Personal Finance
Why ACA subsidy cliff may discourage some people from working
An impending “cliff” in federal health insurance subsidies may discourage some people from working, so that they can save thousands of dollars on annual insurance premiums, according to policy experts and financial planners.
Enhanced subsidies for health plans bought on the Affordable Care Act marketplace are set to expire at the end of 2025, the policy issue at the heart of the recent government shutdown. The federal aid, also known as enhanced premium tax credits, reduces recipients’ out-of-pocket premiums, either upfront or in a lump sum at tax time.
About 22 million Americans — roughly 92% of people who buy insurance on the ACA marketplace — currently receive those enhanced subsidies. Recipients are expected to see their annual health premiums more than double, on average, next year if the benefit is not renewed.
Households whose earnings exceed a certain threshold — 400% of the federal poverty line — are most exposed, according to policy experts.
They’d lose all access to subsidies, meaning they’d pay the full, unsubsidized insurance premium for an ACA health plan.
This is the so-called subsidy cliff.
The cliff creates an incentive for households with some income flexibility — say, hourly workers or self-employed business owners — to work less and dip below that threshold, experts said.
“It’s an unfortunate disincentive to work,” said Cynthia Cox, vice president and director of the Affordable Care Act program at KFF, a nonpartisan health policy research group.
“For some families, [working less] totally makes financial sense, especially if they really need the health insurance,” she said.
Democrats have pushed for an extension of enhanced ACA subsidies, which have been in place since 2021 under a Covid-19 relief package.
As part of talks to end the shutdown, Republicans vowed to vote by the middle of December on a measure to extend the enhanced subsidies. However, policy experts say such legislation faces long odds of success in a Republican-controlled Congress. The White House said it would issue a framework as soon as this week to address rising ACA premiums, but its proposal was reportedly delayed amid congressional backlash.
ACA premium tax credits would revert to their pre-pandemic level if the enhanced subsidies were to lapse.
Under that policy, households were ineligible for premium subsidies if their income exceeded 400% of the federal poverty level. That structure had been in place since 2013.
Millions of households are on the cusp of the 400% threshold.
In 2025, 7% of ACA enrollees — about 1.8 million people — had incomes between 300% and 400% of the federal poverty line, according to an analysis of federal data by the Bipartisan Policy Center, a nonpartisan think tank. Another 3%, or 725,000, had an income between 400% and 500%, it found.
The bulk, about 82%, have incomes below 300% of the federal poverty line, according to the analysis.
There are about 24 million total ACA enrollees in 2025.
‘Literally just stop working’
The income range and the potential financial hit of the subsidy cliff vary by factors such as household size.
For example, a one-person household earning more than $62,600 in 2026 would lose all ACA subsidies, which are also called premium tax credits. For a four-person family, that threshold is $128,600.
Here’s one example of the financial calculus at play, for the average 45-year-old couple with two children, ages 10 and 12, earning an annual income of $132,000.
With enhanced subsidies, the family would pay $11,220 in annual health premiums, or $935 per month, for a benchmark silver-tier plan in 2026, amounting to 8.5% of their annual income, according to a KFF cost calculator.
Without any subsidies, they would pay about $25,900 in annual premiums, or roughly $2,160 per month, for the same plan, amounting to almost 20% of their income, according to KFF.
In this case, reducing their work income by about $4,000 would save them about $14,700 in health premiums next year.
“If someone is going to end up being $5,000 over the cliff, they should literally just stop working,” said Jeffrey Levine, a certified public accountant and certified financial planner based in St. Louis.
Of course, the disincentive effect may be stronger or weaker depending on the specific household.
For example, without enhanced subsidies, the average 45-year-old earning $65,000 in 2026 would see their annual ACA premiums increase to about $8,470 for a benchmark silver-tier plan, up from $5,530 with the subsidies, according to KFF.
Therefore, this person would save about $2,940 on health premium costs if they were to reduce their work income by more than $2,400 — for just $540 or so of net savings.
Someone just over the income threshold would generally see a “meaningful” loss of federal health benefits, but the overall discouragement to work is unclear, said Jonathan Burks, executive vice president for economic and health Policy at the Bipartisan Policy Center.
Medicaid, food stamps also have benefit cliffs
The ACA subsidy cliff isn’t the only example of means-tested benefits that may influence consumers’ incentive to work, Burks said.
Federal programs like Medicaid and Supplemental Nutrition Assistance Program, formerly known as food stamps, have their own respective benefit cliffs, for example, he said.
Conservative-leaning economists have generally scrutinized such federal programs to gauge if they make people less likely to work, said Burks. He called the real-world economic evidence on that “mixed.”
Most benefit cliffs impact programs aimed at lower earners, while the ACA subsidy cliff would kick in for households with somewhat higher incomes, he said.
Generally, it’d be ideal from a policy standpoint to design gradual income phase-outs, so federal benefits throttle down gently for households as their incomes increase, Burks said. However, federal budget constraints generally make such a policy design more challenging, he said.
“There’s always a challenge with any means-tested program with how to handle eligibility thresholds in ‘border land,'” he said.
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