Q: What happens if my income changes and my premium subsidy is too big? Will I have to repay it?
A: Monthly subsidy amounts (ie, the advance premium tax credit – APTC – that’s paid to your insurer each month to offset the cost of your premium) are estimated based on prior-year income and projections for the year ahead, but the actual tax credit amount to which you’re entitled depends on your actual income in the year that you’re getting subsidized health insurance coverage.
If recipients end up earning more than anticipated, they could have to pay back some of the subsidy. This can catch people off guard, especially since the tax credits are paid directly to the insurance carriers, but if overpaid, they must be returned by the insureds themselves.
For 2014, subsidies were reconciled when taxes were filed in early 2015. The IRS reported in early 2016 that about 51 percent of the people who received APTCs in 2014 had to repay a portion of the subsidy when they filed their 2014 taxes; the average amount that had to be repaid was about $860, and 61 percent of people who had to pay back excess APTCs still received a refund once the excess APTC was subtracted from their initial refund.
But on the opposite end of the spectrum, about 41 percent of tax filers who were eligible for a premium tax credit ended up receiving all or some of it when they filed their return. These are people who either paid full price for their exchange plan in 2014 but ended up qualifying for a subsidy based on their 2014 income, or people who got an APTC that was less than the amount for which they ultimately qualified. The average amount of additional premium tax credit paid out on tax returns for 2014 was $640.
The issue of reconciling APTCs was explained in a 2013 IRS publication (see the final column on page 30383, continued on page 30384) which clearly explains that they do expect people to pay back subsidies that are in excess of the actual amount for which the household qualifies.
But the portion of an excess subsidy that must be repaid is capped for families with incomes under 400 percent of Federal Poverty Level. Details regarding the maximum amount that must be repaid, depending on income, are in the instructions for Form 8962, on page 14.
The IRS noted that they would “consider possible avenues of administrative relief,” including such options as payment plans and the waiver of interest and penalties for people who must return subsidy over-payments. If you find yourself in a situation where you must pay back a significant amount of the premium subsidies you received during the prior year, contact the IRS to see if you can work out a favorable payment plan/interest arrangement.