Large families with four or more dependent children get three extra subsidy bumps from Covered California. First, only the three oldest children are billed for health insurance. Second, the artificially inflated Silver plan rates add more dollars to the subsidy. Finally, the subsidy is calculated for the entire household, not just the children being billed for health insurance.
Update: the added subsidy bonus based on children not included on the health plan billing may be going away in 2019, see more at bottom of post.
While it is universal that California individual and family plans only bill for the three oldest children within the household, it was a sharp dad in Santa Barbara who clued me into the rest of subsidy bonus. In other words, I didn’t figure this out all by myself. This father of five children could not figure out why the rates he manually calculated did not match with either the off-exchange plans or the subsidy offered by Covered California. Through his diligent efforts to reverse engineer the business rules engine of the Covered California application, he verified that the software really is accurate, and, what a great deal he was being offered through Covered California.
Bonus 1: Only 3 Oldest Children Are Billed For Health Insurance
The first issue was why the manually calculated rates were higher than those offered by Covered California for his family. He took the ages of his family members (Dad 49, Mom, 49, and five children ages 18, 17, 16, 15, and 14) and pulled the rates from Blue Shield rate sheets and the total was more than Covered California. It really is not written out anyplace that I could find, but only the three oldest children (any dependent child 20 year old and younger) are actually billed for health insurance. His 15 and 14 year old children were covered at no cost.
The three oldest children rule also applies to off-exchange enrollment directly from the health plan. I confirmed this by running a quote for the family through Blue Shield. (I used Region 3 Platinum rates for ease of calculations.) The total rate for the family’s Platinum plan, for all household members, is $6,169.11 as calculated from the rate sheets. But both Blue Shield and Covered California only reflect a rate of $4,883.31. If we added in the rates for the two youngest children, it equaled the rate for all 7 individuals.
Bonus 2: Covered California Inflated Silver Plan Rates Inflate Subsidy
One of the reasons this Santa Barbara dad was pouring over the numbers is because the Covered California Silver plan rates are artificially inflated by 10% to 15% to cover the loss of federal funding for the cost-sharing reductions of the Enhanced Silver plans 73, 87, and 94. There was a possibility that by enrolling in an off-exchange Silver plan, he might be able to save money over Covered California, even with a subsidy. This triggered the second set of numbers that did not add up. The monthly subsidy he calculated was much lower than what Covered California was offering.
The ACA Premium Tax Credit subsidy is determined by making the Second Lowest Cost Silver Plan affordable to the household. What is affordable? The IRS defines the percentage a household should contribute toward their health insurance through a table published in form 8962 Instructions for the Premium Tax Credit reconciliation. The Santa Barbara family income is 336% of the federal poverty level. From the chart, the applicable figure, or percentage contribution, for health insurance is .0969 or 9.69%.
Applying the percentage to the household income, this family should only have to pay $1009.38 per month ($12,112.50 annually). The second lowest cost silver plan for the whole family has a rate of $2,966.04. The monthly subsidy the family would be eligible for (to apply to any metal tier health plan or carrier) is $1,956.67. The subsidy is the difference between the full rate of the health insurance and the applicable contribution the family makes under the affordability rules. (In actuality Covered California was offering $1,938.96, the difference most likely from rounding errors on my part).
Bonus 3: Subsidy Is Based On ALL Family Member, Not Billed Plan Members
But the $1,956.67 was higher than the Santa Barbara dad had calculated. He was coming up with $1,338.47. Why was Covered California seemingly overestimating the Advance Premium Tax Credit Subsidy (APTC)? This is because the APTC subsidy is based on the full rate of all seven household members, like we had calculated from the Blue Shield rate sheets. We had been figuring that the subsidy on the rate of two adults and three children, or what the family would actually be billed for.
So here is the third subsidy bonus for large families. Not only are you billed for only three children, but you get a larger subsidy based on the entire household size. When you combine that with the inflated Silver plan rates, relative to the lower off-exchange Silver plans, large families get a nice subsidy to lower their health insurance premiums. You don’t pay for any more than three children, but you get the Premium Tax Credit as if the whole family were being billed for health insurance.
The big subsidy bonus only works if the entire family is enrolled in the same plan with the same carrier. Once you split the family into groups the children previously not billed for health insurance are now rated. For example, if dad and two of the children were on a Bronze plan, and mom and the other three children were on a Silver plan, all household members would be billed for health insurance. However, the subsidy for the entire family is still in effect. Each household member will be apportioned their part of the subsidy according to their age.
The mysteries were solved and it was confirmed that the Covered California application software is properly determining subsidies based on the rules of the ACA.
Update: Santa Barbara dad wasn’t satisfied with all the answers he received and kept digging. It seemed odd that the government would give extra subsidy money away based on children who are not being billed for health insurance. After all, the subsidies are supposed to make the billed amount affordable, not a theoretical rated amount.
His persistence paid off with a call from someone connected with the IRS directing him to Premium Tax Credit Regulation VI posted to the federal register in December of 2016. Section 3. Benchmark Plan Premiums c. Aggregation of Silver-Level Policies addresses the super subsidy issue.
Existing § 1.36B–3(f)(3) provides that if one or more silver-level plans offered through an Exchange do not cover all members of a taxpayer’s coverage family under one policy (for example, because an issuer will not cover a taxpayer’s dependent parent on the same policy the taxpayer enrolls in), the premium for the applicable benchmark plan may be the premium for a single policy or for more than one policy, whichever is the second lowest-cost silver option.
Because this rule is complex for taxpayers and difficult for Exchanges and the IRS to administer, the proposed regulations delete the existing rule and provide a new rule in its place. Under the proposed regulations, if a silverlevel plan offers coverage to all members of a taxpayer’s coverage family who reside in the same location under a single policy, the plan premium taken into account for purposes of determining the applicable benchmark plan is the premium for that policy.
However, if a silver-level plan would require multiple policies to cover all members of a taxpayer’s coverage family who reside in the same location, the plan premium taken into account for purposes of determining the applicable benchmark plan is the sum of the premiums for self-only policies under the plan for each member of the coverage family who resides in the same location.
Under HHS regulations, the qualified health plan premium for a taxpayer with three dependents is not increased by adding one or more additional dependents to the taxpayer’s family. 45 CFR 147.102(c)(1). That is, the portion of the premium due to the taxpayer’s dependents is capped at three dependents and does not increase as a result of adding more dependents to the family.
However, if the alternative rule suggested by the commenter is adopted, a taxpayer with four or more dependents would have a higher benchmark plan premium than a similarly-situated taxpayer with three dependents even though the additional dependents do not add to the cost of the coverage for the taxpayer with four or more dependents. Thus, aggregating the sum of the self-only policies under a plan for each member of a taxpayer’s coverage family may provide an undue benefit to taxpayers with four or more dependents. Accordingly, this approach should be limited to situations in which a silver-level plan requires multiple policies to cover all members of a taxpayer’s coverage family who reside in the same location.
Except as otherwise provided, these final regulations apply for taxable years beginning after December 31, 2016. The rules relating to the benchmark plan premium described in section 3 of this preamble and the rules relating to reporting by the Exchanges described in section 4 of this preamble apply for taxable years beginning after December 31, 2018.
If I read the regulation correctly, there should be no bonus subsidy for additional children not billed for health insurance all on the same plan. It leaves in place the application of the full subsidy based on household size if the family is broken up into groups and all children are billed for health insurance.
The rule is supposed to be implemented for 2019 according to the federal register text. This means that Covered California should not be awarding the subsidy bonus to families in 2019. Their Shop and Compare Tool, which I used to verify the bonus subsidy, includes the total household amount based on the benchmark Silver plan. This does not mean that the total bonus subsidy will actually be awarded when a family submits their application. It’s possible that the Shop and Compare Tool has not been updated but the actual business rules engine of the CalHEERS software has.