NEW YORK (MainStreet)—Americans who may enjoy benefits of financial aid from the government to help pay for their health insurance in the new healthcare exchanges may find themselves facing an economic incentive to earn less as they reach the edge of the subsidy cliff. Just $1 over the 400% federal poverty level (FPL) limit will eliminate their entire subsidy.
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To ensure that Americans can afford to purchase health care, the Affordable Care Act (ACA) provides for an income-based subsidy paid directly to the insurance company as part or all of the monthly premium. Workers whose annual modified adjusted gross income is at or below 400% of the FPL based on household size (that's $45,960 for an individual and $94,200 for a family of four in 2013) will be eligible for tax credits. At the highest end, families will pay no more than 9.5% of their annual income toward premiums.
"As a result of this design flaw, families that have incomes slightly above the threshold will have substantially lower disposable incomes than families that have incomes slightly below the threshold," says Adam C. Powell, president of Payer+Provider Syndicate, a healthcare consulting firm. "This 'cliff' provides families near 400% of the federal poverty line with a disincentive to make gradual improvements in their income – be it by working a few extra hours each week or by receiving a small raise."
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In these cases, any "extra take-home pay could actually end up costing the household thousands of dollars in federal benefits," says Jonathan Wu, analyst and cofounder of ValuePenguin, a data-analysis company. "For hourly workers, contractors or consultants, this could certainly create incentives for them to 'close up shop' once they came close to these benchmark thresholds."
When they reach that 400% FPL breaking point, "they will have to either figure out how to make their income leapfrog enough to offset lost subsidies, will have to bite the bullet and trade lower disposable income for earnings progression, or will have to avoid the income increase altogether," Powell says.
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Moving from one state to another could also push a family over the subsidy cliff.
"Many [people] don't realize that the insurance they purchase in one state may be different than what they will purchase in a different state if they change jobs during the year," says Sharon Lassar, director of the school of accountancy at the University of Denver. "For example, some states will offer insurance plans where the insurance premium does not change with the age of the insured while others will offer insurance through their exchanges with premiums that do vary with age. A middle-aged worker might be in a situation where, simply by moving across state lines and buying into her new state's plan, she receives or loses thousands of dollars of subsidy."
There are also financial cliffs that families may fall from in the event of an illness.
In addition to the tax credits, the "ACA provides subsidies to reduce families' maximum out-of-pocket liability," Powell explains.
The maximum out-of-pocket liability for families with annual incomes up to 200% of the FPL will be reduced by two-thirds; incomes between 201% to 300% of the FPL will be reduced by one half, and those between 301% to 400% will be reduced by one third, according to Congressional Research Service.
"Thus, families with ill members will face abrupt increases in their maximum out-of-pocket exposure as they move up through the middle class," Powell says.
Families with incomes above the 400% FPL will not qualify for out-of-pocket liability subsidies.
Further, tax subsidies for premiums on the exchanges are based on workers' projected incomes, and if they're projected wrong, the government requires some or all of money to be paid back at tax time for workers earning 100% or more of the FPL. There are, however, caps on the amount that must be paid back: $600 for those earning less than 200% of the FPL, $1,500 for workers earning 200% but less than 300% of the FPL and $2,500 for those earning 300% to 400% of the FPL. There is no cap for workers earning more than 400% of the FPL.
--Written by MainStreet by S.Z. Berg, author of College on the Cheap