Understanding ACA Subsidies: What They Are and How They Work

At the heart of the ACA (the Affordable Care Act aka Obamacare) marketplace system are premium tax credits (subsidies) that help lower the monthly cost of health insurance for people who buy plans on the ACA marketplaces (Healthcare.gov and state exchanges). The amount of financial help you get is based primarily on your income — measured as Modified Adjusted Gross Income (MAGI) — and your household size.

Before 2021 (original ACA rules):

• Subsidies were available only to households earning between 100% and 400% of the Federal Poverty Level (FPL).

• Within that range, subsidies were sized so you’d pay a set percentage of your income toward the benchmark (silver) plan — increasingly more as income rose toward the top of the range.

• If your income was above 400% FPL (about $62,600 for one person or ~$128,600 for a family of four in 2026), you were ineligible for any premium subsidy — this was often called the “subsidy cliff.”

Under enhanced subsidies (2021–2025):

• The American Rescue Plan Act (ARPA, 2021) temporarily expanded the subsidies:

  • It removed the 400% FPL cutoff, meaning people with incomes above that level could still receive financial help.

  • It also capped how much any enrollee should pay toward their benchmark premium — no more than about 8.5% of income, even for higher‑income households.

These enhanced subsidies dramatically reduced monthly premiums for millions and nearly doubled ACA marketplace enrollment since 2021.

What’s Happening Now: Subsidies Set to Expire

As of December 2025, the enhanced subsidies are scheduled to expire at the end of the year unless Congress takes action to extend them. Recent congressional efforts to renew or extend them have failed in the Senate, with both Democratic and Republican proposals falling short of the 60 votes needed to move forward under current Senate rules.

A Republican‑led House healthcare bill also does not include an extension of the enhanced subsidies and instead focuses on other health policy elements, leaving the fate of subsidy extensions uncertain.

What Happens If Congress Does Not Extend the Subsidies

If Congress lets the enhanced subsidies expire on January 1, 2026, several major consequences would follow:

1. The “Subsidy Cliff” Returns

The original subsidy rules come back:

• Households with income above 400% of the FPL lose eligibility for any subsidy.

• For example, if your income is just $1 above the 400% FPL threshold, you could go from receiving thousands in tax credits to zero subsidy overnight. healthinsurance.org

This is the classic “subsidy cliff.” Once you exceed the cutoff, you get no assistance — unlike the enhanced structure that smoothed that drop‑off.

2. Premium Costs for Most People Will Rise

With less federal support:

• Marketplace premiums would increase for virtually all enrollees.

• Some estimates suggest that average premiums could more than double in 2026 compared with 2025 costs for many people. Human Rights Watch

Progressive thresholds that once capped premiums as a percentage of income would no longer apply under the enhanced structure.

3. Millions Could Lose Coverage

The non‑partisan Congressional Budget Office projects:

• ACA marketplace enrollment could drop from about 22.8 million in 2025 to around 18.9 million in 2026 if the enhanced subsidies lapse.

• Over the next decade, millions more could become uninsured as cost‑conscious individuals choose to forgo coverage — especially healthier younger adults.

4. Marketplace Instability

A higher average premium and fewer healthy enrollees could destabilize marketplaces, because:

• Healthier people might drop coverage due to cost.

• A smaller risk pool tends to drive costs up further, creating a negative feedback loop.

What Happens If Congress Does Extend the Subsidies

If Congress acts to extend the enhanced tax credits:

1. Continued Affordability

• The structure that limits premiums based on income and eliminates the subsidy cliff would remain in place.

• Most people currently benefiting from subsidies would continue to see their monthly payments kept at a manageable percentage of income.

2. Higher Enrollment

• With more affordable plans, more people are likely to enroll, sustaining the marketplace risk pool and possibly preventing premium inflation.

3. Budget and Political Tradeoffs

• Permanently extending enhanced subsidies would come with significant federal spending implications — projected in the hundreds of billions over a decade.

• It would also be politically significant: health insurance affordability is a major voter concern, and the outcome could affect future elections.

A Closer Look at the “Cliff” for Different Incomes

With Enhanced Subsidies (2021–2025)

• Your subsidy gradually decreases as income rises, but there’s no sharp cutoff.

• You are guaranteed that your premium won’t exceed a set percentage of your income — a cushion for middle‑income households above 400% FPL.

Without Enhanced Subsidies (2026 onward if not extended)

• Subsidies would be available only between 100% and 400% of FPL.

• If your income goes even slightly above that limit — e.g., 401% FPL — you get no tax credit at all.

• For some near the threshold, this could mean their premium skyrockets from a subsidized $200–$300 per month to thousands. healthinsurance.org

This sharp loss of support is the “cliff.”

What Else Matters

Other Policy Proposals

Some lawmakers have proposed alternatives to extending the current subsidies, such as:

• Funding Health Savings Accounts (HSAs) or cost‑sharing reductions rather than extending ACA tax credits. These alternatives generally provide less targeted assistance than the premium subsidies.

State Efforts

Some states offer additional state‑level subsidies or programs that could soften the blow if federal subsidies lapse — but these vary widely by state and typically aren’t enough to fully replace federal support.

Bottom Line

Congress faces a decisive moment:

• If it extends enhanced ACA subsidies, millions would continue receiving affordable health coverage, the subsidy cliff would remain eliminated, and marketplace enrollment would be stable.

• If it doesn’t act, the enhanced support disappears at the end of 2025, premiums rise, the classic 400% FPL “cliff” returns, and millions may face higher costs or drop coverage altogether.

This is not just an isolated policy choice — it will ripple through the broader U.S. health system, federal budgets, and personal finances for millions of Americans in 2026 and beyond.

Final Thoughts

Year-end tax planning is a cornerstone of financial success for individuals and businesses, and understanding the implications of both scenarios regarding the ACA subsidies can have enormous impacts on your personal household finances, especially for those close to the “subsidy cliff.” Consult with us today if you want to discuss this in greater detail and navigate the complexities.