Q. Under what circumstances might I have to repay my ACA subsidy?
A. The Affordable Care Act offers government subsidies to help low- and middle-income Americans offset the cost of their health insurance premiums. But some subsidy recipients do end up repaying some or all of their subsidy. Here’s what you need to know:
A quick refresher on subsidies
The ACA’s subsidies come in the form of the premium tax credit – a refundable tax credit available to people who meet the following criteria:
- You purchased a metal-level, ACA-compliant health insurance plan through a health insurance marketplace/exchange.
- You’re not claimed as a dependent on another person’s tax return.
- Your income is between 100% and 400% of the federal poverty level. (The lower threshold is 139% of the poverty level in states that have expanded Medicaid.) The poverty level generally increases each year. The size of your family will help dictate eligibility, as poverty-level income is higher when family size is larger.
- Your tax filing status is not married filing separately (though there are exceptions for domestic abuse and spousal abandonment victims).
- You don’t have access to an affordable employer-sponsored health insurance plan that provides minimum value. Health plans are said to meet the minimum value standard if they’re designed to pay at least 60% of the total cost of medical services for a standard population, and their benefits include substantial coverage of doctor and hospital inpatient services. “Affordable,” meanwhile, means that the portion of the premium you have to pay (for just yourself — not counting family members) for the lowest-cost plan offered by your employer doesn’t cost more than 9.86% of your household income. (That’s for 2019; it will drop to 9.78% of household income in 2020).
- You’re not eligible for health coverage through a government program like Medicare or Medicaid. (If you’re eligible for Medicare but would have to pay premiums for Medicare Part A, you can opt for a plan in the marketplace instead, with subsidies if you’re eligible based on your income).
Claiming your subsidy
You have two options for claiming your health insurance subsidy, which is actually just a tax credit: You can take it in advance, throughout the year, or you can claim the entire credit on your tax return.
With the former option, your subsidy will be sent to your health insurance provider on your behalf. That sum will then be credited to your premiums so that you pay less for them as you go. With the latter, you’ll pay your premium costs in full as you go, but you’ll get a lump sum from the IRS after filing your tax return.
(Whether you end up getting a refund will depend on your overall tax liabilities, but the entire premium tax credit will be subtracted from what you owe and/or added to your refund.)
Be careful when claiming your subsidy in advance
Most people who are eligible for a health insurance subsidy claim that money in advance. But be careful when going that route.
Your subsidy is based on an estimate of your total income for the year you’re receiving it. If that estimate is accurate, you’re golden. The same holds true if you overestimate your income — you’ll get the additional premium tax credit when you file your tax return. But if you underestimate your income, you could wind up having to pay the IRS back during tax time if you received your subsidy in advance.
Now the amount of money you’ll need to pay back will depend on the extent to which you overestimated your income. If it’s a small margin, then you may only need to repay a portion of your subsidy. And as long as your income doesn’t exceed 400% of the poverty level, the IRS caps the amount you’ll have to repay. (See Table 5 in the instructions for Form 8962.) But here’s the kicker: if your total income for the year ends up exceeding the limit for being eligible for a subsidy in the first place, you’ll be forced to pay back your entire subsidy.
What if you get employer health insurance mid-year?
It could be the case that you start off the year without access to an affordable employer-sponsored health insurance plan, only to get hired somewhere mid-year where that benefit exists.
If you received a subsidy in advance, you may be wondering whether you’ll need to pay it back. The answer, however, depends more on your income than on the fact that you now have employer-sponsored health insurance. If your total income for the year – including income from your new job – is in line with the estimate you provided when you applied for your subsidy, you won’t have to pay that money back. But if your income goes up substantially, you may end up having to repay some or all of that subsidy when you file your taxes.
Furthermore, once you become eligible for an affordable, minimum-value health insurance plan through your employer, you’re no longer eligible for premium subsidies as of the month you become eligible for the employer’s plan. But that fact alone won’t cause you to have to repay funds you previously received when employer-sponsored health insurance truly wasn’t an option for you, as premium tax credit reconciliation on your tax return is done on a month-by-month basis.
Finally, if you’re offered health insurance through an employer that you feel is too expensive based on the share you have to pay, you can’t just opt out, buy your own health plan, and attempt to snag a subsidy. The fact that an affordable plan (by IRS definitions) is available to you renders you ineligible for money toward your premiums.
Unfortunately, the cost of obtaining family coverage is not taken into consideration when determining whether an employer-sponsored plan is affordable, which leaves some families stuck without a viable coverage option.
Maurie Backman has been writing professionally for well over a decade, and her coverage area runs the gamut from healthcare to personal finance to career advice. Much of her writing these days revolves around retirement and its various components and challenges, including healthcare, Medicare, Social Security, and money management.