Introduction

Individuals and families without access to subsidized health insurance coverage may be eligible for a premium tax credit (PTC). This credit, authorized under the Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended), subsidizes the cost of purchasing specific types of health plans (i.e., qualified health plans, or QHPs) offered by private health insurance companies through ACA-established exchanges (or marketplaces).¹ In February 2023, approximately 14.3 million individuals received advanced payments of the credit.²

Congress passed a series of Coronavirus Disease 2019 (COVID-19)-related relief and economic stimulus legislative measures, including the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2). ARPA expanded PTC eligibility and increased subsidy amounts for tax years 2021 and 2022, among other PTC provisions. A subset of ARPA's PTC provisions were extended under the enacted budget reconciliation measure commonly referred to as the Inflation Reduction Act (IRA; P.L. 117-169). These temporary PTC provisions will expire at the end of tax year 2025.³

This report provides background on the PTC and illustrates possible subsidy amounts for hypothetical households using actual 2023 QHP premiums. The hypothetical examples vary in demographic and other factors that directly affect PTC calculations; such factors include income, age, geographic location, and statutory provisions. The report concludes with a discussion that considers the subsidy estimates in a broader context, including interactions with other sources of coverage, actual income distribution, and premium trends.

Background

Eligibility

To be eligible to receive the PTC, households (individuals or families) must meet income and other eligibility criteria. Under ACA-only rules, income eligibility was limited to households with annual incomes at or above 100% of the federal poverty level (FPL) but not more than 400% of FPL.⁴ Under ARPA and IRA rules, PTC income eligibility applies to annual household incomes at or above 100% of FPL; currently, there is no maximum income limit.⁵

Table 1 displays the income levels equivalent to 100% of FPL, for the location and size of family, that corresponded to the eligibility criteria for the PTC in 2023 (using poverty guidelines updated by the Department of Health and Human Services [HHS] for 2022⁶).

Calculation of Subsidy Amount

The dollar amount of the PTC is based on a statutory formula and varies for each household. Calculation of the credit is based on the annual income of the household (i.e., taxpayer(s) and tax dependents), the premium for the QHP in which the individual (and any dependents) enrolls through an individual exchange, and other factors. For the sake of simplicity, the following formula illustrates the credit calculation:

Maximum Credit Amount = Benchmark Plan Premium – Required Premium Contribution

Premiums for a given QHP offered through an individual exchange are allowed to vary based on specific factors related to the individual (or family) seeking health insurance, as long as such variation is not in violation of state and federal law. Individual exchange QHPs must use adjusted (or modified) community rating rules to determine premiums. Adjusted community rating prohibits the use of health factors in the determination of premiums but allows premium variation based on other factors. Federal law allows QHP premiums to vary based on the following four factors: size of household enrolling in a QHP, geographic rating area, tobacco use, and age. (State law may further limit premium variation.) In other words, individuals (or families) enrolling in the same QHP may be charged different premium amounts.

For purposes of this report, benchmark plan refers to the second-lowest-cost silver plan in the household's rating area, per statute.⁷ Required premium contribution refers to the amount that a PTC-eligible household may pay toward the exchange premium. The required premium contribution is capped at a specified percentage of household income (applicable percentage), with such income measured relative to FPL (see Table 1). As household income increases, the applicable percentage used to determine a household's required premium contribution generally also increases. The required premium contribution percentages typically are updated through guidance issued by the Internal Revenue Service (IRS) on an annual basis (see Figure 1 for applicable percentages for 2023 under ACA-only rules).⁸ However, ARPA and IRA temporarily replaced those percentages for tax years 2021-2025 (see Figure 2).⁹

In 2023, the required premium contributions for PTC-eligible households with annual incomes between 100% and 150% of FPL were 0% of income. In other words, such households would receive full premium subsidies toward the cost of enrolling in benchmark plans. Eligible households with higher incomes may receive partial subsidies. For all eligible households with annual incomes at or above 400% of FPL, each such household would be required to spend up to 8.5% of its income (prorated monthly) before receiving any credit. For some higher-income households, this may result in receiving no credit despite being eligible. Beginning in 2026, the applicable percentages of income used in the credit formula will revert to the annual adjustment process established under the ACA.

Figure 1. Cap on Required Premium Contributions for Individuals Who Are Eligible for the Premium Tax Credit in 2023, ACA-Only Rules (cap varies by income, as measured relative to the federal poverty level)

Source: Internal Revenue Service (IRS), Rev. Proc. 2022-34, https://www.irs.gov/pub/irs-drop/rp-22-34.pdf. Notes: The cap assumes that the eligible individual enrolls in the benchmark plan (second-lowest-cost silver plan) used to calculate premium credit amounts. If the individual enrolled in an exchange plan that was more expensive than the benchmark plan, the individual would be responsible for paying any premium amount that exceeded the calculated credit amount. ACA = Patient Protection and Affordable Care Act (P.L. 111-148, as amended).

Figure 2. Cap on Required Premium Contributions for Individuals Who Are Eligible for the Premium Tax Credit in 2023, ARPA and IRA Rules (cap varies by income, as measured relative to the federal poverty level)

Source: 26 U.S.C. §36B(b)(3)(A)(iii) Notes: The cap assumes that the eligible individual enrolls in the benchmark plan (second-lowest-cost silver plan) used to calculate premium credit amounts. If the individual enrolled in an exchange plan that was more expensive than the benchmark plan, the individual would be responsible for paying any premium amount that exceeded the calculated credit amount. ARPA = American Rescue Plan Act of 2021 (P.L. 117-2); IRA = the enacted budget reconciliation measure commonly referred to as the Inflation Reduction Act (P.L. 117-169).

Although the maximum credit amount for a given individual is calculated as the (non-zero) difference between the benchmark plan premium and the required contribution, the individual may choose to enroll in any QHP in the applicable rating area (i.e., a benchmark or non-benchmark plan). Therefore, the premium of the plan in which the individual enrolls may affect the final PTC amount, the final premium contribution amount, or both.

For example, an individual may choose to enroll in the highest-cost QHP, which may have a premium greater than the benchmark plan premium. For such an individual, the premium contribution would include not only the calculated required contribution amount (based on household income and the applicable percentage) but also the premium difference between the benchmark plan and the highest-cost QHP. Therefore, by choosing to enroll in a higher-premium plan, the individual's total premium contribution is greater than it would have been had he or she enrolled in the benchmark plan. The reverse applies for an individual who enrolls in a QHP with a premium that is lower than the benchmark plan. The calculated PTC amount is subtracted from the lower premium, leaving a remainder that is smaller than the amount the individual would have had to pay had he or she enrolled in the benchmark plan (unless the individual already received a full subsidy). By choosing to enroll in a lower-premium plan, the individual's total premium contribution is smaller in most instances.

Premium Tax Credit Estimates

The following figures illustrate maximum PTC amounts for hypothetical households by income levels measured relative to the federal poverty level. (For simplicity purposes, each hypothetical household comprises one person.¹⁰) The hypothetical individuals vary by selected ages and geographic locations to illustrate the variation in PTC amounts due to changes in underlying premiums.¹¹ The individual QHP premium amounts used in these hypothetical scenarios are actual 2023 premiums.¹² In addition, the subsidy estimates assume the hypothetical individuals are eligible for the PTC; however, not all actual households that meet the income criteria are eligible for the PTC.¹³

Hypothetical Example 1

Figure 3 illustrates maximum PTC amounts for a 27-year-old individual residing in Lebanon, KS, the geographic center of the continental United States. Lebanon is in Kansas rating area 4 (KS-04); therefore, the premium used in calculating PTC amounts is the premium for the benchmark plan offered in KS-04.¹⁴

As explained above, PTC-eligible households with annual incomes between 100% and 150% of FPL receive full premium subsidies to enroll in the benchmark plan in their local area. For the hypothetical individual referenced in Figure 3, the monthly premium for the benchmark plan is $427.86; therefore, the maximum annual PTC is $5,134.32.¹⁵ As income increases, the required premium contribution generally increases. Consequently, the maximum PTC amount generally decreases further up the income scale, eventually reaching zero dollars. In other words, although there is no upper income limit under current law, there is an effective limit resulting from application of the PTC formula.

Figure 3. Maximum Annual Premium Tax Credit for a Hypothetical Eligible Individual, by Annual Income, 2023 (27-year-old resident in Lebanon, KS)

Sources: CRS calculations based on 26 U.S.C. §36B(b)(3)(A)(iii) and HIX Compare Individual Market data posted by the Robert Wood Johnson Foundation. The dataset is available at https://hix-compare.org/. HHS, "Annual Update of the HHS Poverty Guidelines," 87 Federal Register 3315, January 21, 2022, https://www.govinfo.gov/content/pkg/FR-2022-01-21/pdf/2022-01166.pdf. Notes: Annual income is measured relative to the federal poverty level. PTC calculations for 2023 use the 2022 poverty guidelines. The PTC calculations use 2023 premiums for Kansas rating area 4, which includes Lebanon. The maximum PTC amounts are based on the premium for the applicable benchmark plan. The dotted line approximates when the PTC is zero dollars at the applicable income levels indicated in the figure and as income increases above those levels.

Hypothetical Example 2

Figure 4 illustrates the difference in PTC amounts—for the same hypothetical individual as in Figure 3—using different rules for calculating required premium contributions: ACA-only rules (as illustrated in Figure 1) and ARPA/IRA rules (as illustrated in Figure 2). Because the premium contributions under ARPA/IRA rules are smaller than the premium contributions under ACA-only rules, the maximum PTC amounts at each applicable income level are greater under ARPA/IRA rules (until PTCs reach zero dollars). This has a direct impact on federal spending, given that the PTC is financed through a permanent appropriation.¹⁶

Figure 4. Maximum Annual Premium Tax Credit for a Hypothetical Eligible Individual, by Annual Income, Comparing ACA-Only and ARPA/IRA Rules, 2023 (27-year-old resident in Lebanon, KS)

Sources: CRS calculations based on IRS, Rev. Proc. 2022-34, https://www.irs.gov/pub/irs-drop/rp-22-34.pdf.26; U.S.C. §36B(b)(3)(A)(iii); and HIX Compare Individual Market data posted by the Robert Wood Johnson Foundation (available at https://hix-compare.org/). HHS, "Annual Update of the HHS Poverty Guidelines," 87 Federal Register 3315, January 21, 2022, https://www.govinfo.gov/content/pkg/FR-2022-01-21/pdf/2022-01166.pdf. Notes: Annual income is measured relative to the federal poverty level. PTC calculations for 2023 use the 2022 poverty guidelines. The PTC calculations use 2023 premiums for Kansas rating area 4, which includes Lebanon. The maximum PTC amounts are based on the premium for the applicable benchmark plan. The dotted line approximates when the PTC is zero dollars at the applicable income levels indicated in the figure and as income increases above those levels.

Hypothetical Example 3

Figure 5 illustrates the inverse relationship between PTCs and premium contributions. As illustrated in Figure 3, the maximum annual PTC for the hypothetical individual is $5,134.32. The same individual is referenced in the figure below. Given the PTC amount is the (non-zero) difference between the benchmark plan premium and the required premium contribution, the larger the required contribution, the smaller the PTC.

With respect to Figure 5, the benchmark plan premium ($5,134.32) serves as the maximum dollar amount for the sum of the PTC and required contribution (based on the PTC formula). Consider the hypothetical individual in this figure with income at 200% of FPL. According to Table 1 and Figure 2, this person would have an annual income of $27,180 and contribute two percent of income toward the benchmark plan premium. Two percent of annual income would equal $543.60 for the required contribution (see orange line in the figure), leaving 4,590.72 for the maximum annual PTC (see blue line in the figure). This same calculation process may be applied at any income level to determine the required contribution and maximum PTC, given the inverse relationship between these two amounts.

Figure 5. Maximum Annual Premium Tax Credit and Maximum Annual Required Contribution for a Hypothetical Eligible Individual, by Annual Income, 2023 (27-year-old resident in Lebanon, KS)

Sources: CRS calculations based on 26 U.S.C. §36B(b)(3)(A)(iii) and HIX Compare Individual Market data posted by the Robert Wood Johnson Foundation (dataset available at https://hix-compare.org/). HHS, "Annual Update of the HHS Poverty Guidelines," 87 Federal Register 3315, January 21, 2022, https://www.govinfo.gov/content/pkg/FR-2022-01-21/pdf/2022-01166.pdf. Notes: Annual income is measured relative to the federal poverty level. PTC calculations for 2023 use the 2022 poverty guidelines. The PTC calculations use 2023 premiums for Kansas rating area 4, which includes Lebanon. The maximum PTC amounts and required contributions are based on the premium for the applicable benchmark plan. The dotted line approximates when the PTC is zero dollars at the applicable income levels indicated in the figure and as income increases above those levels.

Hypothetical Example 4

Figure 6 illustrates the impact of limited age rating on PTC amounts. As explained above, factors that affect the premium will change the premium credit amount; such factors may include age, family size, and geographic location. For example, two adults at different ages face different premiums for the same individual QHP (if allowed under state law), reflecting the documented phenomenon that as individuals age, health care spending generally increases.¹⁷ However, federal law limits the extent to which plans may age-rate individual insurance.¹⁸

Figure 6 compares the PTC amounts for individuals who reside in the same rating area but are different ages: 27 years and 50 years. Given that PTCs limit consumer premium spending according to income, the PTC difference at a given income level represents premium variation due to age differences. Therefore, the PTC for the 50-year-old exceeds the PTC for the 27-year-old at every applicable income level (until PTCs for both ages reach zero dollars). Moreover, the credit amount zeroes out at different income levels, as there is no upper income limit under current PTC rules.

Figure 6. Maximum Annual Premium Tax Credit for Hypothetical Eligible Individuals, by Selected Ages and Annual Income, 2023 (27-year-old and 50-year-old residents in Lebanon, KS)

Sources: CRS calculations based on 26 U.S.C. §36B(b)(3)(A)(iii) and HIX Compare Individual Market data posted by the Robert Wood Johnson Foundation (dataset available at https://hix-compare.org/). HHS, "Annual Update of the HHS Poverty Guidelines," 87 Federal Register 3315, January 21, 2022, https://www.govinfo.gov/content/pkg/FR-2022-01-21/pdf/2022-01166.pdf. Notes: Annual income is measured relative to the federal poverty level. PTC calculations for 2023 use the 2022 poverty guidelines. The PTC calculations use 2023 premiums for Kansas rating area 4, which includes Lebanon. The maximum PTC amounts are based on the premium for the applicable benchmark plan. The dotted lines approximate when the PTC is zero dollars at the applicable income levels indicated in the figure and as income increases above those levels.

Hypothetical Example 5

Figure 7 illustrates how geographic location can vary PTC amounts. Exchange plan premiums vary within and across states as long as such variation does not violate state and federal law. Figure 7 illustrates PTC amounts for the same health plan (Clear Silver offered by Ambetter) that is the 2023 benchmark plan in three rating areas: Kansas rating area 4 (KS-04), Alabama rating area 11 (AL-11), and Tennessee rating area 3 (TN-03).¹⁹ The premiums for this plan (for a 27-year-old individual) in these rating areas are as follows: $427.86 (KS-04); $445.90 (AL-11); and $396.94 (TN-03). As such, the PTC amount differs across the rating areas at every applicable income level (until PTCs for the rating areas reach zero dollars). Moreover, the PTCs zero out at different income levels across the rating areas.

Figure 7. Maximum Annual Premium Tax Credit for Hypothetical Eligible Individuals, by Selected Locations and Annual Income, 2023 (27-year-old residents in three geographic areas)

Sources: CRS calculations based on 26 U.S.C. §36B(b)(3)(A)(iii) and HIX Compare Individual Market data posted by the Robert Wood Johnson Foundation (dataset available at https://hix-compare.org/). HHS, "Annual Update of the HHS Poverty Guidelines," 87 Federal Register 3315, January 21, 2022, https://www.govinfo.gov/content/pkg/FR-2022-01-21/pdf/2022-01166.pdf. Notes: Annual income is measured relative to the federal poverty level. PTC calculations for 2023 use the 2022 poverty guidelines. KS-04, AL-11, and TN-03 refer to Kansas rating area 4, Alabama rating area 11, and Tennessee rating area 3, respectively. The PTC calculations use 2023 premiums for each rating area. The maximum PTC amounts are based on the premium for the applicable benchmark plan. The dotted lines approximate when the PTC is zero dollars at the applicable income levels indicated in the figure and as income increases above those levels.

Policy Considerations of Expanded Premium Tax Credit Provided by ARPA/IRA Provisions

Income Distribution and Ineligibility

As indicated in the illustrative figures discussed above, the PTC eligibility and formula rules that applied in 2023 allowed certain households with higher incomes (compared with those eligible under ACA-only rules) to be eligible to receive subsidized health insurance.

Although the purpose of the ARPA and IRA PTC provisions was to expand eligibility and provide enhanced subsidies, these provisions interact with other eligibility factors that limit the extent to which higher-income households may qualify for the PTC. This interaction underscores the importance of considering not only income eligibility under ARPA/IRA but the full set of PTC eligibility criteria (e.g., access to other sources of health coverage) that may render an individual ineligible for the PTC.

It is instructive to first consider the income eligibility criteria in the context of actual income distribution of one-person households in the geographic areas of interest. As reported under the American Community Survey (ACS), nearly three out of four one-person households had incomes below 400% of FPL in 2022 (in the three rating areas illustrated in the preceding figure); see Figure 8.²⁰ Moreover, approximately half of one-person households in those areas had incomes around 250% of FPL.²¹

Figure 8. Annual Income Distribution of One-Person Households, 2022 (selected geographic areas)

Sources: CRS computations using data from the American Community Survey (ACS); U.S. Census Bureau, ACS 2018-2022 5-Year Public Use Microdata Sample (PUMS) files, https://www.census.gov/programs-surveys/acs/data.html; and HHS, "Annual Update of the HHS Poverty Guidelines," 86 Federal Register 7732, February 1, 2021, https://www.govinfo.gov/content/pkg/FR-2021-02-01/pdf/2021-01969.pdf. Notes: FPL = federal poverty level. The 2021 poverty guidelines were used to determine FPL, in keeping with PTC rules. KS-04, AL-11, and TN-03 refer to Kansas rating area 4, Alabama rating area 11, and Tennessee rating area 3, respectively. Each of these rating areas comprises multiple counties. ACS PUMS files include only one substate geographic identifier, the public use microdata area (PUMA); these are statistical geographic areas of at least 100,000 people located within a single state. CRS generated geographic correspondence files to identify the PUMAs, which correspond to the counties that comprise each of the three rating areas. Income was adjusted to 2022 levels using the ACS income adjustment variable.

Although the income distribution data indicate a nontrivial share of households with higher incomes, such data do not account for access to other sources of health coverage that would make these households ineligible for the PTC. For example, higher-income households generally have access to employer-provided health benefits. According to data published by the Bureau of Labor Statistics (BLS), 94% of nonfederal government and private-sector workers in the highest quartile of average hourly wages are offered health benefits by their employers, compared with 43% of workers in the lowest quartile.²² The availability of employer-sponsored health benefits generally would make these workers ineligible for the PTC (with exceptions).²³ Although such workers may not claim the tax credit, workers who have employer-provided health coverage receive other substantial tax benefits.²⁴

Effect on Eligible Population

The income distribution of one-person households and employer offers of health coverage raises a question about what effect the ARPA/IRA rules have had on the population that is eligible for the PTC. The interaction of the PTC's income-related eligibility requirements and other factors results in a subsidized population that generally falls within lower to middle income brackets, aligning with pre-ARPA/IRA eligibility criteria. For instance, the survey data illustrated in Figure 8 also include data on households with subsidized, directly purchased coverage.²⁵ Of households consisting of one-person, non-elderly adults that only had subsidized, directly purchased coverage, approximately 75% nationwide had incomes below 400% of FPL in 2022.²⁶ There are households with incomes above 400% of FPL that may receive the credit, but the PTC formula requires sizeable premium contributions from such households. For this population, any PTC received would indicate that these households already contributed 8.5% of their income toward the benchmark plan premium.

With respect to families, a larger household size has implications for premiums, income, PTC eligibility, and PTC amounts. As discussed in the "Eligibility" section of this report, the premium for a given health plan varies based on family size (among other factors), reflecting the common insurance practice of charging a larger premium for a household consisting of more than one person (e.g., family coverage). Household income would include income from all members of a tax-filing unit (e.g., working child who is a tax dependent). Household size also affects FPL since the HHS poverty guidelines increase as family size grows.²⁷ For households with employed individuals, access to employer-provided health benefits (to one or more individuals) has implications for PTC eligibility, as discussed above concerning one-person households. Taken together, a given income level may result in differences in PTC eligibility and PTC amounts depending on household size. However, just as it is with one-person households, PTC-eligible families with incomes at or above 400% of FPL would contribute 8.5% of their income toward benchmark plan premiums with any remining amount covered by the PTC.

Differences in PTC Amounts

The PTC amounts that eligible households with annual incomes at or above 400% of FPL receive would be less than the amounts received by those at lower income levels (all else equal). For example, eligible households with incomes up to 150% of FPL receive full premium subsidies toward benchmark plans. Such a difference in PTC amounts is illustrated in Figure 3 for a 27-year-old residing in Lebanon, KS in 2023. This hypothetical individual with income at 100% of FPL would have received a PTC that covered the entire monthly premium amount for the benchmark plan in that area, $427.86. In contrast, a 27-year-old with income at 425% of FPL would have received a monthly credit of approximately $18.

Nonetheless, credits may be available to households with very high incomes given the lack of an income limit. This is particularly relevant under age-rating rules; for example, see the potential availability of credits for a hypothetical 50-year-old individual with increasing annual income compared to a 27-year-old individual in Figure 6. The potential availability of tax credits to some higher-income households speaks to the persistent phenomenon of high health insurance premiums.

Premium Growth

The steady growth in premiums is well documented, with studies primarily focused on the primary source of private health coverage in the United States: employer-sponsored health benefits.²⁸ With enactment of the ACA, greater attention has been paid to individual health insurance, particularly with respect to premium trend.²⁹ One study found that the median annual premium for individual policies grew 59% from 2011 to 2021.³⁰ For individual exchange plans specifically, "premiums [rose] steeply from 2016-2018" but "held mostly steady from 2019 to 2020."³¹ More recent analyses found single-digit premium increases for exchange plans.³² Overall, premium growth typically outpaces both wage growth and inflation, with implications for individuals and families seeking health coverage.³³ To the extent that the PTC does not have an income limit, premium growth can continue to alter which households are eligible for and claim the PTC; this, in turn, directly affects total federal spending.³⁴

For example, the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) developed estimates for PTC provisions in S.Con.Res. 5.³⁵ CBO and JCT projected that the PTC provisions would increase the subsidized PTC population by (1) drawing in new individuals who were attracted to the enhanced subsidies and (2) allowing current enrollees who were initially ineligible for the PTC because their incomes were greater than 400% of FPL to gain eligibility. With respect to budgetary effects, CBO and JCT estimated an increase in premium tax credits of approximately $35.5 billion. Specifically, "new marketplace enrollees would account for $13.0 billion of the estimated increase in premium tax credits and existing marketplace enrollees would account for the remaining $22.5 billion."³⁶