The “Affordable” Care Act

In 2010 President Obama signed the Affordable Care Act (ACA) often referred to as “Obamacare”.  The intent was to extend the benefits of health insurance to a larger population but in practice it has created a system with extensive pitfalls.

In fact, putting the word "affordable" in the name is a bit of a misnomer. Calling to mind Inigo Montoya's famous phrase from the 1987 film, "The Princess Bride":

The new law required insurance companies to extend the same benefits to individuals as they did to large corporations.  They could no longer exempt “preexisting conditions” or refuse coverage.  Of course, this meant higher premiums which were supposed to be offset by an advance (or loan) from the government paid directly to the insurance company.  (They don't call it as a “loan” but that’s essentially what it amounts to.)

At tax time, participants are required to reconcile their income to the amount of subsidy (or loan) they received and either get a refund or pay the difference.  Since it’s inception, approximately 24 million people (or around 8% of the population) have participated in the program.

So, what could go wrong?

For starters, not everyone has a predictable income.  Small business owners and commissioned employees often have big swings from year to year.  And even those with predictable incomes might have a windfall such as a taxable inheritance or a bonus which can trigger tens of thousands of dollars in subsidy repayments.  To protect against this, a safety net was established which basically said no one would ever pay back more than 8% of their income for health insurance.  But like a lot of nice things, it got abused by people understating their income.

The second problem is the complexity.  A lot of us struggle with the concept of mingling health insurance with taxes - we think of them as two separate things.  The IRS has been instructed not to accept tax returns for people on subsidized insurance without a proper reconciliation (Form 8962).  The problem is that due to HIPPA laws, they are not provided with numbers to verify if the form is accurate, making enforcement nearly impossible.

Finally, there is a general lack of understanding.  We’ve heard people say things like, “I’m not on Obamacare, I’m with Select Health” or “I’m not receiving a subsidy, my agent found me insurance for just $75 per month!”  Both statements are wildly inaccurate and show that we have failed to educate people on what is actually going on. 

So, what IS Obamacare and who benefits?  The following chart illustrates how much the government is willing to pay toward health insurance for families of from one to six people:   

Disclaimer:  These figures are for Washington County, Utah and are estimates only to be used for illustrative purposes!

Insurance costs can vary so the government assumes an average which they refer to as the “Second Lowest Cost Silver Plan” or SLCSP.  You find your best deal on insurance and, depending on your income and household size, this chart shows how much the government is willing to pay toward your monthly premium. Notice how abruptly the subsidy drops off after income exceeds 400% of the Federal Poverty Level (FPL).

Let's look at a detailed example:  A family of 4 making $100,000 per year would qualify to receive an advance (or loan) toward their premiums of $1,951 per month.  The average premium (or SLCSP) in their area is $2,781 per month.  There are a few different insurance companies to choose from but assuming they choose an average-priced plan, they would pay $830 per month and the government covers the rest. Zooming in on the blue line from the chart above, we can see that their premium would be split up as follows:

How does that affect their taxes?  At tax time, they must report the amount of premium subsidy received.  If their income is close to the $100,000 they predicted, then all is right with the world and they will break even.  If their income is lower than expected, they may even get money back in the form of additional premium tax credit (PTC).

But what if they made more?  Notice how close they are to the edge of the phaseout? Suppose that same family won $10,000 on The Price Is Right (a situation based on actual events).   That would reduce their PTC by $83/mo and cost them $996 in addition to their Federal and state income taxes! If their winnings were over $32,000 then they would "fall off the cliff" and be required to repay the entire subsidy of $23,412 plus tax which would consume nearly 100% of their windfall and be a devastating financial blow.

For tax pros, it gets old explaining to people why they owe so much when it isn’t even tax… it’s insurance premiums!  A lot of insurance agents set up such plans with little understanding how people are affected on the back end.  Most of us would never take out a loan without knowing the terms but that’s exactly what this is.  It’s basically getting a loan to pay for health insurance that you may or may not have to pay back…

What changed for 2026?

From its inception in 2010 until 2016 the ACA provided at least partial coverage to anyone earning between 138% and 400% of the Federal Poverty Level (FPL).  Those earning less than 138% of the FPL generally qualify for Medicaid (provided they have less than $2,000 in assets, not counting their primary home and car.) If someone made more than 400% of the FPL, the subsidy immediately dropped to zero!  During those early years going over by even $1 meant disqualification from the program.  (One client had to repay $12,000 in subsidy because they made $7 over the limit.)

In 2017 a phaseout was established that essentially built a “ramp” to soften the blow for those who happened to go over by a small amount.  Incidentally, the penalty for not having coverage was also suspended that same year.

As a pandemic measure program was created for 2022 and 2023 which enhanced the income thresholds temporarily increasing them by 50% above their previous levels.  The cost of insurance did not go down but subsidies were extended to more people with higher incomes - up to 600% of the FPL!  Many people hoped that these “enhanced subsidies” would be made permanent, but they were not. 

For 2024 and 2025 the income thresholds dropped to just 15% above their previous levels.  This meant extending benefits to those making up to 460% of the FPL. In other words a single person making $80k per year in 2023, who had become accustomed to receiving a $5,000 annual subsidy, suddenly found themselves ineligible for ANY sort of assistance in 2024.  But at least there was still an 8% safety net so it wasn't the end of the world. Until...

Beginning in 2026 we revert back to having NO repayment caps AND no 8% safety net!!! This means the "ramp" is once again eliminated and you could end up owing the full amount of excess subsidy if your income ends up too high!  Here are the amounts you would need to stay below in order to keep your subsidized coverage.

2026 Federal Poverty Levels

Household	100%	138%	400%
1	15,960	22,025	63,840
2	21,640	29,863	86,560
3	27,320	37,702	109,280
4	33,000	45,540	132,000
5	38,680	53,378	154,720
6	44,360	61,217	177,440

If your 2026 income is going to be between 138% and 400% of FPL for your household size, then you are likely a good candidate for an ACA policy and can review your options for coverage at www.healthcare.gov 

But if there is ANY chance you could go over the 400% threshold for 2026 then you need to consider reducing your subsidy to zero or look at alternative insurance options.  Health insurance does not always equate to good health care and an average cost of $905/mo. for a single person feels really high!  Going uninsured may not an option for a lot of people but there are lots of viable alternatives such as www.starthealth.com or www.zionhealthshare.org who offer excellent coverage at a fraction of the cost.  We are not affiliated with either of these, we have just found them to be an economical alternative to appropriately insure for medical emergencies.

What will the future hold? Nobody knows.  It’s a complex problem without an easy solution.  Given the political climate and complex history of the ACA, we can be sure that there will be sweeping changes – and, in this authors opinion, they wouldn’t have to be that great to be better than what we currently have.