How Premium Tax Credits And Cost-Sharing Reductions Work

Individuals who purchase a plan in the health insurance marketplace may qualify for federal premium tax credits that will help lower premiums. The credit can be used at the time premiums are paid, with the credit sent directly from the federal government to the individual’s health insurer. Individuals may also qualify for cost-sharing reductions, which help lower their out-of-pocket costs like deductibles and other forms of cost-sharing when using their health insurance coverage.

How the premium tax credit works. Individuals who qualify for the tax credit have the choice to have the full amount of the credit in advance, to reduce premiums up front, or wait to get the credit when they file their taxes. Individuals can also take a lower advance credit than the full amount for which they are eligible, and receive the rest when they file their taxes.

The premium tax credit is provided on a sliding-scale basis, in order to give more financial help to lower income buyers (beginning at 100 percent of the federal poverty level, or $12,880 for an individual in 2022) and less help to those with higher incomes. The credit is pegged to the cost of the premium for the second lowest cost silver plan in a health insurance marketplace, known as the benchmark plan. The credit lowers premiums based on how much individuals must pay for the benchmark plan as a share of their income. For example, families with incomes of 100 percent of poverty ($26,500 for a family of 4 in 2022) will pay annual premiums that are no more than 0 percent of their household income, bringing their premium to $0 if they buy the benchmark plan. At 400 percent of poverty or more ($106,000 for a family of four in 2022), families will pay annual premiums that are no more than 8.5 percent of their household income in 2022.

A consumer can “buy up” from the benchmark plan by buying a more expensive silver, gold or platinum plan, but the tax credit won’t cover as much of the premium as it will for the benchmark silver plan. Conversely, a consumer could “buy down” by looking for an inexpensive bronze plan. Because the premium tax credit is pegged to the cost of a silver plan, it will cover a greater percentage of the premium for a bronze plan.

Because the amount of the credit is based on income, any changes in income must be reported to the health insurance marketplace within 30 days. An individual whose income goes down may qualify for a bigger premium tax credit. Under regular rules, someone whose income goes up may be eligible for a smaller credit and will be responsible for repaying the difference between the smaller credit they should have gotten and the larger one they were getting based on old income information. However, this rule won’t apply for tax year 2020 under federal guidance granting taxpayers flexibility in response to COVID-19.

How cost-sharing reductions work: Individuals and families with income between 100 and 250 percent of the federal poverty level may also qualify for help paying out-of-pocket costs for services covered by their plan. The subsidy, known as a “cost-sharing reduction,” lowers the out-of-pocket limit and increases the generosity of coverage for eligible individuals depending on income. The subsidy goes directly to the insurer to reduce an enrollee’s out-of-pocket costs at the time the covered service is received. However, the cost-sharing reduction is only available for people enrolled in a silver plan. Where the standard value of a silver plan is 70 percent of total average costs for covered services, individuals eligible for the cost-sharing reduction will get a silver plan that covers 73 percent, 87 percent or 94 percent of total average costs for covered services, depending on income, with lower out-of-pocket limits as indicated below.


Actuarial Value

Out-of-Pocket Limit

100 – 150 % FPL

94 %

$2,900 Individuals; $5,800 Family

150 – 200 % FPL

87 %

$2,900 Individuals; $5,800 Family

200 – 250 % FPL

73 %>

$6,950 Individuals; $13,900 Family

85 Fed. Reg. 29230 (May 14, 2020)

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