The Affordable Care Act (ACA) offers subsidies to people who enroll in a health care plan on the ACA marketplace. The amount of the subsidy is based on the income of the enrollee, with people who earn slightly more than the federal poverty level (FPL) receiving the largest subsidies. In contrast, those who have an income that’s just over four times the federal poverty level were ineligible for subsidies.

In the event an enrollee who was just under the FPL for subsidies got an increase in pay, they had to pay full price for their insurance. Thus the term subsidy cliff was coined. However, changes are coming to the subsidy cliff for the next few years and will help enrollees save on their health insurance premiums.

It’s not always easy to tell if your income is going to send you over the cliff, or not. Keep reading to fully understand the subsidy cliff, and make sure you have a good idea of whether or not you’ll receive financial help for the year.

How do health insurance subsidies work?

Those who do not receive their health insurance coverage through an employer or other government programs may be eligible for Affordable Care Act (ACA) subsidies to help them afford their monthly premiums. The most common kind of subsidies are called advanced premium tax credits and are usually available to those with an annual income from 100% to 400% of the FPL.

Every year the government benchmarks the FPL at a particular income. Your eligibility for government assistance – such as ACA subsidies – is based on how much your income is above or below the FPL. Other factors such as age, location, and household size can seriously affect your eligibility for ACA subsidies. The cut-off for ACA subsidies is 400% of the FPL.

Where does the subsidy cliff come in?

Once an individual or household’s annual income is 401% or more of the FPL they are likely no longer eligible for subsidies. Those who are not eligible for ACA premium tax credits must front the entire bill for their health insurance.

There is currently no phase-out of subsidies for those who make just over the FPL. This means that a slight change in income can cost a household thousands of dollars in subsidies.

Your subsidy cliff may be steeper depending on factors like where you live, how many people are in your family, and your age.

Will the ACA subsidy cliff return in 2025?

The Inflation Reduction Act (IRA), passed in 2022, has effectively extended the elimination of the Affordable Care Act (ACA), and Obamacare subsidy cliff through 2025. This significant change ensures that the subsidy, which assists individuals and families in affording health insurance, is calculated based on a percentage of their total income, rather than adhering to a strict income limit. Before this, individuals or families earning 400% of the Federal Poverty Level (FPL) or more would abruptly lose eligibility for subsidies. However, under the updated provisions, those with incomes at or above 400% of the FPL can still qualify for a subsidy in the form of a premium tax credit (PTC), provided their health insurance premium exceeds 8.5% of their income. This PTC is now designed to phase out gradually as income increases, replacing the abrupt ‘cliff’ with a more gradual reduction in assistance. This change aims to make health insurance more affordable and accessible for a broader range of income levels, preventing a sudden loss of subsidy for those just exceeding the income threshold.

Will the ACA subsidy cliff continue in 2025?

As of the current legislation, the gradual phase-out of subsidies under the Affordable Care Act (ACA), which was extended by the Inflation Reduction Act (IRA) through 2025, is set to end after this year. This means that unless Congress enacts new legislation, the ACA subsidy structure will revert to its previous format in 2026. Before the IRA, there was a sharp ‘subsidy cliff’ at 400% of the Federal Poverty Level (FPL). Individuals and families with incomes just above this threshold lost their eligibility for subsidies entirely, leading to significantly higher costs for health insurance.

If the subsidy cliff returns in 2026, individuals and families earning slightly more than 400% of the FPL could once again face a sudden and substantial increase in the cost of their health insurance premiums. This would be due to the abrupt loss of premium tax credits (PTC), which are currently designed to phase out gradually with increasing income under the IRA provisions. The impact of this change could be significant for those hovering around the 400% FPL mark, as they might find health insurance suddenly becoming less affordable.

Therefore, the future of the ACA subsidy structure beyond 2025 remains uncertain and depends on potential future actions by Congress. Without legislative intervention, the system will default back to its pre-IRA state, reintroducing the subsidy cliff and potentially affecting the affordability of health insurance for many Americans.

Example of the ACA subsidy cliff

For determining subsidy eligibility in 2025, we’ll use the FPL numbers from 2024. In 2024, 400% of the FPL was projected to be $54,360.

Consider a 24-year-old living in Illinois earning $50,000 annually. With this income, they would pay a monthly premium of $209.85 on the most affordable plan after receiving a subsidy of $157. If the same individual’s income were $52,000, slightly above 400% of the FPL, their premium would increase to $300.19 per month. The slight increase in income results in losing subsidy eligibility, thereby raising their premium costs significantly.

An individual who’s closer to Medicare age benefited greatly from the subsidy as it covered most or all of the premiums of cheaper plans if the individual was under 400% of the FPL. If the individual was slightly over the FPL, they would pay $1,025 a month for the cheapest plan. 

Tips to Avoid the Subsidy Cliff

Navigating the subsidy cliff is crucial for those close to the income threshold that determines eligibility for health insurance subsidies under the Affordable Care Act (ACA). Falling just over this income limit can result in losing substantial financial assistance, dramatically increasing your health insurance costs. This sharp increase is often referred to as the “subsidy cliff.” Understanding how to manage your income and expenses to stay below this threshold can save you from unexpected hikes in your insurance premiums and maintain affordable healthcare coverage.

Accurately calculate household income

Accurately calculating your household income is essential for avoiding the subsidy cliff when applying for health insurance subsidies under the Affordable Care Act. Misestimating your income could inadvertently place you above the subsidy eligibility threshold, leading to higher health insurance premiums without financial assistance.

To ensure you accurately calculate your household income:

1. Include All Sources of Income: Sum up all income sources, including wages, salaries, bonuses, tips, and any self-employment income. Don’t forget other sources like rental income, investment returns, alimony, and some forms of social security benefits.
2. Use Your Modified Adjusted Gross Income (MAGI): For ACA purposes, your household income is your MAGI. This includes your adjusted gross income (AGI) from your tax return, plus any non-taxable Social Security benefits, tax-exempt interest, and foreign income. This is the figure used to determine your eligibility for subsidies.
3. Check for Changes in Income: Regularly update your income information in the Marketplace if your income changes during the year. This proactive approach helps prevent situations where you might end up owing money when you file your annual tax return because your actual income was higher than estimated.
4. Utilize IRS Tools and Resources: The IRS provides calculators and resources that can help you estimate your income accurately. Using these tools can guide you through the process and help ensure that you include all necessary information.

By taking these steps, you can more precisely estimate your household income, which is crucial for staying below the subsidy cliff and maintaining affordable health insurance coverage.

Report income changes as soon as possible

If you experience any income changes throughout the year, make sure you report them as soon as possible. You may become eligible for subsidies if you experience a drop in income or become ineligible if your income increases.

If you qualify for ACA subsidies, you report your expected income at the beginning of the year. If you end up making more than you originally reported, you may end up owing money back on your taxes. So, make sure you report any changes in income to avoid having an unexpectedly large tax bill at the end of the year.

What happens if you underestimate your income?

One of the flaws of the ACA is the fact that you have to state your estimated income for the coming year to receive the subsidy. You can base your income on the previous year, but it’s not possible to accurately estimate how much you’ll make in advance. You may wind up underestimating or overestimating how much you earn. 

Fortunately, there is no penalty for getting more in subsidies than you are entitled to. However, you will see the amount you overestimated taken out of your tax refund or in addition to your tax payment. 

How to find affordable health coverage

The ACA features a health insurance exchange that’s offered for individuals living in states that don’t have their own health insurance marketplaces. However, if you do live in a state with a health insurance marketplace, you’re barred from using the federal healthcare exchange. In the event you can’t find a healthcare plan that you like, or is within your budget, eHealth can help. We’re here to help you learn more about individual and family plans along with helping you find coverage at a price that works for you.