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Affordable Care Act Subsidies Simplified


By applying the KISS principle, Affordable-Care-Act subsidies, also known as premium tax credits, can be easily understood, easily calculated, and easily obtained. KISS is the acronym for Keep it Simple, Stupid. The expression was reportedly coined by Kelly Johnson, a lead engineer at Lockheed Shunk Works and has been used by many authors for decades. It was a slogan and apparently one of the driving forces behind the success of the late Vince Lombardi, legendary Hall-of-Fame coach of the Green Bay Packers.

Simply stated, a premium tax credit is a percentage of one’s health insurance premium paid by the federal government for the purchase of Obamacare health insurance by low income and middle income individuals and families. It is predicated on the premise that no household should have to spend more than a specified percentage of its income on health insurance premiums. To be eligible for the credit beginning in 2014 individual or household incomes must fall between less than 133% and 400% of the federal poverty level. The premium tax credit or subsidy paid by the government is the difference between the cost of the second cheapest silver-level insurance plan in a given state (known as the benchmark plan) and the percentage of the premium which the enrollee is responsible for based on where the enrollee’s income ranks on the federal poverty level scale.

Individual responsibility for premium costs based on income level as a percentage of the federal poverty level is as follows:

Income Level as Percentage of Federal Poverty Level Premium Costs as a Percentage of Income in 2014
 Less than 133%  2

 At least 133% but less than 150%


 At least 150% but less than 200%  4-6.3

 At least 200% but less than 250%


 At least 250% less than 300%


 At 300% but less than 400%


The federal poverty level of a household’s income varies depending on the size of the household, and the cost of benchmark insurance plans vary from state to state, but the formula used to calculate tax subsidies is uniform and is as follows: Tax subsidy or premium tax credit = (the cost of the second-lowest-price silver plan) minus (x% of income). If for example a five-member household with an income of $82,710 which is at the 300% federal poverty level, purchases a benchmark silver-level health insurance policy with an annual cost of $13,000, the annual subsidy would be $13,000 - ($82,710 x 9.5%). ($82,710 x 9.5%) = $7857.45. Therefore the final calculation is $13,000 - $7857.45 = $5142.55. This annual subsidy of $5142.55 divided by 12 equals a monthly subsidy of $654.79.

Rather than going through this manual calculation however, the KISS principle can be applied by accessing the premium tax calculator on the website of the federal health insurance exchange or the private health exchange alternative if there are login problems with the federal one. In using the calculator to determine eligibility for a premium tax credit in 2014, it will be necessary to enter the number of individuals including yourself, which you will be claiming on your 2014 income tax return, your estimated household income for 2014, the number of people in the household who will be applying for the subsidy, your zip code, county of residence, and your date of birth.

If the calculation shows that you are eligible for a subsidy, it will be applied to the plan that you purchase at the time through the health insurance exchange, and will show up as a monthly premium discount adjustment from that plan. Using the above example, if you select the benchmark plan which costs $1300 per month, your monthly premium would be $1300 minus the $654.79 subsidy, or $645.21. Although the subsidy is based on the second lowest cost silver-level plan in your state, you do have the option of purchasing a higher level plan and paying a higher premium or a lower level plan and saving more since the actual subsidy will be the same.

Victor E. Battles, M.D. is a board-certified internist with 30 + years of patient contact. He has been a principal investigator in several clinical research trials and is the founder of Proactive Health Outlet. Additionally, he has worked in the areas of quality assurance and utilization review.

Victor E. Battles, M.D.
December 9, 2013

For more information about the federal health insurance exchange and marketplace health insurance, and to determine whether or not you qualify for a health insurance tax subsidy click the respective links.


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