The Obamacare Subsidy You Could Be Missing

Robert Berger

In 2014, nearly 26 million Americans may be eligible for health insurance subsidies, according to data from Families USA, a national nonprofit focused on affordable health care. For those who may qualify, it's essential they understand what subsidies they and their family could be entitled to under the Affordable Care Act.

Subsidies aren't just for the poor. The subsidy that Obamacare offers, given in the form of a tax credit, is meant to offset insurance costs to limit the percentage of income spent on insurance premiums. The subsidy phases out, though, when a person's income exceeds 400 percent of a given year's federal poverty level. In 2013, for instance, the FPL for a single-person household is $11,490, while the FPL for a four-person household is $23,550, according to the Office of Assistant Secretary for Planning and Evaluation.

As such, according to this year's FPL, the Obamacare subsidies won't phase out until a family of four has an income of more than $94,200. Consequently, the subsidies for Obamacare will extend well into the middle class.

Subsidies limit health insurance premium spending. The goal of the Obamacare subsidies and tax credits is to limit the percentage of income any individual or family spends on health care purchased through the statewide health insurance exchanges. For those who can't get affordable care through an employer, the government might step in to ensure they aren't spending an unreasonably high percentage of their income on health care.

The percentage allowed will depend on one's income bracket. For earnings up to 133 percent of the FPL, premium spending will be limited to 2 percent of income. For income between 200 percent and 250 percent of the FPL, spending will be limited to 6.3 percent of income. And for earnings between 350 percent of the FPL, spending will be capped at 9.5 percent of income.

Workers with employer insurance may be eligible. Even those who have available insurance through an employer might be eligible for subsidized health care. If premiums cost more than 9.5 percent of one's household income - or if the plan pays less than 60 percent of the cost of covered benefits - one could buy health care through the exchange and receive the government subsidy.

How the subsidy works. The subsidy for health insurance is technically a tax credit, which would normally reflect on a taxpayer's returns each year. However, since many low- and middle-income families can't afford to pay insurance premiums without help upfront, this credit works differently.

Instead of applying when they file their taxes, eligible individuals and families can apply for this tax credit when they sign up for insurance. The government will calculate how much is owed in the tax credit, and the amount will be paid directly to the insurance company. Then, the insured person only needs to pay the remaining portion of the premium (normally paid out in monthly installments) to the insurer.

If individuals or families choose to apply for the credit when they file their taxes, this will be a refundable credit. Those who can afford to pay their health insurance premiums throughout the year may take that route, in which case the subsidy will first pay down any taxes the individual has due, and whatever is left over will be distributed as a tax refund.

While the first option - receiving the payout upfront - is more manageable for many families, make sure to calculate your income correctly. If your income increases, and it turns out that your advance payment was too large, you'll have to repay at least a portion of the overpayment. How much of the overpayment you'll be required to repay will depend on how far above the FPL you are.

Make sure you get the subsidy you need. If you're like many Americans with decent employer-sponsored health care coverage, an Obamacare subsidy doesn't apply to you at this time. However, if you'll be looking for health insurance on your state's exchange in 2014, stay abreast of changes in these subsidies, as they could make a difference in your ability to pay for health care coverage.

Rob Berger is the founder of the popular personal finance blog, the Dough Roller. The website covers such topics as personal finance, credit and investing, including how to get health insurance if you are self-employed.

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