Qualifying for Healthcare Incentives Under Obamacare

Those who earn less may qualify for more subsidies under Obamacare.

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The Congressional Budget Office recently issued a report on the job impact of the Affordable Care Act, also known as Obamacare. It concluded that U.S. economy will have the equivalent of 2.3 million fewer full-time workers by 2021 as a result of the law. This is not because employers will reduce the number of jobs. Rather, it is because some workers will choose to work fewer hours or not work at all because they can get the health coverage they need through Obamacare.

Many of these workers—or, rather, nonworkers—are expected by the CBO to be people who qualify for Obamacare tax subsidies. Such subsidies are available only for individuals and families whose adjusted gross incomes are no more than 400% of the federal poverty level (FPL). Almost half of American households have household incomes below 400% of FPL and may qualify for these credits. The following chart shows the 2013 federal poverty levels (see Nolo's article on federal poverty levels for the most recent guidelines).

Household Size

400% of Federal Poverty Level (2013)

1

$45,960

2

$62,040

3

$78,120

4

$94,200

The amount of the credit is determined on a sliding scale based on cost of coverage (which in turn is based largely on age and location), household size, and income. Those with the lowest incomes will receive the largest tax credits. The credit can be substantial. For example, a single person who earns $40,000 per year would be required to pay a maximum of 9.5% of his or her income ($3,800 per year) for health insurance. If silver level coverage on the state exchange cost $6,000 per year, he or she would be entitled to a $2,200 annual credit, or $183 per month.

Individuals who already have health coverage through an employer or spouse's employer don’t qualify for the health insurance credits unless:

  • the employer's health plan covers less than 60% of the cost of covered benefits, or
  • the individual’s share of the premium is more than 9.5% of household income.

These subsidies are particularly helpful for lower and moderate income self-employed individuals who can’t obtain affordable coverage through a spouse.

However, as noted by the CBO report, the way the subsidies work could lead some individuals to work less than they otherwise would. Take, for example, a 45-year-old self-employed woman with one dependent child who lives in San Francisco, California. If she ends up earning $62,039 during 2014, she’ll qualify for a subsidy of $122 per month if she obtains health insurance through the California health exchange (coveredca.com); that’s $1,464 per year. If she earns $62,040 or more she’ll qualify for no subsidy at all. If she received the subsidy during the year, she’d have to pay it back when she pays her taxes for the year. This means that if a client offered her $2,000 for a job in December, but she already earned $62,000 in 2014, she’d be better off not taking it. After taxes, the additional $1,000 in income for the year would leave her with no more than $750 in her pocket. Meanwhile, she lost $1,464 in subsidies.

It might have been better if the Obamacare subsidies were phased out gradually based on income, instead of suddenly stopped at 400% of FPL. But Obamacare was designed this way on purpose to avoid busting the budget.

Whether these potential disincentives to work that are built in to Obamacare are good or bad for society as a whole is anyone’s guess. It’s not necessarily a bad thing if some people choose to work less and spend more time with their family or otherwise enjoying life. Work isn’t everything.

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