Subsidies Assist Individuals and Families in Purchasing Health Insurance from Exchanges

A policy brief from the Robert Wood Johnson Foundation discusses subsidies in the form of tax credits for private health insurance purchased through newly established health insurance exchanges as provided for by the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148). The first open enrollment period for the exchanges is scheduled for October 1, 2013. Prior to this date, exchanges must be established, qualified health care plans approved, personnel trained, and the public made aware about their rights and responsibilities.


The federal government subsidizes employer-based health insurance through the income tax system, a practice done so since the 1940s. Contributions to health benefit plans and direct reimbursements for medical care expenses are excluded from employees’ and retirees’ income for tax purposes. The exclusion for employer-provided health care is estimated to reduce income and payroll tax revenues by $230 billion in 2013.

The foundation notes that individuals who purchase their own coverage are entitled only to the deduction allowed for unreimbursed medical expenses. The expenses must exceed 10 percent of adjusted gross income (AGI) or 7.5 percent for individuals aged 65 or older. Most families at lower income levels already have low marginal tax rates, or forego itemized deductions, resulting in little to no tax benefit. Participation in current tax credit programs are substantially low among even eligible individuals.

Tax Credits

In order to make premiums affordable under the exchanges, tax credits will be provided. An element of these credits is that they are refundable; taxpayers would receive the full amount of the credit, regardless of how much they might owe in federal income taxes. The Congressional Budget Office (CBO) has projected that the tax credit subsidies would cost the federal coffers $16 billion in outlays and $3 billion in reduced revenues beginning with fiscal year 2014. These figures would rise to $115 billion in outlays and $16 billion in reduced revenues by 2023. CBO estimates indicate that the federal government would spend over $5,000 per subsidized enrollee in 2014.


The tax credit will equal the difference between the premium for what is known as the benchmark plan (second lowest) and a specified percentage of income. This benchmark plan is only used to determine the credit percentage, as participants can choose any plan. Adjustments would be made in subsequent years to account for growth of premium over income.

The tax credit can be advanced each month for individuals and families that are unable to pay the upfront costs of the full premium. The advances are based on the participant’s anticipated annual income and would be reconciled after actual taxes are filed.


Individuals are eligible for the premium tax credits if (1) they are not eligible for employer-provided coverage or for a public health insurance program; (2) they are U.S. citizens or lawful residents of the U.S.; (3) not incarcerated; and (4) their modified AGI is 100–400 percent of the poverty line. This amounts to earning caps of $46,000 for an individual and $94,000 for a family of four when the subsidies are to come into effect.

The foundation notes that there are still major unresolved issues around PPACA’s premium tax credit provisions, including the (1) expected effect that enrollment numbers will have on future premium prices in the individual insurance market; (2) costs of the subsidies and their impact on the U.S. budget; and (3) mechanics of administering a complicated program through the untested exchanges.