Ever since the Affordable Care Act came out, some people who buy health insurance on the ACA exchange have to watch carefully for the premium subsidy cliff. The Premium Tax Credit is cut off at 400% Federal Poverty Level. If your income is $1 higher than the cutoff, you lose all the premium subsidy, which can be well over $10,000 depending on your age and your household size.
If you live in California, as I do, you may be able to breathe a sigh of relief in the next few years. California passed a new law that extends the premium subsidy to 600% Federal Poverty Level (FPL) for 3 years starting in 2020. California will pick up where the federal government leaves off. News media such as Los Angeles Times reported this in California Gov. Gavin Newsom has signed his first budget. Here’s where the $215 billion will go:
“Based on federal guidelines, subsidies will be available starting in January to individuals earning up to almost $75,000 a year and families of four earning as much as $154,500. The subsidies to purchase health insurance will be highest for those who earn the least, with the lowest earners eligible for enough financial assistance to pay their entire monthly premiums.”
However, in typical treatment by news media, they don’t tell you the details. Subsidies will be available. How much can people expect? If you want to know how the new California state subsidies really work, you have to come to my blog. 🙂
Before you get too excited, please note:
1) This only affects California. The additional subsidies come from the state budget.
2) The new law only covers three years: 2020, 2021, and 2022. It doesn’t affect 2019. The law may or may not be extended for 2023 and beyond.
3) The specific program design depends on the state budget appropriations each year. The state board has published the program design for 2020. The subsidies in 2021 and 2022 may be substantially higher or substantially lower.
4) In the program design for 2020, the state subsidy for incomes greater than 400% FPL drops off sharply. If your income is more toward the higher end of the range, you may not get much from the state after all. And if your income is above 600% FPL, you will get nothing.
California State Premium Assistance
The new California law also offers small additional premium subsidies on top of the federal Premium Tax Credit for incomes between 200% FPL and 400% FPL. In this post I will first focus on the state subsidy for those who don’t qualify for the federal Premium Tax Credit today when their income is above 400% FPL. Please skip to the end for the additional state subsidy for incomes between 200% FPL and 400% FPL.
The new California state subsidy is called the State Premium Assistance.
The State Premium Assistance follows the same structure as the federal Premium Tax Credit (see ACA Health Insurance Premium Tax Credit Percentages). The state says based on your income, you are supposed to pay this percentage of your income toward a second lowest-cost Silver plan in your area. After you pay that amount, and after any federal Premium Tax Credit (none for those with income above 400% FPL), the state will pick up the rest. If you choose a more expensive policy or a less expensive policy than the second lowest-cost Silver plan in your area, you pay or save 100% of the price difference.
Also similar to the federal Premium Tax Credit, you first get an advance premium assistance in the form of a lowered premium based on your estimated income. Then you calculate your actual State Premium Assistance based on your actual income when you file your California state income tax return. You pay or get a refund of the difference between the advance premium assistance and the actual premium assistance.
To calculate the new California State Premium Assistance, first you find out where you stand relative to the Federal Poverty Level for your household size. For 2020 coverage, the Federal Poverty Levels are:
|Number of persons in household||FPL|
|more||add $4,420 each|
Then you find out the percentage of income you are expected to pay toward a second lowest-cost Silver plan in your area.
|Income||2020 Expected Premium|
|400% – 450% FPL||9.68% – 14% of income|
|450% – 500% FPL||14% – 16% of income|
|500% – 600% FPL||16% – 18% of income|
Finally when you choose a less expensive plan, your net premium is:
Expected Premium – (2nd Lowest-Cost Silver Plan – Plan Chosen)
When you choose a more expensive plan, you net premium is:
Expected Premium + (Plan Chosen – 2nd Lowest-Cost Silver Plan)
Let’s see an example.
Suppose a household size of 2 in California has $70,000 income in 2020. The full premium for the 2nd lowest-cost Silver plan in their area is $16,000/year. The full premium for their chosen Bronze plan is $12,000/year. What will this household pay in 2020 after the California State Premium Assistance?
Their income as a percentage of FPL is:
$70,000 / $16,910 = 414%
Because this is above 400%, they don’t qualify for the federal Premium Tax Credit. Without the new California State Premium Assistance, they will pay $12,000, the full premium for their Bronze plan.
With the new California State Premium Assistance, when their income is between 400% and 450% FPL, their expected premium as a percentage of income is prorated between 9.68% and 14%:
9.68% + (414 – 400) / (450 – 400) * (14% – 9.68%) = 10.89%
Their net premium for their Bronze plan after the California State Premium Assistance is:
$70,000 * 10.89% – ($16,000 – $12,000) = $3,623
When their net premium is reduced from $12,000 to $3,623, that’s over $8,000 in subsidy from the state of California. For a married couple, this $8,000 subsidy is four times the California state income tax they pay on their $70,000 income!
If we do the same calculation for different incomes, the results look like this:
The blue line shows the net premium without the California State Premium Assistance. As soon the income goes over 400% FPL, the premium shoots up to the full premium of the plan. The orange line shows, with the new California State Premium Assistance, the net premium increases gradually to the full premium.
Remember a Bronze plan has $6,000 deductible for single and $12,000 deductible for a family plan. It’s still expensive at higher income levels, but at least you won’t have to worry about the sudden jump when you fall off the cliff for the federal Premium Tax Credit.
Also note the net premium increases sharply in this chart. At the beginning of the range, the net premium increases by about $500 for each $1,000 in additional income. When you lose the state subsidy that fast, you have a big incentive to keep your income down.
Bottom line, the new California State Premium Assistance for ACA health insurance is great news to California residents who don’t qualify for the federal Premium Tax Credit today because their income is too high. If ACA health insurance is too expensive for you because you don’t qualify for the federal subsidy, come to California.
Additional Subsidy for 200% – 400% FPL
Now we look at the small additional premium subsidy from the state of California to those who already receive the federal premium tax credit. The additional subsidies from the state are calculated by lowering the applicable percentages of income you are expected to pay toward a second lowest-cost Silver plan.
|200% – 250% FPL||6.49% – 8.29%||6.24% – 7.80%|
|250% – 300% FPL||8.29% – 9.78%||7.80% – 8.90%|
|300% – 400% FPL||9.78%||8.90% – 9.68%|
Translating the savings to dollars, for a household size of 2 in 2020:
|2020 Income||California Premium Subsidy|
For a household size of 4 in 2020:
|2020 Income||California Premium Subsidy|
As you see from the tables, the additional subsidy from California first increases as your income goes from 200% FPL to 300% FPL. Then it drops down as your income goes from 300% FPL to 400% FPL. I guess the theory is that at the lower incomes your premium after the federal premium tax credit is already low enough. Therefore you don’t need much additional subsidy from the state. As your income goes past 300% FPL, you can afford more of the premium yourself. So again you don’t need as much additional subsidy from the state.
- 2020 State Premium Assistance – Final Program Design Document, Covered CA
- Covered CA Board Resolution adopting the final program design, Covered CA
- Senate Bill No. 78, signed by the Governor
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