August 15th was the deadline to take advantage of the premium tax credits (PTC) originally provided in the Affordable Care Act (ACA) and recently expanded in the American Rescue Plan Act (ARPA). Future extensions may provide longer-lasting benefits, although the extensions may create trade-offs for consumer choice and program costs.
The ACA provided a refundable tax credit for eligible low-to-moderate income households to purchase health insurance coverage through the federal and state marketplace. Individuals are eligible to claim the tax credits if their yearly household income falls between 100 to 400 percent of the federal poverty line (FPL) for their family size, are ineligible to receive affordable coverage through an employee-sponsored plan or are provided public coverage, are not claimed as a dependent, and are legal residents of the United States.
Premium credits are calculated based on the monthly costs of the second-lowest price Silver Plan and expected yearly income, limiting monthly premium contributions to between 2.07 and 9.83 percent of a household’s income. Progressively larger credits are given to families with lower incomes.
Premium credit payments can be paid immediately through advance monthly disbursements made to insurers or can be claimed by taxpayers when they file taxes.
Households that choose to receive a reduced premium through advanced payments do so based on expected income, and then they must reconcile what they received in advance with their actual income when they files taxes. Families with lower-than-expected yearly income will receive additional qualified credit upon filing a tax return, while families that make higher than expected income must repay some or all of their credit through a reconciliation payment.
Reconciliation caps limit the portion of excess advanced payments that households must repay, depending on a household’s adjusted gross income compared to the FPL. In 2016 filings, 62 percent of advanced payment recipients had to repay excess credits—28 percent of whom benefited from the repayment liability caps. In 2018, 6 million tax returns indicated receipt of advance credit payments, totaling $46.1 billion, of which 3.2 million received excess payments.
In the first half of 2020, more than 10.5 million people enrolled for PTCs, and 86.4 percent chose to receive their credits in advance. The average monthly premium per enrollee came out to $574.95, with average monthly advance premium tax credit payments reaching $491.30. The Congressional Budget Office (CBO) projects the premium tax credit program cost $53 billion in 2020.
For 2021 and 2022, the ARPA provides larger PTCs to qualifying households. The law extends eligibility to taxpayers with household income above 400 percent of the federal poverty line by lowering the upper premium contribution limit to 8.5 percent of household income. All household income levels will experience a boost in premium credits for 2021 and 2022. It removes the requirement that people repay some of all of their credits due to changes in income levels for 2020. Finally, it would increase the amount of credit available to people who received unemployment benefits at any point in 2021.
- A single 21-year-old with an income of $19,300—or 150 percent of the federal poverty line (FPL)—would claim $4,300 in premium tax credits under the ARPA, compared to $3,500 under prior law.
- A single 45-year-old with an income of $58,000—or 450 percent of FPL—would claim $1,250 in premium tax credits under the ARPA, compared to zero under prior law.
As of the beginning of July, more than 1.5 million Americans have enrolled in coverage, while an additional 2.5 million of people previously enrolled have seen their monthly premium costs lowered by 40 percent on average. The additional subsidies will decrease premiums, on average, by $50 per person per month or $85 per policy per month, with four out of five enrollees able to receive a plan for $10 or less a month.
These sweeping benefits do not come without a cost. The CBO estimated the changes would increase premium tax credits by $35.5 billion, with new marketplace enrollees accounting for a $13 billion increase in premium tax credits and existing enrollees the remaining $22.5 billion. Additionally, suspending the repayment of improperly advanced PTCs would increase the deficit by $6.3 billion. Expansions for people who received unemployment benefits adds another $4.5 billion to the deficit
With nearly 11 million uninsured Americans still eligible to receive reduced premium coverage under the ACA and ARPA, the Biden administration, along with congressional Democrats, have recently considered making the ARPA expansion permanent. That would include permanent elimination of reconciliation and repayment requirements for overpayments of credits, expanding ACA benchmark benefits to a more generous reference plan, and closing state Medicaid gaps.
If made permanent, the ARPA changes—excluding repayment repeal—would reduce revenue by slightly more than $163 billion from 2022 to 2031, according to the Treasury Department.
The future of premium credit expansions will have huge effects on the program’s appeal to prospective enrollees. For example, people who have yet to enroll because the extension is temporary may enroll if it becomes permanent. Extending the current expansion would decrease the number of uninsured and raise insurance coverage for millions of Americans. However, this means the long-term revenue effects may be larger than currently estimated. An increased subsidy may also come with the threat of premium hikes and fewer employer-based options.
The changes to the reconciliation process are particularly concerning. During the economic downturn and immediate recovery, the potential of having to repay advanced credits imposes financial uncertainty for Americans amidst an already uncertain time—limiting that was the rationale for removing the reconciliation requirement for 2020, but it is still in place for 2021 and 2022. Going forward, however, a permanent elimination of the reconciliation process may create problematic incentives if it leads to situations in which people underestimate future earnings to receive higher credits.
Lawmakers must grapple with the revenue implications and the incentives created by the policy changes when they consider how to address premium credit expansion extensions in the upcoming 2022 Budget Resolution.