If you cannot afford the premium — the monthly base price — of a health insurance plan, you may qualify for a subsidy to help reduce the costs. Exactly how much assistance you can get for paying the premium is based on the premium price of the second-lowest cost silver plan in your area. We’ll discuss how to determine the amount of subsidy available to you and an example.
What is the second-lowest cost silver plan (SLCSP)?
If you don’t have employer-sponsored health insurance you will purchase a health plan on the marketplace the designated Open Enrollment period or, in certain circumstances, during a Special Enrollment period. You can look at different plans to find the most affordable care option that fits needs on healthcare.gov.
Marketplace health plans are classified into metal tiers or categories: Bronze, Silver, Gold, Platinum, in addition to catastrophic coverage. The lower-tier plans generally have a lower premium. The second-lowest cost silver plan will simply be the health plan in the Silver category with the second-lowest monthly premium.
Why does the SLCSP matter?
Even if you don’t end up purchasing the second-lowest cost silver plan, it’s important for determining how much of a tax credit you can get if you qualify for one. If you have low household income and meet other eligibility requirements, you might qualify for a premium tax credit, which can help reduce the monthly cost.
The way it works is that you can choose to apply the credit directly to your insurance company to lower your premium — called the advance premium tax credit (APTC) — or you can claim a credit at the end of the year on your tax return. This will help lower your taxable income and give you a bigger refund check. (We’ll discuss taxes later.)
How much this premium subsidy is for depends on your income (specifically, what percent of the federal poverty level it is) and the cost of the second-lowest cost silver plan.
(See where Obamacare plans cost the most around the country.)
Second-lowest cost silver plan and the premium tax credit
To estimate how much of a premium subsidy you will receive you need to know:
Estimated annual income (in relation to the federal poverty guidelines.)
Premium of the second-lowest cost silver plan.
Based on your income, the state will determine the maximum amount you should be paying for a health insurance premium, which is called the premium cap. This is usually expressed as a percentage of your income. (For example, you shouldn’t spend more than 5% of your income on health insurance premiums for a silver plan if you make $20,000.) Then you can compare the premium cap suggested by the government to the actual premium costs of the SLCSP.
The amount of the tax credit you will receive is the difference between the premiums for SLCSP and the premium cap determined by the state based on your income level.
Calculating the premium tax credit using the SLCSP
Let’s walk through an example for an individual in enrolling in a marketplace plan in California.
You estimate that your annual income will be $30,350, or 250% of the federal poverty guidelines.
According to Obamacare rules, the most you should have to pay in premiums for a Silver plan is 8.36% of your income (this percentage comes from a sliding scale based on your income. You can check it out in the calculator below) — that’s $2,537 per year or $211 per month.
On the marketplace, the second-lowest cost silver plan actually has a $585 monthly premium.
Find the difference between what the government says you should pay and what you’d actually pay. $585-$211=$374.
The difference is the premium subsidy. In this case the discount is $374, which you can apply towards any plan on the health insurance marketplace, not just the Silver plan.
Each state has different guidelines as well as coverage offerings, so you can use this Health Insurance Marketplace Calculator from the Kaiser Family Foundation to estimate your subsidy.
The costs associated with the second-lowest cost silver plan is still important, even after you’ve qualified for subsidies and purchased a health policy. The premium cost of the SLCSP is needed for one last thing: filing your taxes.
When you received the premium tax credit, you may have chosen to apply it in advance as a payment to the insurance company. You will have to report the exact amount you used on your income tax return. Since the premium subsidy was based on your estimated income for the year, you might owe money to the IRS if you ended up making more money than you anticipated.
You can find how much of the premium tax credit you applied, your enrollment premiums, and the premium cost of the SLCSP on IRS Form 1095. This form is filed and provided by the marketplace or your insurer. This information can be used to fill out Form 8962, which must be included with your federal tax return.