silver Plan||Maximum Monthly Premium Payment for Second-Lowest Cost Silver Plan|
9 For more information, see the Internal Revenue Service final rule on “Health Insurance Premium Tax Credit” (Federal Register, May 23, 2012, vol, 77, no. 100, p. 30392; available at: http://www.gpo.gov/fdsys/pkg/FR-2012-05-23/pdf/2012-12421.pdf) and the 2013 federal poverty guidelines (available at:
10 Income examples are based on the federal poverty guidelines for the continental United States. The FPL percentages in Column 2 correspond to higher income amounts in Alaska and Hawaii.
11 In Medicaid expansion states, an individual at 133 percent of the FPL may be Medicaid eligible, rather than eligible for tax credits in the Marketplace.