As 2025 draws to a close, it is becoming increasingly possible that we will see important adjustments to Affordable Care Act tax credits. The enhancements to Premium Tax Credits, in place since 2021, could expire on Dec. 31, 2025, without legislative action.
These enhanced credits started during the pandemic and were extended by the Inflation Reduction Act of 2022. They have greatly lowered health insurance coverage costs for millions of Americans, including business owners who use ACA marketplace coverage. But unless Congress acts to extend the ACA Premium Tax Credit enhancements (with expanded eligibility and lower contribution percentages) on Dec. 31, 2025, they will revert to pre-2021 rules.
With ACA open enrollment running through Jan. 15, 2026, this timing could create a challenge. Business owners making coverage decisions now must weigh the impacts of ACA coverage cost after 2025. Let’s break down what’s changing, why it matters, and how business owners can prepare.
What are enhanced premium tax credits?
The ACA’s Premium Tax Credit (PTC) was designed to help make health insurance cheaper for individuals and families buying coverage through the Health Insurance Marketplace (also referred to as the Affordable Care Act marketplace). Traditionally, eligibility was limited to households with income between 100% and 400% of the Federal Poverty Level (FPL). Those above 400% received no assistance — a steep “subsidy cliff” that left many paying full price for coverage.
The American Rescue Plan Act of 2021 temporarily eliminated that cliff and reduced expected contribution percentages across the board. Even high-income households could qualify for credits if premiums exceeded a certain share of income. Congress later extended these provisions through 2025 under the Inflation Reduction Act of 2022.
What happens after Dec. 31?
If no legislative action occurs, the system reverts to pre-2021 rules starting Jan. 1, 2026:
- Income cap returns: Households above 400% of FPL lose eligibility for credits entirely. A small income increase could lead to higher annual premiums with the ACA “subsidy cliff” in 2026.
- Higher expected contributions: For those still eligible, contribution percentages rise, and they can expect higher premiums.
For business owners, this change could be expensive. This is especially true for self-employed people or early retirees without employer coverage. If you have structured compensation and withdrawals to optimize ACA subsidies, that strategy may need a complete overhaul.
Impact of tax credit expiration on business owners
Health insurance planning for entrepreneurs and small business owners often considers the major expenses that are involved. Enhanced credits have the potential to provide financial relief, which can be used for reinvestment or personal savings. Losing these benefits could:
- Increase operating costs: Owners who cover their own premiums or contribute to family coverage may see annual costs jump significantly.
- Impact retirement planning: Early retirees relying on ACA coverage until Medicare eligibility could face unexpected budget gaps.
- Revise tax planning strategy: Many owners have managed Modified Adjusted Gross Income (MAGI) carefully to maximize credits. With the cliff reinstated, income planning becomes even more critical.
Consider this example: A 60-year-old couple with $50,000 MAGI currently has a premium payment of about $1,880 thanks to enhanced credits. Without these credits, their ACA coverage cost after 2025 could significantly increase, which may require proactive planning.
Planning strategies before the sunset
It’s important to anticipate these changes and adjust accordingly. Here are key steps to consider:
- Review health coverage options
During open enrollment, evaluate whether ACA marketplace plans remain the best fit. For some, private plans or association-based coverage may offer competitive alternatives post-sunset.
- Model 2026 scenarios
Run projections under both current and future rules. Understanding potential premium increases can help you make informed decisions about income, withdrawals, and savings.
- Optimize MAGI
Income management will remain vital. Strategies may include:
-
- Timing business income and deductions.
-
- Leveraging retirement contributions to reduce MAGI.
-
- Considering Roth conversions carefully. These could increase income, which may affect subsidy eligibility.
- Build a cushion
If premiums rise significantly, having liquidity to absorb higher costs is essential. This may involve adjusting investment allocations or setting aside reserves.
- Stay informed
Legislative changes are possible for extending the health insurance premium tax credit sunset, but uncertainty is high. Stay engaged and flexible. If Congress extends the enhanced credits, plans may shift again.
Stay ahead of changes
From individual tax brackets to estate exemptions, a comprehensive review of overall tax and financial strategies is necessary to adjust to all changing laws, not just health coverage. As we navigate ACA enrollment this season, the looming sunset of enhanced credits underscores the importance of proactive planning. Health care costs can significantly impact both personal and business finances.
By modeling scenarios, managing income, and exploring alternatives, we can help clients stay ahead of these changes. If you have questions about how these shifts might affect your situation, or want to review your broader financial plan, reach out to your wealth advisor. Together, we’ll ensure you’re prepared for whatever 2026 brings.
If you’re not a Mercer Advisors client and want to learn more about how we can help with financial planning for your personal and business situations, let’s talk.
