A reader writes in, asking:
“I’m trying to find more info on ACA premium subsidies. Specifically, I want to understand which year’s MAGI [modified adjusted gross income] is used. For example, would a person’s health insurance premiums for 2015 be determined based upon his 2014 MAGI or 2013 MAGI, etc.?”
The premium tax credit (i.e., the subsidy that reduces premiums) works like any other credit in that it is your income in a given year that determines the size (if any) of the credit for which you are ultimately eligible in that year. For example, your 2014 “household income” (defined here) is what will determine the size of the credit for which you are eligible in 2014.
What is unique about the premium tax credit, however, is that it can be claimed in advance. The applications for coverage ask for an estimate of your annual income, and if your estimate is such that it would make you eligible for a credit, you can take that credit in advance in the form of lower monthly premiums.
But, when it comes time to file your tax return for the year (e.g., April 2015 for your 2014 return), you effectively “settle up.” If your income ends up being lower than you had estimated, and you are therefore eligible for a larger credit than you received in advance, you can receive the remainder of the credit when you file your return.
Conversely, if your income ended up being higher than you had estimated, you have to pay back the excess credit that you received in advance. There are, however, some limitations on the amount you would have to pay back. Specifically, if your “household income” for the year ends up being:
- Less than 200% of the federal poverty level, the amount you could have to pay back is limited to $600 ($300 if you’re single),
- 200-299% of the federal poverty level, the amount you could have to pay back is limited to $1,500 ($750 if single), and
- 300-399% of the federal poverty level, the amount you could have to pay back is limited to $2,500 ($1,250 if single).
If your household income for the year ends up being greater than (or equal to) 400% of the federal poverty level, you would have to pay back the entire amount of any excess credit you received in advance. (Note: The dollar amounts above will be adjusted for inflation, beginning in 2015.)
Of note, however, is the fact that there is no provision for “settling up” with regard to the cost sharing subsidies (i.e., the subsidies that reduce your deductible, out of pocket maximum, etc.). They too are initially based on the income estimate that you provide when applying for coverage, but they are not corrected retroactively if your estimate ends up being off target. (Of course, even ignoring any ethical qualms, you wouldn’t want to intentionally lie in order to get a larger subsidy, given that section 1411(h) of the PPACA provides for penalties of up to $250,000 for “knowingly and willfully providing false or fraudulent information” when applying for coverage.)
In the event that it becomes clear that your actual income for the year is going to be significantly different from the estimate you provided (e.g., due to a change in job status or marital status), you must inform the insurance exchange as to your change in circumstances, and they will adjust any subsidies you are receiving accordingly going forward.