When it comes to buying health insurance through the ACA marketplace, subsidies can make a big difference in what you pay for coverage. These subsidies, also called “premium tax credits,” are designed to make healthcare more affordable. But how do they actually work?
The government isn’t exactly known for concise descriptions, so we’ve gone ahead and simplified it for you. But, if you’re interested in digesting some jargon, check out this IRS article for a fascinating read.
Note: The calculations included in this article are based on the 2025 plan year. We expect that there will be changes to the subsidy calculation for 2026 and will update this article once confirmed.
What are ACA subsidies?
Subsidies, or premium tax credits, are essentially financial assistance provided by the federal government to make health insurance a bit more affordable on the marketplace.
Just to clear the air before we get into the nitty gritty…these are not “handouts.” Subsidies are primarily based on household income, but also take into account things like family size and your geographic location. Think of it more as leveling the playing field.
These subsidies come in two main flavors:
- Premium Tax Credits (the more popular option)
This assists by lowering your monthly premium, which is the amount you pay each month to keep your insurance active. The credits are based on your income and household size.
- Cost-Sharing Reductions (CSRs)
This lowers your out-of-pocket costs for things like deductibles, co-pays, and coinsurance, but it’s only available if you choose a Silver-level plan on the marketplace.
How Are Subsidies Determined?
Now, if you’re not an accountant the following terms can get confusing. Luckily for all of us who are math-adverse, this is calculated within the marketplace. #smallmiracles
The ACA marketplace calculates your subsidy based on a few key factors:
Step 1: Your Modified Adjusted Gross Income (MAGI)
Just like the name states, it’s your adjusted gross income…but modified. Super clever, right? It includes wages, Social Security benefits, and rental income, but may exclude things like untaxed Social Security or certain deductions.
Odds are your AGI and MAGI will be fairly similar.
Step 2: The Federal Poverty Level (FPL)
The marketplace uses income thresholds, or the FPL, to determine if you qualify for subsidies. For 2025, the levels looked something like this:
- 1-person household: $15,650 annually
- 4-person household: $32,150 annually
(psst…you just add $5,500 per additional person)
People earning between 100% and 400% of the FPL are eligible for subsidies.
There’s a caveat though, due to temporary changes made under the American Rescue Plan and later extended, there’s currently no upper income limit for subsidies—just a cap based on the cost of coverage for your household. Those temporary changes are being evaluated for 2026, so the threshold may change.
Step 3: Benchmark Plan Costs
The amount of your subsidy is tied to the second-lowest cost Silver plan available in your area, known as the benchmark plan. The ACA ensures that you won’t pay more than a certain percentage of your income for this plan based on your income bracket. The government covers the gap between your calculated contribution and the actual cost of your premium.
For example, if the benchmark plan costs $500/month and your income qualifies you to contribute $80/month, the government will provide a $420 subsidy.
Income Brackets and Contribution Rates
Here’s how much of your income you’re expected to contribute toward premiums for the benchmark Silver plan:
- Earn 150% of the FPL or less? Your coverage can cost as little as $0 monthly due to expanded subsidies.
- Earn 200% of the FPL? You might pay around 2-4% of income for benchmark plan
- Earn above 400%? Thanks to the subsidy cap, your cost will not exceed 8.5% of your annual income under current subsidy rules.
Example Scenario
Amy is a single individual, or a one-person household, with an annual income of $37,650. Here’s how it plays out for her:
- Her income puts her at approximately 250% FPL.
- Contribution rate for her bracket = 4-6% of income.
- Total annual contribution = $2 259 /year (roughly $88/month).
- If the benchmark plan’s premium is $450/month, Amy qualifies for a subsidy of $262//month.
Amy can apply this subsidy to any plan, lowering her costs significantly. Woohoo, Amy!
What Happens If Your Income Changes?
Subsidies are based on your projected annual income for the year, but life is full of surprises. A pay raise, new job, or other changes can alter your annual gross income.
Here’s how to handle it:
- Update Your Marketplace Application Promptly
If your income goes up or down, you should report it to the ACA marketplace as soon as possible. This ensures your subsidy amount adjusts accordingly, avoiding repayment surprises at tax time. This can also be helpful to avoid losing health care coverage if you suffered a cut in your household income.
- Reconciliation During Tax Season
After the year ends, your subsidy gets reconciled on your tax return. Earned more income than you originally reported? You might owe back some of that subsidy. Earned less? You may get money back.
Real-Life Example
Mike estimated his income at $25,000 but actually earned $30,000. If his final income exceeds what his subsidy was based on, the IRS will require him to pay back a portion of it at tax time and possibly increase your monthly premium payment.
Pro tip: To avoid surprises, try to provide the most accurate income estimate possible.
Who benefits the most from subsidies?
ACA subsidies are designed to help individuals and families with low-to-moderate incomes. That said, the 8.5% affordability cap has made a huge difference for middle-income earners.
Groups That Benefit Greatly
- Early retirees on limited income before Medicare eligibility.
- Part-time workers with fluctuating wages.
- Freelancers or gig workers navigating variable incomes.
For higher earners, the affordability cap means they can still qualify for assistance, especially in states with higher-than-average premiums. (Looking at you, New York.)
There’s no double dipping
At StretchDollar we utilize something called an ICHRA (or an Individual Coverage HRA) to allow small businesses to give their employees pre-tax $$$ to go towards the premium of the health plan they choose on the marketplace. That employee can either take the benefit OR take the subsidy, not both.
Let’s jump into another scenario:
Jimmy might get $300 a month from his employer for his health plan via ICHRA. Depending on the factors we went over earlier, including if the benefit offered was deemed affordable, he could potentially be paying less if he didn’t take the $300 but instead utilized subsidies. If Jimmy’s chosen plan is $500, he could be paying $200 a month while utilizing his ICHRA, or his subsidy option could have him paying $150.
It really does differ person to person, so having a broker (or insurance guide) to help you navigate your options is really optimal.
Cost-Sharing Reductions (CSRs)
While premium subsidies lower your monthly payment, CSRs make your insurance cheaper to use by reducing deductibles, co-pays, and other costs. These are available for people earning up to 250% of the FPL and only apply to Silver-tier plans.
Example
Lila, earning 200% of the FPL, picks a Silver plan with a $4,000 deductible. Thanks to CSRs, her deductible drops to $800, significantly reducing her overall out-of-pocket expenses.
If you qualify, a Silver plan with CSRs often offers the best value.
How to Apply for ACA Subsidies
Applying for ACA subsidies is straightforward:
- Visit HealthCare.gov (or your state marketplace, if applicable).
- Complete an application with your household size and estimated MAGI.
- Review available plans and see how the subsidies lower your costs.
Subsidies are applied automatically when you enroll in coverage—it’s that simple.
By understanding how these subsidies work, you can make informed decisions and find affordable coverage through the ACA marketplace. Whether you’re exploring options for the first time or re-evaluating your plan, subsidies exist to make health insurance more accessible for everyone.
If you’re a StretchDollar user and wondering about whether you should take the subsidy or your ICHRA dollars, click the pink help bubble on the right hand side of the screen to talk with our team.
