Means Test: Definition, How It Works, Examples

What Is a Means Test?

A means test is a method for determining whether someone qualifies for financial assistance to obtain a service or good, for instance, welfare payments. It looks at the means, or monetary resources, a person has available to them to pay for a particular service or good, then determines that person's access to financial assistance based on their ability to pay for it.

Key Takeaways

  • A means test determines if a person or household is eligible to receive some sort of benefit or payment.
  • Means-tested benefits include many government assistance and state and federal welfare programs that measure a family's income against the federal poverty line.
  • Universal or unconditional benefits, such as public schools, Medicare, and social security retirement income do not feature a means test.

Understanding Means Tests

Means tests are commonly used to determine eligibility for various types of assistance or relief. In essence, if you have the means or ability to pay for something on your own, you won't be given free assistance in paying for it. Means-tested benefits can be contrasted with universal, or unconditional, benefits, which are given to everybody regardless of economic position or income.

Educational institutions or scholarship foundations may offer means-based scholarships or grants, which are given to students who are qualified to attend an educational institution but wouldn't otherwise be able to afford tuition. Federal financial aid for higher education is also subject to means testing, as households who have accumulated enough assets to fund a college education or who make enough money to have funded an education if they had saved often don't qualify for financial aid.

A common means test is the one used to determine eligibility for Chapter 7 bankruptcy. Means testing is also used in distributing Medicare benefits and has been suggested as a solution to the Social Security problem. Since debts do not have to be repaid under Chapter 7 bankruptcy, it is supposed to be limited to bankruptcy filers experiencing the greatest hardship. People who do not pass the Chapter 7 means test are limited to Chapter 13 bankruptcy, which establishes a repayment plan for debts.

A different sort of benefits accrues universally or unconditionally, without any means test. Universal basic income (UBI) is one example where everybody is paid some subsistence level of income regardless of other income or assets. Social security income for older Americans is also universal, although the level of benefits may differ based on lifetime earnings. Public education is also often given unconditionally, although people may elect to send their children to private schools.

Means Test Examples

Today in the United States, welfare benefits are given based on a means test of income dealing with the Federal Poverty Level (FPL), or the "poverty line." This number is an economic measure that is used to decide whether the income level of an individual or family qualifies for certain federal benefits and welfare programs. The FPL is the set minimum amount of income that a family needs for food, clothing, transportation, shelter, and other necessities.

The FPL is used to determine who would qualify for certain federal subsidies and aid such as Medicaidfood stamps, Family Planning Services, the Children’s Health Insurance Program (CHIP), and the National School Lunch Program. The FPL varies according to the size of the family and their geographical location within the country. For example, Alaska and Hawaii have higher poverty levels since the cost of living in these regions is higher. In terms of family size, $5,140 is added to the poverty level for each additional family member ($6,430 for Alaska and $5,910 for Hawaii). If the FPL for a family of two is $19,720, a family of three would therefore have a poverty level set at $24,860 ($19,720 + $5,140) in any of the states excluding Hawaii and Alaska.

Article Sources
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  1. United States Courts. "Chapter 7 - Bankruptcy Basics."

  2. United States Courts. "Chapter 13 - Bankruptcy Basic."

  3. Social Security Administration. "Analysis of Benefit Estimates Shown in the Social Security Statement."

  4. U.S. Department of Health and Human Services. "Programs that Use the Poverty Guidelines as a Part of Eligibility Determination."

  5. U.S. Department of Health & Human Services. "HHS Poverty Guidelines for 2023."

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