The Types of Health Insurance Subsidies and How They Work

Shopping for the right health insurance can feel overwhelming. In addition to seeking coverage that works best for your household, you need to weigh costs. If you’re concerned about affordability, the good news is that you may access subsidies. What are health insurance subsidies, how do they work, and what are the tax consequences of using subsidies?

While some people have health insurance at work, others have to include it in their monthly expenses. But health insurance is often expensive and households with low income may struggle to afford it. That’s where subsidies come in handy.

If your company doesn’t offer a health plan and you don’t qualify for Medicare or Medicaid, you may be eligible for assistance to help you afford a plan. Your eligibility for health insurance subsidies and the amount of help you may access depend on various factors, such as household size and income level.

Health plans eligible for subsidies are only those purchased through exchanges. The goal of subsidies is to increase insurance coverage by making health plans more affordable.

There are two types of subsidies offered through exchanges: premium tax credit and cost-sharing reduction. While premium subsidies lower your monthly plan costs, cost-sharing subsidies are meant to reduce the out-of-pocket costs you incur for a doctor’s appointment or hospital stay. Both subsidies can be applied to all four health plans (bronze, silver, gold, and platinum) available through health insurance marketplaces or exchanges.

Depending on your income and the plan you choose, premium tax credits may cover part or all of your premium payments in a year. The assistance you receive is calculated based on your estimated annual income. If you overstated the income, your bill may be higher than it should be and you may receive a refund. If you understated your income, you may receive more credit than due, and you may need to return any excess benefits.

The payment can go directly to your plan provider every month, or you may pay the premiums yourself and claim the credit as a tax refund when filing returns. Since the premium subsidy is refundable, you should get the refund even if you have a federal income tax liability.

You can only access cost-sharing subsidies if you have a silver plan. The assistance offered here covers various out-of-pocket medical bills. The plan also has a maximum out-of-pocket spending limit in a year.

The IRS doesn’t consider either premium or cost-sharing health insurance subsidies as income, meaning if you paid the plan costs yourself to receive the credit as a lump sum, you won’t owe the IRS a penny. However, if you received excess tax credit through premium subsidies, you may need to return some money.