Impending Return of the ACA Subsidy Cliff and How to Navigate It
The Affordable Care Act’s subsidy cliff, which affects health insurance premiums, is set to return in 2026. This may sound alarming, but financial planners have suggested some ways households can avoid this pitfall and potentially save thousands in insurance costs next year.
So, what exactly is the subsidy cliff? It’s essentially a specific income limit that households must stay under to qualify for premium tax credits. These credits help make monthly premiums in the ACA Marketplaces more manageable for many—around 22 million Americans rely on these subsidies to afford health insurance.
Historically, before 2021, households making under 400% of the federal poverty line were eligible for these subsidies. However, just earning a dollar more meant losing the benefit entirely, leaving them to cover full unsubsidized premiums.
During the Biden administration, legislation aimed to enhance these subsidies and effectively remove the subsidy cliff. But if Congress doesn’t take action soon, this issue will resurface in January, catching many households off guard when they find themselves without their premium tax credits.
Tommy Lucas, a certified financial planner, emphasizes the significant impact this “mythical tax” can have. In 2024, around 1.5 million individuals, or roughly 7% of ACA enrollees, were at risk of surpassing that income threshold.
Financial advisers caution those who could be affected to stay well clear of that cliff. As Lucas puts it, “You don’t want to put your toes up on that cliff and play with it.”
Now, the reemergence of the cliffs isn’t set in stone. The Democrats’ demands during a recent government shutdown included extending enhanced subsidies. Although some Senate Democrats sided with Republicans to temporarily end the shutdown without extending the ACA provisions, Republican leaders are promising a vote on a health care bill written by Democrats soon.
Many believe that success remains in question. “It looks like there is pretty much a consensus that the subsidy will be abolished,” Lucas observes. It’s a case of preparing for the worst while hoping for the best.
Understanding the Economic Implications of the Subsidy Cliff
The income limits for the subsidy cliff vary depending on the size of the household. For instance, a single-person household will lose ACA subsidies in 2026 if their income exceeds $62,600, whereas the threshold for a four-person household is set at $128,600.
Research indicates the economic consequences of hitting this cliff can differ based on factors like age, geography, and income. Shamik Rakshit’s analysis points out that those just above the threshold could feel the most strain, particularly older individuals who often face higher premiums.
For example, a 60-year-old earning $64,000 would need to pay about $14,900 in premiums without the tax credit, while someone earning $62,000 would only pay around $6,200 thanks to the subsidy.
Jeffrey Levin, a financial planner from St. Louis, echoes the importance of managing income wisely. He mentions, “The worst thing that can happen is a dollar falling off a cliff.”
Strategies to Lower Income and Qualify for ACA Subsidies
Finance experts have highlighted several ways to reduce income, allowing households to qualify for subsidies this year and next. However, these methods often apply to those teetering on the edge of the threshold—substantial income jumps may be unmanageable.
The critical figure here is the household’s modified adjusted gross income (MAGI) for 2026. When signing up for health insurance, estimates of this income determine the premium subsidies. Underestimating means individuals may end up repaying excess subsidies later.
1. Roth IRA Conversions and Withdrawals
Roth IRAs are funded with after-tax contributions, but they grow tax-free, and this aspect is key. Withdrawals typically don’t count toward AGI, allowing some room for those close to the subsidy threshold. However, caution is warranted as there are rules governing these accounts to avoid taxes and penalties.
2. Contributing to Tax-Advantaged Accounts
Households might consider putting money into pre-tax accounts like IRAs or health savings accounts (HSAs). This could lessen their AGI thanks to upfront tax breaks. Nevertheless, eligibility for these accounts can depend on several factors.
Additionally, HSAs are mainly available to those with high-deductible health plans. Households must choose their plan by mid-December to get coverage in early 2026.
3. Selling Investments at a Loss
For those with taxable investment accounts, selling non-performing assets might serve as a route to alter AGI, particularly if capital gains are low or nonexistent. The key is that only profits affect the AGI, so generating losses could even lower it for some investors.
4. Reducing Work Hours
Lastly, individuals with flexible work arrangements might think about cutting back on hours to keep income within the acceptable range for premium deductions. As Levine suggests, in some cases, it might be worth considering leaving a job altogether if it pushes income above the threshold.
