No Asset Tests for ACA Subsidies

The Affordable Care Act's (ACA) premium subsidies (premium tax credits) have no asset test. Neither does the expansion of Medicaid under the ACA. In both cases, eligibility is simply based on income. It doesn't matter how much money people have in the bank or the stock market, or how much their homes are worth—the assistance available via expanded Medicaid or premium subsidies depends only on income.

(Annual income is used to determine premium subsidy eligibility, although Medicaid eligibility can also be based on monthly income. This makes Medicaid particularly useful for people who experience a sudden drop in income mid-year).

This article will explain how the ACA's subsidies and Medicaid eligibility work, and how the lack of asset tests is very much in line with how financial assistance works with other types of health insurance.

Medicaid Expansion

In the District of Columbia and the 39 states that have expanded Medicaid, Medicaid coverage is available to enrollees with household income up to 138% of the poverty level. That corresponds to an income limit of $20,120 for a single person in the continental U.S. in 2023, but as the poverty level increases over time, the upper income limit for Medicaid eligibility also increases.

(Note that as of December 2023, Medicaid expansion will take effect in North Carolina, bringing the number of Medicaid expansion states to 40.)

Under Medicaid expansion, Medicaid eligibility for adults under the age of 65 is based solely on income (along with immigration status; in most states, a person must have been lawfully present in the U.S. for at least five years to qualify for Medicaid). Assets are not taken into consideration. Assets are also not taken into consideration for CHIP, or when Medicaid/CHIP eligibility is determined for someone who is pregnant. But asset tests are still used for Medicaid eligibility in some circumstances, including for people who are 65 or older.

Although Medicaid expansion has provided coverage for millions of Americans since 2014, it's important to note that some states have chosen to not provide this benefit, meaning that some Americans are left without coverage. In 10 of the 11 states that have not expanded Medicaid under the ACA (all but Wisconsin), there are nearly 2 million people who are in the coverage gap, with no realistic access to health insurance—they don't qualify for Medicaid, and their incomes are too low for premium subsidies, which don't extend below the poverty level.

Premium Tax Credits (aka, Subsidies)

In states that haven't expanded Medicaid, eligibility for premium subsidies in the exchange starts at the poverty level. Through the end of 2025, there is no set income cap for subsidy eligibility, as it varies from one person to another, depending on how the cost of the benchmark plan compares with their household income. (The income cap was temporarily removed by the American Rescue Plan, and that provision was extended through 2025 by the Inflation Reduction Act.)

In states that have expanded Medicaid, eligibility for premium subsidies begins where Medicaid eligibility ends (138% of the poverty level) and the same rules apply in terms of there being no set income cap for subsidy eligibility at least through the end of 2025.

(Prior to the American Rescue Plan's enhancement of premium subsidies, applicants could only qualify for premium subsidies if their household income didn't exceed 400% of the poverty level. For a family of four enrolling in coverage in the Continental U.S. early in 2021—before the American Rescue Plan was enacted—that amounted to an income cap of $104,800 in order to be eligible for subsidies.)

The ACA's family glitch has long been an obstacle that prevented millions of Americans from qualifying for premium subsidies. But as of 2023, the IRS finalized new rules to fix the family glitch, making some of those families newly eligible for subsidies if they shop for coverage in the exchange.

Unfortunately, there are still some people who are ineligible for subsidies due to the aforementioned Medicaid coverage gap. But the ACA, together with the American Rescue Plan and Inflation Reduction Act, ensures that affordable health coverage is available to most people (note that people who are eligible for Medicaid are not eligible for premium subsidies in the exchange, because they have access to other affordable coverage).

What Counts as Income?

Eligibility for expanded Medicaid and premium subsidies under the ACA depends on modified adjusted gross income (MAGI). And there's an ACA-specific MAGI—it is NOT the same as the regular MAGI with which you might already be familiar.

It's important to note that when you're applying for subsidies in the exchange, you'll be projecting your income for the year that you'll have coverage, but your actual income won't be certain until the year is over. That's why subsidy amounts have to be reconciled with the IRS when you file your taxes.

So although the discussion here will talk about adding various lines of the 1040, know that those exact calculations won't be done until after the year is over. When you're applying for coverage, you'll be estimating what you expect to have on those lines. You can provide the exchange with real-time updates throughout the year, if necessary, or just wait until your file your taxes to reconcile the details.

With that said, here's how ACA-specific MAGI is calculated:

You start with your adjusted gross income (AGI), which is Line 11 on the 2020 Form 1040.

Then there are three things that must be added to your AGI in order to get your MAGI to determine subsidy and Medicaid eligibility. If you have income from any of these sources, you have to add it to your AGI (if you don't have income from any of these sources, your MAGI is simply equal to your AGI): 

• Non-taxable Social Security income
• Tax-exempt interest income (for example, if you have federally tax-exempt municipal bonds)
• Foreign earned income and housing expenses for Americans living abroad 

Your subsidy eligibility (and Medicaid eligibility in the states that have expanded Medicaid) depends on your MAGI. But there's no asset test.

Some opponents of the ACA have cried foul, complaining that people with millions of dollars worth of investments can be receiving premium subsidies in the exchange. This is true, although investment income outside of a tax-advantaged account (401k, IRA, HSA, etc.) counts as annual income.

So a single person who doesn't work but earns $100,000 in dividends (or capital gains if they sell some of their investments) during the year in a taxable account would likely not be eligible for premium subsidies in the exchange. Through at least the end of 2025, there's no set income cap for subsidy eligibility. But subsidies are only available if the cost of the benchmark plan would be more than 8.5% of household income.

So for a single person to qualify for subsidies with a household income of $100,000, the benchmark plan would have to cost at least $708/month (8.5% of $100,000 is $8,500 for the year, which amounts to $708/month). If the person is older and/or lives in an area where health insurance is very expensive, that's possible. But most single people earning $100,000 are going to find that they're not eligible for subsidies.

(For reference, the average benchmark plan price in the U.S. for a 40-year-old in 2023 is $456/month. But older enrollees pay more and there are some areas of the country where coverage is much more expensive than the average.)

Tax Breaks for Health Insurance Are the Norm

But it's also important to note that the ACA's premium subsidies are simply a tax credit. For people who get their health insurance from an employer—which is the majority of Americans under age 65—there have always been significant tax breaks. The portion of the premiums paid by the employer is tax-free compensation for the employee. And the portion of the premium that's paid by the employee is payroll deducted pre-tax.

There have never been any asset tests—or income tests for that matter—with this arrangement. And it's important to note that the government spends far more on the tax exclusion of employer-sponsored health insurance than on the premium tax credits for people who buy their own coverage. (Albeit there are also far more people covered by employer-sponsored health insurance.)

On the other hand, individual/family (ie, self-purchased) health insurance premiums are only fully tax-deductible for self-employed people. People who purchase their own coverage but aren't self-employed (eg, they work for an employer that doesn't offer coverage) can include health insurance premiums in their total medical expenses for the year, but only medical expenses that exceed 7.5% of income can be deducted.

And in order to deduct medical expenses that are more than 7.5% of your income, you have to itemize your deductions, which very few people do (the Tax Cuts and Jobs Act, enacted in late 2017, significantly increased the standard deduction, so itemizing deductions isn't worth it for most tax filers).

The ACA and the American Rescue Plan are providing premium subsidies to the majority of the more than 15.6 million people who are enrolled in Marketplace/exchange plans.

This has essentially leveled the playing field in terms of the tax advantages for people who buy their own health insurance and people who get insurance from an employer (although people who buy their own coverage but earn too much to qualify for subsidies in the Marketplace are still at a disadvantage tax-wise when compared with their counterparts who receive employer-sponsored health insurance).

A person with a million dollars in savings but only $30,000/year in income (either investment income or income from a job, or a combination of the two) can benefit from the ACA's premium tax credit. Some opponents of the ACA have lamented that this is unfair and that it's taking advantage of a "loophole" in the ACA.

But if that same person worked for an employer who provided health insurance, they would be receiving tax-free compensation in the form of the employer's contribution to the premiums and would be paying their own portion of the premiums with pre-tax dollars.

She might only be paying $100 or so in premiums each month (or nothing at all, depending on how generous her employer is; the average covered single employee pays just over $110/month for their coverage, while their employer pays an average of nearly $550/month). And yet this is rarely perceived as a loophole, nor is it seen as rich people "taking advantage" of the system. 

When viewed from this perspective, the ACA's premium tax credits have simply helped to put individual health insurance more on par with employer-sponsored health insurance. And they've also made it possible for people younger than 65 to take the plunge into self-employment, part-time work, or early retirement, without having to worry that health insurance premiums will eat up all of their savings before they reach Medicare age.

Summary

Eligibility for the ACA's premium subsidies and Medicaid expansion are based on income, without regard for assets. Some have argued that this is a "loophole" but it is not. And the government spends far more on the tax exclusion for employer-sponsored health coverage—which is available to eligible employees, regardless of their income or assets.

A Word From Verywell

If you're eligible for the ACA's Medicaid expansion or premium tax credits but have a significant nest egg, you don't need to worry that you're taking advantage of the system or benefitting from a "loophole." The law was written this way for a reason: The goal was to ensure that health coverage is affordable for as many people as possible.

People who get employer-sponsored health coverage have always had substantial tax advantages, without any sort of asset or income tests. The ACA's income-based assistance has helped to level the playing field for people who have to obtain their own health insurance.