How adding even $1 in additional income can cost you $$Thousands
A new Obamacare flaw: Many could face a precipitous ‘subsidy cliff’ as income approaches certain limits
Mark J. Perry | August 1, 2013, 5:39 pm
Although this won’t affect everybody, many individuals and households whose income is near 400% of the Federal Poverty Level (FPL) will fall off a precipitous Obamacare “subsidy cliff” as soon as their income exceeds the 400% FPL limit by one dollar. The 400% FPL is currently about $46,000 for individuals, $62,000 for a married couple, and $78,120 for a family of three. As income approaches those limits, there may be some perverse incentives to work less, refuse overtime, etc., to avoid falling off the “Obamacare cliff.”
ValuePenguin does the math and finds this serious flaw in the Unaffordable Care Act:
If your income is at or below the above 400% FPL figure for your household size, the government will subsidize your healthcare so that you spend no more than 9.5% of your income. But earn one dollar above the 400% FPL threshold and the subsidies disappear completely. This obviously creates a problem! If insurance costs substantially more than the capped premium for your family, that extra dollar may actually cost your household a huge amount in actual dollars.
Here’s an example for a family of three in New York:
Using insurance premium data released by New York state, lets calculate the pre and post 400% FPL impact on health insurance expenses for a family of three in New York, NY. From the premium data we can see that the second lowest silver plan (this is the plan used to determine subsidies) available on the exchange costs $394.58 for an individual and will cost $1,065 for a family monthly.
On an annual basis, this plan would cost $12,784 before subsidies. As long as the family above earns less than $78,120 they will only be required to spend $7,421, with the government subsidizing the rest. That’s a total savings of $5,363.
$78,120 – $7,421 = $70,699 of take-home income after health insurance.
What happens if the family earns one extra dollar and has income of $78,121? Suddenly they lose the entire amount of the savings and are actually worse off than they were before.
$78,121 – $12,784 = $65,337 of take-home income after health insurance.
Since the subsidies come in the form of tax credits, any dollar amount a household receives is essentially after taxes. Therefore to regain the $5,363 dollars in post tax dollars, the family’s income would actually have to rise greater than that amount once you account for state, federal and payroll taxes.
To illustrate: For a family in this income bracket, they would be responsible for 25% in federal taxes, 6.2% in FICA and 1.45% for Medicare. This family would need to earn $7,962 additional dollars or $86,083 to end up where they were before. For the self-employed because who contribute double to FICA and Medicare they would need to earn $8,983 additional dollars.
Conclusion: Americans benefiting most from subsidies, generally those facing higher insurance costs due to state regulations or age ratings, will find themselves facing peculiar economic incentives as they reach 400% of the FPL. Extra hours, a raise, or even investment income, may end up pushing a household into having less disposable income than they did when they were earning less.
While this will not effect most Americans, for those that this does effect the monetary impact could be significant. The magnitude of the impact will depend on how expensive pre-subsidized insurance costs are for the household. The higher these costs, the more of a subsidy cliff the household will face. Since all Americans will be required to purchase insurance of some form, it is especially important for those people earning at or around the 400% of the FPL mark to be aware of how their income and potential subsidies may impact their actual take-home pay.