Personal Finance

Health insurance costs for millions set to drop under final Covid-relief bill

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Key Points
  • The American Rescue Plan removes the income cap — for two years — for health insurance premium tax credits through the federal health exchange (or a state marketplace).
  • The amount you pay would be limited to 8.5% of your income, as measured by the exchange.
  • Anyone who received too much in tax credits in 2020 won't have to pay back the excess.

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Ika84 | E+ | Getty Images

Private health insurance through the nation's public exchanges is set to become more affordable — at least for a couple of years.

The $1.9 trillion Covid relief package, which received final congressional approval Wednesday and will soon head to President Joe Biden for his signature, includes provisions that will reduce the cost of health insurance amid the ongoing pandemic and elevated unemployment.

Those changes include increasing premium subsidies (technically tax credits) that are available through the federal marketplace and state exchanges for 2021 and 2022, expanding who qualifies for the financial help and forgiving amounts due by taxpayers who received too much in subsidies in 2020 (and minimizing that issue for 2021).

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The stimulus measure, called the American Rescue Plan, also includes $1,400 stimulus checks for most adults (and their dependents), a $300-per-week unemployment supplement and increased child tax credits for qualifying families, as well as money for vaccination programs, state and local governments, and schools.

The majority of the 11.5 million people already enrolled in exchange-based health plans receive premium tax credits. Those individuals or families would be able to recalculate their subsidy after the new rules take effect.

"They could go into healthcare.gov and update their account to get the higher tax credits going forward," said Karen Pollitz, a senior fellow with the Kaiser Family Foundation.

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A special enrollment period for the exchanges — for existing enrollees to switch or for new enrollees to get coverage — is currently open and will close May 15.

Here are details of some of the health-care provisions in the stimulus package.

Premium tax credits

Current law limits eligibility for premium tax credits through the federal and state exchanges to households whose income is from 100% to 400% of the poverty level. The stimulus package would remove that cap for 2021 and 2022, as well as limit the amount anyone pays in premiums to 8.5% of their income as calculated by the exchange.

The tax credit is based on factors that include income, age and the benchmark "silver" plan in your geographic area. The amount you qualify for is basically advanced to you over the course of the year via reduced premiums.

For illustration, as outlined in a report from the Congressional Budget Office: Say a 64-year-old with $58,000 in income — about 450% of the 2021 poverty level of $12,880 — currently pays $12,900 in annual premiums for a plan through the exchange because they don't qualify for subsidies. Under the proposed change, that person would pay no more than $4,950 (8.5% of their income) — meaning the tax credits would amount to $7,950.

Older adults' premiums are triple what younger adults would pay.
Karen Pollitz
Senior fellow with the Kaiser Family Foundation

The older an enrollee is, the greater the savings would be, due to premiums being based at least partly on your age. 

"Older adults' premiums are triple what younger adults would pay" normally, Pollitz said, so the savings would have a bigger impact.

The CBO report estimates that the expanded eligibility would result in 1.7 million more people getting insurance through the marketplace, with 40% of them being individuals who are currently ineligible for premium tax credits under current law because their income is above the 400% cap.

The 2020 tax issue

One result of the federal government's expanded unemployment benefits last year was that some unemployed workers had more income than they did when they were working.

That could have resulted in marketplace enrollees getting more in premium tax credits than they were eligible for. Under normal circumstances, that mismatch would mean they generally need to pay back the excess at tax time.

The stimulus bill essentially forgives any amount due on 2020 tax returns, Pollitz said.

The measure also would ensure that this year, if you qualify for tax credits and unemployment benefits push up your income, any amount above 133% of the poverty level would generally be disregarded in the calculation for subsidies through the exchanges.

COBRA subsidies

A law known as COBRA allows workers who lose their job to remain on their company's health plan for up to 18 months — but the person typically must pay the full monthly premium, which can be pricey without an employer chipping in.

The final stimulus bill will subsidize 100% of insurance premiums — only through September — for laid-off employees who want to remain with their company-sponsored plan. (An earlier version of the bill put the subsidized share at 85%.)