Federal laws cap the amount you have to pay for individual and family health insurance at a percentage of your household’s annual income. The government accomplishes this via the health insurance premium tax credit, which your state’s Health Insurance Marketplace facilitates on behalf of the IRS.
The premium tax credit is a tax credit that offsets your annual health insurance premiums. It’s a way for the government to pay for some or all of your private health insurance costs. Specifically, it caps your household’s annual out-of-pocket health insurance costs as a percentage of your household’s income based on a percent of income cap.
How to determine your household’s percent of income cap
For 2023, the percent of income cap ranges from 0 percent to 8.5 percent. Your percent of income cap depends on where your household income falls relative to the federal poverty level. If your household’s annual income is greater than or equal to 400 percent of the poverty level, your percent of income cap is 8.5 percent. Otherwise, your percent of income cap varies based on the income bands in the chart below.
Note: Before 2021, premium tax credits were only available to households with annual income below 400 percent of (or four times) the federal poverty level for their household size. For 2021 - 2025, the American Rescue Plan (ARP) and the Inflation Reduction Act have suspended the income eligibility requirement and eliminated the "subsidy cliff".
The federal poverty level is set each year by Health and Human Services (HHS). The government uses it to determine your household’s eligibility for government assistance programs like Medicaid and premium tax credits. The chart below lists the 2022 federal poverty levels for the 48 contiguous states and the District of Columbia. Hawaii and Alaska have different numbers. Notice that the federal poverty level increases with household size.
Example percent of income caps
Using the two charts above, here are five examples:
- A household of 1 with $51,520 in income would have a percent of income cap of 8.5% (That’s an annual dollar cap of $4,379.)
- A household of 2 with $43,550 in income would have a percent of income cap of 4% (That’s an annual dollar cap of $1,742.)
- A household of 3 with $65,880 in income would have a percent of income cap of 6% (That’s an annual dollar cap of $3,953.)
- A household of 4 with $39,750 or less in income would have a percent of income cap of 0% (That’s an annual dollar cap of $0.)
- A household of 5 with $500,000 in income would have a percent of income cap of 8.5% (That’s an annual dollar cap of $42,500.)
Since you have many health insurance plan options available in your state’s Marketplace, the IRS must pick one of them to “benchmark” against your income. By law, the benchmark plan is the “second-lowest-cost silver plan” available in your area. The number in parentheses is the most each household would need to pay for their benchmark plan. I call this number the annual dollar cap.
Note: Your maximum premium tax credit is calculated based on your benchmark plan. But, you don’t have to buy the benchmark plan. You can use your premium tax credit to purchase any Marketplace plan available in your area.