Means Test: Definition, How It Works, Examples

What Is a Means Test?

A means test determines eligibility for financial assistance to obtain a service or good, such as welfare payments. It assesses a person’s monetary resources and determines access to financial assistance based on their ability to pay.

Key Takeaways

• A means test determines eligibility for benefits or payments.
• Means-tested benefits include government assistance and welfare programs that measure income against the federal poverty line.
• Universal benefits, such as public schools, Medicare, and social security retirement income, do not require a means test.

Understanding Means Tests

Means tests determine eligibility for various types of assistance or relief. If someone has the means or ability to pay for something, they won’t receive free assistance. Means-tested benefits differ from unconditional benefits, which are given to all regardless of economic position or income.

Scholarships or grants based on means are offered by educational institutions or foundations to students who otherwise wouldn’t afford tuition. Federal financial aid for higher education is also subject to means testing.

Means testing is used in Chapter 7 bankruptcy, Medicare benefits, and as a solution to the Social Security problem. Chapter 7 bankruptcy is limited to filers experiencing the greatest hardship. Universal benefits, such as universal basic income (UBI) and social security income for older Americans, are given unconditionally.

Means Test Examples

In the United States, welfare benefits are based on a means test using the Federal Poverty Level (FPL). The FPL determines eligibility for federal subsidies and programs like Medicaid, food stamps, and the National School Lunch Program. The FPL varies by family size and location within the country, with higher levels in Alaska and Hawaii due to higher cost of living.