When the Affordable Care Act was signed into law in 2010, healthcare became more affordable to millions of Americans. Not only did the new healthcare law drive down the cost of health insurance by offering more options to the public, but it also created a system of federal cost assistance to make buying insurance easier and less expensive. This system centers on subsidies, which can be applied toward your monthly premium and medical costs to help reduce your financial burden. In the following article, we’ll explain how subsidies work.

What is a subsidy?

The term “subsidy” refers to the amount set aside by the federal government to provide cost assistance to low-income individuals and families. Subsides are funded through taxes and distributed according to need. Subsidies are designed for those who don’t earn enough money to pay for monthly premiums, those whose employer doesn’t offer insurance, and those whose work-based insurance is too expensive. In general, however, if you earn between 100 and 400 percent of the federal poverty line or FPL, then you most likely qualify for some type of federal cost assistance to buy insurance on the marketplace.

How much are subsidies worth?

For a small percentage of people, subsidies will cover the entire cost of health insurance premiums each month. For most people, subsidies cover enough to make the premiums affordable. The amount you get in subsidies will depend on your household size, your state, how much you make and whether you can get insurance through work. It’s difficult to give an average amount when it comes to subsidies because different factors affect the percentage. Here’s an example of an average family of four living in the United States:

  • The Hamiltons earn an average income of $52,000 per year. Mr. and Mrs. Hamilton are 40 years old, and their two children are minors. Neither adult smokes.
  • Neither parent can get insurance through work.
  • According to a subsidy calculator, the Hamiltons earn about 218 percent of the FPL, which means they qualify for federal assistance on the marketplace.
  • The Hamiltons’ premium tax credit is worth 63 percent or $524 per month. If they didn’t get cost assistance, they would have to pay $826 per month for a silver-level insurance plan. With assistance, they’ll only have to pay $302 for that same plan.

If the Hamiltons took their tax credit and applied it to a less expensive bronze plan, they would only pay about $114 per month. They could also apply the tax credit to a more expensive plan. You can use your federal subsidy for any plan on the marketplace that fits your family’s needs. One way to save money on insurance is to apply a subsidy to a gold or platinum plan so that you reduce your long-term out-of-pocket expenses. The Kaiser Family Foundation offers a subsidy calculator to help you determine how much of a tax credit you might receive.

How can I apply for financial assistance?

You can only get a premium tax credit by applying for health insurance via your state health exchange or the federal marketplace if your state doesn’t run its own exchange site. Once you sign up on HealthCare.gov, you’ll answer questions about your household size and income, and the system will automatically tell you whether you qualify for a subsidy. You’ll also see your eligibility for other cost assistance programs like Medicaid or the Children’s Health Insurance Program for your kids.

What if my income varies?

If your income varies throughout the year, then don’t worry. You can apply a subsidy in one of three ways: in equal monthly installments, in small sums throughout the year or in one lump sum as a tax credit on your annual return. Subsidies under Obamacare are also called “Advance Premium Tax Credits” because they’re technically an advance by the government on your future tax return. If your income or household size changes, then report the change to the marketplace in which you enrolled so that the government can automatically adjust your credit.