NEW YORK (MainStreet)Americans who may enjoy benefits of financial aid from the government to help pay for their health insurance in the new healthcare exchanges may find themselves facing an economic incentive to earn less as they reach the edge of the subsidy cliff. Just $1 over the 400% federal poverty level (FPL) limit will eliminate their entire subsidy.
To ensure that Americans can afford to purchase health care, the Affordable Care Act (ACA) provides for an income-based subsidy paid directly to the insurance company as part or all of the monthly premium. Workers whose annual modified adjusted gross income is at or below 400% of the FPL based on household size (that's $45,960 for an individual and $94,200 for a family of four in 2013) will be eligible for tax credits. At the highest end, families will pay no more than 9.5% of their annual income toward premiums.
"As a result of this design flaw, families that have incomes slightly above the threshold will have substantially lower disposable incomes than families that have incomes slightly below the threshold," says Adam C. Powell, president of Payer+Provider Syndicate, a healthcare consulting firm. "This 'cliff' provides families near 400% of the federal poverty line with a disincentive to make gradual improvements in their income be it by working a few extra hours each week or by receiving a small raise."
In these cases, any "extra take-home pay could actually end up costing the household thousands of dollars in federal benefits," says Jonathan Wu, analyst and cofounder of ValuePenguin, a data-analysis company. "For hourly workers, contractors or consultants, this could certainly create incentives for them to 'close up shop' once they came close to these benchmark thresholds."