Contents

• Background
• Premium Tax Credit
• Eligibility
• File Federal Income Tax Returns
• Enroll in a Plan Through an Individual Exchange
• Have Annual Household Income at or Above 100% of the Federal Poverty Level
• Not Eligible for Minimum Essential Coverage
• Determination of Required Premium Contributions and Premium Tax Credit Amounts
• Required Premium Contribution Examples
• Reconciliation of Advance Premium Tax Credit Payments
• Preliminary Tax Credit Data
• Tax Year 2022
• Enrollment Data
• Cost-Sharing Reductions
• Reduction in Annual Cost-Sharing Limits
• Reduction in Cost-Sharing Requirements

Summary

Certain individuals without access to subsidized health insurance coverage may be eligible for the premium tax credit (PTC). The PTC was established under the Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended) and was amended under the American Rescue Plan Act of 2021 (ARPA, P.L. 117-2) and the enacted FY2022 budget reconciliation measure (P.L. 117-169; commonly referred to as the Inflation Reduction Act) to include several temporary provisions. The dollar amount of the PTC varies from individual to individual, based on a formula specified in statute. Individuals who are eligible for the PTC may be required to contribute some amount toward the purchase of private health insurance.

To be eligible to receive the premium tax credit in 2025, individuals must have annual household income at or above 100% of the federal poverty level; not be eligible for certain types of health insurance coverage, with exceptions; file federal income tax returns; and enroll in a plan through an individual exchange. Exchanges (or marketplaces) are not insurance companies; rather, exchanges serve as marketplaces for the purchase of private health insurance.

The PTC is refundable so individuals may claim the full credit amount when filing their taxes, even if they have little or no federal income tax liability. The credit also is advanceable so individuals may choose to receive advanced payments of the credit (or APTC). APTCs are provided on a monthly basis to coincide with the payment of insurance premiums, automatically reducing consumer costs associated with purchasing insurance. The credit is financed through permanent appropriations.

Individuals who receive premium tax credit payments also may be eligible for subsidies that reduce cost-sharing expenses. The ACA established two types of cost-sharing reductions (CSRs). One type of subsidy reduces annual cost-sharing limits; the other directly reduces cost-sharing requirements (e.g., lowers a deductible). Individuals who are eligible for CSRs may receive both types.

The ARPA made temporary changes to the PTC and to CSRs. Of those temporary changes, one provision expanded eligibility for the PTC and increased the credit amount for tax years 2021 and 2022.

The FY2022 budget reconciliation measure extended the ARPA provisions for three additional years to sunset at the end of tax year 2025.

This report describes current law and applicable regulations and guidance, specifically with regard to how the PTC and CSR requirements apply in 2025.

Background

Certain individuals and families without access to subsidized health insurance coverage may be eligible for a premium tax credit (PTC). This credit applies toward the cost of purchasing specific types of health plans offered by private health insurance companies. It was authorized under the Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended) and was amended under the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2) and the enacted FY2022 budget reconciliation measure (P.L. 117-169; commonly referred to as the Inflation Reduction Act).¹ Individuals who receive PTC payments also may be eligible for subsidies that reduce cost-sharing expenses.²

To be eligible for the PTC and cost-sharing reductions (CSRs), individuals and families must enroll in health plans offered through health insurance exchanges and meet other criteria. Exchanges operate in every state and the District of Columbia (DC).³ Exchanges are not insurance companies; rather, they are marketplaces that offer private health plans to qualified individuals and small businesses. The ACA specifically requires exchanges to offer insurance options to individuals and to small businesses, so exchanges are structured to assist these two different types of customers. Consequently, each state has one exchange to serve individuals and families (an individual exchange) and another to serve small businesses (a Small Business Health Options Program, or SHOP, exchange).

Health insurance companies that participate in the individual and SHOP exchanges must comply with numerous federal and state requirements. Among such requirements are restrictions related to the determination of premiums for exchange plans (rating restrictions). Insurance companies are prohibited from using health factors in determining premiums. However, they are allowed to vary premiums by age (within specified limits), geography, number of individuals enrolling in a plan, and smoking status (within specified limits).⁴

Premium Tax Credit

The dollar amount of the PTC is based on a statutory formula and varies for each individual. Individuals who are eligible for the premium credit generally are required to contribute some amount toward the purchase of their health insurance.

The PTC is refundable so individuals may claim the full credit amount when filing their taxes even if they have little or no federal income tax liability. The credit also is advanceable so individuals may choose to receive the credit in advance of filing taxes and on a monthly basis to coincide with the payment of insurance premiums (technically, advance payments go directly to insurers). Advance payments (or APTC) automatically reduce monthly premiums by the credit amount. Therefore, the direct cost of insurance to an individual or family that is receiving APTC payments generally will be lower than the advertised cost for a given exchange plan. The PTC is financed through a permanent appropriation through Title 31 of the United States Code, which provides indefinite budget authority for PTC/APTC disbursements (31 U.S.C. 1324).

Eligibility

To be eligible to receive the PTC, individuals must meet the following criteria:

• file federal income tax returns;
• enroll in a plan through an individual exchange;
• have annual household income at or above 100% of the federal poverty level (FPL)⁵ for tax year 2025;⁶ and
• not be eligible for minimum essential coverage (see the "Not Eligible for Minimum Essential Coverage" section in this report), with exceptions.

These eligibility criteria are discussed in greater detail below.

File Federal Income Tax Returns

Because premium assistance is provided in the form of a tax credit, such assistance is administered by the Internal Revenue Service (IRS) through the federal tax system. The premium credit process requires qualifying individuals to file federal income tax returns, even if their incomes are at levels that normally do not necessitate the filing of such returns.

Married couples are required to file joint tax returns to claim the premium credit, with some exceptions. The calculation and allocation of credit amounts may differ in the event of a change in tax-filing status during a given year (e.g., individuals who marry or divorce).⁷

Enroll in a Plan Through an Individual Exchange

The PTC is available only to eligible enrollees in plans sold through individual exchanges; this credit is not available through SHOP exchanges. Individuals may enroll in exchange plans if they (1) reside in a state in which an exchange was established; (2) are not incarcerated (except individuals in custody pending the disposition of charges); and (3) are U.S. citizens, U.S. nationals or lawfully present residents. ⁸

Undocumented individuals (individuals without proper immigration documentation for legal residence) are prohibited from purchasing coverage through an exchange, even if they could pay the entire premium. Because the ACA prohibits undocumented individuals from obtaining exchange coverage, these individuals are not eligible for the PTC. Although certain individuals are not eligible to enroll in exchanges due to incarceration or immigration status, their family members may still receive the PTC as long as those family members meet all eligibility criteria.

Generally, enrollment through individual exchanges is restricted to a certain time period: an open enrollment period (OEP). The OEP for exchanges occurs near the end of a given calendar year for enrollment into health plans that begin the following year. Under certain circumstances, individuals may enroll in exchange plans outside of the OEP during a special enrollment period (SEP).⁹

Have Annual Household Income at or Above 100% of the Federal Poverty Level

Individuals generally must have household income (based on FPL) that meets a minimum level to be eligible for the PTC in 2025.¹⁰ Household income is measured according to the definition for modified adjusted gross income (MAGI).¹¹ An individual whose MAGI is at or above 100% of FPL may be eligible to receive the PTC for tax year 2025.¹² Table 1 displays the income levels equivalent to 100% of FPL, for the location and size of family, that correspond to the eligibility criteria for the PTC in 2025 (using poverty guidelines updated by the Department of Health and Human Services [HHS] for 2024).¹³

Not Eligible for Minimum Essential Coverage

To be eligible for a premium credit, an individual may not be eligible for minimum essential coverage (MEC), with exceptions (described below). The ACA broadly defines MEC to include Medicare Part A; Medicare Advantage; Medicaid (with exceptions); the State Children's Health Insurance Program (CHIP); Tricare; Tricare for Life, a health care program administered by the Department of Veterans Affairs; coverage provided through the Peace Corps program; any government plan (local, state, federal), including the Federal Employees Health Benefits Program (FEHBP); any plan offered in the individual health insurance market; any employer-sponsored plan (including group plans regulated by a foreign government); any grandfathered health plan; any qualified health plan offered inside or outside of exchanges; and any other coverage (such as a state high-risk pool) recognized by the HHS Secretary.¹⁴

However, the ACA provides certain exceptions regarding eligibility for MEC and PTC. Notwithstanding the above MEC restrictions, an individual may be eligible for the credit even if he or she is eligible for any of the following sources of MEC:

• the individual (nongroup) health insurance market;¹⁵
• an employer-sponsored health plan that is either unaffordable¹⁶ or inadequate;¹⁷ or
• limited benefits under the Medicaid program.¹⁸

With respect to the exception provided when employer-sponsored plans are unaffordable or inadequate, the Biden Administration promulgated a final rule that clarified implementation of this exception.¹⁹ Under the rule, the eligibility determination process considers family premiums and cost-sharing requirements of employer plans to test for affordability and adequacy of such plans to family members. Under the prior rule,²⁰ the determination of family eligibility considered costs to the employee only even if the family was seeking coverage (this is referred to colloquially as the "family glitch"). The previous exclusion of family costs in the eligibility determination process resulted in some family members being ineligible for the PTC even when employer coverage is unaffordable to them, because the employee-only cost is determined to be affordable. The previous test of adequacy of family coverage likewise excluded family costs.

Medicaid Expansion

Under the ACA, states have the option to expand Medicaid eligibility to include all nonelderly, nonpregnant individuals with incomes up to 138% of FPL.²¹ If an individual who applied for the premium credit through an exchange is determined to be eligible for Medicaid, the exchange must enroll that individual in Medicaid instead of an exchange plan. Therefore, in states that implemented the optional Medicaid expansion to include individuals with incomes at or above 100% of FPL (or any state that decided to expand eligibility to individuals irrespective of the ACA's Medicaid expansion provisions), premium credit eligibility begins at the income level at which Medicaid eligibility ends.²²

Determination of Required Premium Contributions and Premium Tax Credit Amounts

Required Premium Contribution Examples

The amount of the PTC varies from household to household. Calculation of the credit is based on the annual household income (i.e., MAGI) of the individual (and tax dependents), the premium for the exchange plan in which the individual (and any eligible dependents) is enrolled, and other factors.²³ For simplicity's sake, the following formula illustrates the calculation of the credit:

Maximum Credit Amount = Benchmark Plan Premium – Required Premium Contribution

Premiums are allowed to vary based on a few characteristics of the person (or family) seeking health insurance (e.g., family size). For purposes of this report, Benchmark Plan premium refers to the premium for the second-lowest-cost silver plan (see text box in the "Eligibility" section of this report) in the person's (or family's) local area. Required Premium Contribution refers to the amount that a premium tax credit-eligible individual (or family) may pay toward the exchange premium. The required premium contribution is capped according to household income, with such income measured relative to the federal poverty level (see Table 1). As household income increases, the share of income used to determine the required premium contribution also generally increases. The required premium contribution caps typically are updated through IRS guidance on an annual basis. However, the ARPA and the enacted FY2022 budget reconciliation measure temporarily replaced those caps (see Figure 1).²⁴

The maximum amount of the credit for a given individual is calculated as the difference between the premium of the plan in which the individual enrolls and the required contribution. Given that the premium and required contribution vary from person to person, the premium credit amount likewise varies. An extreme example is that when the premium for the benchmark plan is very low, the tax credit may cover the entire premium and the individual may pay nothing toward the premium. The opposite extreme scenario, for some higher-income individuals, is when the required contribution exceeds the premium amount, leading to a credit of zero dollars, meaning the PTC-eligible individual (or family) would pay the entire premium amount.

In 2025, eligible households with annual incomes between 100% and 150% of FPL receive full premium subsidies (toward benchmark plans); eligible individuals with higher incomes may receive partial subsidies for such plans. 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 their income (prorated monthly) before receiving any credit. For some higher-income households, this results in receiving no credit despite being eligible. Beginning in 2026, the percentages of income used in the credit formula will revert back 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 2025 (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 individual enrolls in the benchmark plan (second-lowest-cost silver plan) used to calculate premium credit amounts. If the individual enrolls in an exchange plan that is more expensive than the benchmark plan, the individual would be responsible for paying any premium amount that exceeds the calculated credit amount. Section 9661 of the American Rescue Plan Act of 2021 (ARPA, P.L. 117-2) applied these percentages to tax years 2021 and 2022. Section 12001 of the enacted FY2022 budget reconciliation measure (P.L. 117-169) extends the APRA provision through the end of tax year 2025.

To illustrate the required premium contribution calculation for 2025, consider a premium tax credit eligible individual living in Lebanon, KS—the geographic center of the continental United States—with household income of $22,590 (150% of FPL, according to applicable regulations). For 2025, such an individual would be required to contribute 0.0% of that income toward the premium for the benchmark plan in his or her local area (see Figure 1). In other words, the individual would have a zero-dollar premium if he or she enrolled in the benchmark plan. In contrast, an individual residing in the same area with income of $37,650 (250% of FPL) would be required to contribute 4.0% of his or her income toward the premium for the same plan. The maximum amount this individual would pay for the benchmark plan would be $1,506 (that is, $37,650 x 4.0%) for the year or approximately $126 per month.²⁵

A similar calculation is used to determine the required premium contribution for a family. For instance, consider a couple and one child residing in Lebanon, KS, who are eligible for the PTC with household income of $38,730 in 2025. For a family of this size, this income is equivalent to 150% of FPL for premium credit purposes. Just as in the example above of the individual with income at 150% of FPL, this family would be required to contribute 0.0% of its annual income toward the premium for the benchmark plan in its local area. In contrast, a family residing in the same area with income of $64,550 (250% of FPL) would be required to contribute 4.0% of its income toward the premium for the same plan. The maximum amount this family would pay for the benchmark plan would be $2,582 ($64,550 x 4.0%) for the year (approximately $215 per month).²⁶

Generally, the arithmetic difference between the premium and the individual's (or family's) required contribution is the tax credit amount provided to the individual (or family). Therefore, factors that affect either the premium or the required contribution (or both) will change the premium credit amount; such factors include age, family size, geographic location, and choice of metal plan.

Reconciliation of Advance Premium Tax Credit Payments

As mentioned previously, an eligible individual (or family) may receive advance payments of the premium credit to coincide with insurance premiums due dates. For such an individual, the advance premium tax credit (APTC) is provided on a monthly basis and the amount is calculated using an estimate of income. When an individual files his or her tax return for a given year, the total amount of APTC he or she received in that tax year is reconciled with the amount he or she should have received, based on actual income, as determined on the tax return.

If an individual's income decreased during the year and he or she should have received a larger tax credit, the additional credit amount will be included in the individual's tax refund for the year or used to reduce the amount of taxes owed. If an individual's income increased during the year and he or she received too much in APTC payments, the excess credit amount generally will be repaid in the form of a tax payment.

For individuals with incomes below 400% of FPL, any repayment amount is capped with greater tax relief provided to individuals with lower incomes (see Table 2).

Preliminary Tax Credit Data

The IRS has published preliminary data about the PTC in its annual "Statistics of Income" (SOI) reports. The most recently published SOI report is for tax year 2022.²⁷ The following data provide summary statistics about two overlapping populations: tax households that received APTC, and households that claimed the credit on their individual income tax returns.²⁸

Tax Year 2022

For tax year 2022, around 8.6 million tax returns indicated receipt of advance payments of the tax credit totaling to almost $61 billion. Of those 8.6 million returns, approximately 5.1 million tax households received excess advance payments, while more than 2.3 million tax households received deficient advance payments. The remaining difference represents households that received the correct amount in APTC.

The SOI data indicate that approximately 7.9 million tax returns for the 2022 tax year claimed a total of more than $54 billion of tax credit. The 7.9 million returns represent the number of tax households that were actually eligible for the credit, based on the information provided in the 2022 tax returns.²⁹ These eligible households represent those who received advance payments of the credit and those who claimed the credit after the end of the tax year.³⁰

The IRS also has published limited tax credit data by state, county, and zip code.³¹

Enrollment Data

HHS regularly publishes data on persons selecting and enrolling in exchange plans, including individuals who were determined eligible for the PTC. For plan year 2024, HHS posted reports and public-use files available with national enrollment data, as well as limited data by state, county, and zip code.³² During the 2024 open enrollment period (OEP), approximately 92% of all exchange enrollees were eligible for the tax credit.³³

Cost-Sharing Reductions

An individual who qualifies for the PTC, is enrolled in a silver plan (see text box above, "Actuarial Value and Metal Plans"), and has annual household income no greater than 250% of FPL is eligible for cost-sharing reductions (CSRs).³⁴ The purpose of CSRs is to reduce an individual's (or family's) expenses related to cost-sharing requirements under the silver plan; such requirements may include deductibles, co-payments, coinsurance, and annual cost-sharing limits.³⁵ There are two types of CSRs, and the level of assistance for each varies by income band (see descriptions below). Individuals who are eligible for cost-sharing assistance may receive both types of subsidies, as long as they meet the applicable eligibility requirements.³⁶

Reduction in Annual Cost-Sharing Limits

Each metal plan limits the total dollar amount an insured consumer will be required to pay out of pocket for use of covered services in a plan year (referred to as an annual cost-sharing limit in this report). In other words, the amount an individual spends in a given year on health care services covered under his or her plan is capped.³⁷ For 2025, the annual cost-sharing limit for self-only coverage is $9,200; the corresponding limit for family coverage is $18,400.³⁸ One type of cost-sharing assistance reduces such limits (see Table 3). This CSR reduces the annual limit faced by premium credit recipients with incomes up to and including 250% of FPL; greater subsidy amounts are provided to those with lower incomes. In general, this cost-sharing assistance targets individuals and families that use a great deal of health care in a year and, therefore, have high cost-sharing expenses. Enrollees who use little health care may not generate enough cost-sharing expenses to reach the annual limit.

For example, consider the hypothetical individual who resides in Lebanon, KS and has household income at 150% of FPL (as discussed in the "Required Premium Contribution Examples" section of this report). A person eligible to receive CSRs at that income level would face an annual cost-sharing limit of $3,050, compared to an annual limit of $9,200 for someone also enrolled in a silver plan but does not receive this subsidy. The practical effect of this reduction would occur when this individual spent up to the reduced amount. For additional covered, in-network services received by the individual, the insurance company would pay the entire cost. Therefore, by reducing the annual cost-sharing limit, eligible individuals are required to spend less before benefitting from this financial assistance.

Reduction in Cost-Sharing Requirements

The second type of CSR also applies to premium credit recipients with incomes up to and including 250% of FPL. For eligible individuals, the cost-sharing requirements (for the plans in which they have enrolled) are reduced to ensure that the plans cover a certain percentage of allowed health care expenses, on average. The practical effect of this CSR is to increase the actuarial value (AV) of the exchange plan in which the person is enrolled (see Table 4). In other words, enrollees face lower cost-sharing requirements than they would have without this assistance. Given that this type of CSR directly affects cost-sharing requirements (e.g., lowers a co-payment), both enrollees who use minimal health care and those who use a great deal of services may benefit from this assistance.

To be eligible for cost-sharing subsidies, an individual must be enrolled in a silver plan, which already has an AV of 70% (see text box above, "Actuarial Value and Metal Plans"). For an individual who receives the CSR referred to in Table 4, the health plan will impose different cost-sharing requirements so that the silver plan will meet the applicable increased AV. The ACA does not specify how a plan should reduce cost-sharing requirements to increase the AV from 70% to one of the higher AVs. Through regulations, HHS requires each insurance company that offers a plan subject to this CSR to develop variations of its silver plan; these silver plan variations must comply with the higher levels of actuarial value (73%, 87%, and 94%).³⁹ When an individual is determined by an exchange to be eligible for CSRs, the person is enrolled in the silver plan variation that corresponds with his or her income.

Consider the same hypothetical individual discussed in the previous section. Since this person's income is at 150% of FPL, if he or she receives this type of subsidy, the silver plan in which he or she is enrolled will have an AV of 94% (as indicated in Table 4), instead of the usual 70% AV for silver plans. Such an increase in the AV has a notable effect on applicable cost-sharing requirements. For example, the benchmark plan in Lebanon, KS, has a deductible of $5,000 in 2025. For an individual whose income allows for enrollment in a silver plan with an AV of 94%, that plan's deductible is $0.⁴⁰ Given that a deductible is the amount an insured consumer must pay for covered health services before the applicable insurer begins to pay for such services (with exceptions), a lower deductible means the consumer pays less upfront before the insurer begins paying for covered services.

Footnotes