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Calculating the Health Insurance Subsidy

Income, age, family size and location all factor into the calculation for the tax credit to help pay premiums for policies purchased on the exchanges.

I read your articles about the health insurance changes for 2014 and had a couple of follow-up questions. How is the premium subsidy calculated? Do the subsidies vary based on age and location, or just on income? And when can I sign up for a policy?

The Kaiser Family Foundation’s subsidy calculator can help you estimate how much you could receive as a subsidy for health insurance policies purchased on the exchanges, based on estimates of benchmark premiums for someone your age with your income and family size. Premiums will also vary by location, and specifics for your state exchange will become available in October (that’s when you can sign up for a policy that takes effect on January 1). Go to HealthCare.gov for links to your state exchange.

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You can’t get a subsidy if your employer offers coverage that is considered to be “affordable” (for the definition, see Get Ready for Obamacare). If you pass that test, then you need to meet the household income test. Subsidies are available to people whose modified adjusted gross income is 100% to 400% of the federal poverty level, which is about $11,500 to $46,000 for an individual and $24,000 to $94,000 for a family of four. See Who Qualifies for a 2014 Health Insurance Subsidy for an explanation of modified adjusted gross income.

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The size of your income also determines the maximum amount you have to pay for insurance -- starting at 2% of your income if your modified adjusted gross income is below 133% of the federal poverty level and gradually rising to 9.5% of your income if your modified AGI is 300% to 400% of the federal poverty level. A family of four with a household income of $60,000, for example, earns about 255% of the federal poverty level. They’d be expected to pay no more than 8.19% of their income -- $4,913 per year, or about $409 per month -- for a “benchmark” policy, and they would receive a tax credit to make up the difference.

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The benchmark policy is the second-to-lowest-cost silver plan in your area, and the premiums for that policy will vary based on location and age. In almost all states, insurers can charge a 64-year-old up to three times as much as they charge a 21-year-old. The Kaiser Family Foundation recently released a study that shows the cost of that benchmark policy in 17 states and the District of Columbia (where the information is currently available). Additional states will release their information by October 1.

Premiums for the benchmark, second-to-lowest-cost silver policy are $763 per month for a family of four with two 40-year-old adults in Los Angeles, according to Kaiser. If their monthly premiums for the benchmark policy are capped at $409 per month based on their income, they would get an advance tax credit worth $354 to pay the remainder of the bill. But they can apply that credit to any other silver policy, or to a bronze, gold or platinum policy and may end up paying more or less than the $409 per month depending on the cost of the other policy.

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Income, age and family size can make a big difference in the calculation. A 60-year-old couple in Los Angeles with a household income of $30,000, for example, earns about 193% of the federal poverty level. They’d be expected to pay no more than 6% of their income for the benchmark policy, which equals $1,800 per year ($150 per month). The Kaiser Family Foundation study found that their benchmark plan in L.A. would cost $1,082 per month, so they’d receive a tax credit of $932 per month.

The Kaiser study found that the lowest-cost bronze plan they could buy costs $797 per month; if they chose that plan, they would owe no additional premiums after the tax credit. Because that couple earns less than 250% of the federal poverty level, they’d also qualify for a cost-sharing subsidy that reduces co-payments and other out-of-pocket costs, but only if they buy a silver plan.

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