How a Health Insurance Subsidy Could Cost You Big Time

Health Insurance Cost


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If you get government help paying your health insurance premiums, there’s a clause in the Affordable Care Act that could cause you big problems next April 15. If you're not careful, you might have to pay back part or all of your health insurance premium subsidy when you file your taxes. Here's how it works and what you need to know.

The Subsidy Is Based on Estimated Not Actual Income

The amount of premium tax credit health insurance subsidy you were awarded is based on an estimate of your income for the year you’re receiving the subsidy. If the estimate matches what you actually make, you won’t have a problem.

But, if you get a raise, a bonus, or your income varies from year to year, you could accidentally underestimate your income. If you underestimate your income, you’ll get a larger health insurance subsidy than you’re supposed to get.

Choosing the Advanced Payment Option Increases Risk

As its name suggests, the premium tax credit health insurance subsidy is a tax credit; it’s credited to you when you file your taxes after the year is over.

However, because it’s hard to pay your health insurance premium this month using funds you won’t receive until next spring when you file your taxes, the Affordable Care Act allows the tax credit to be paid in advance. If you choose the advanced payment option, the subsidy money is sent directly to your health insurance company each month. This decreases the monthly premium you pay for health insurance. You don't have to wait until you file your taxes; the advanced payment option helps you afford health insurance right now.

Because they need the subsidy money to help make their monthly health insurance payments, most people take their health insurance subsidy as an advance payment. However, with the advanced payment option, if you underestimate your income on your subsidy application, you risk receiving an entire year’s subsidy based on an incorrect income estimate. You might get more subsidy money than you should have gotten.

You Might Have to Pay the Health Insurance Subsidy Back

When you receive the premium tax credit health insurance subsidy, part of preparing your federal income tax return is a process called reconciliation. In this process, you compare the amount of subsidy the government actually paid your health insurance company with the amount it should have paid based on your true income for the year. If those two amounts are different, you will “reconcile” them when you file your taxes.

If you overestimated your income for the year, then the subsidy the government paid in advance to your insurer was smaller than it should have been. No harm; no foul. The difference will be added to your tax refund or will decrease the amount of taxes you owe. [Note that if you overestimated your income and then your actual income ends up so low that you wouldn't have been eligible for a subsidy at all (ie, your income is either under the poverty level in a state that hasn't expanded Medicaid, or under 139 percent of the poverty level in a state that has expanded Medicaid), the IRS will not make you repay your subsidy, but you also won't get any additional subsidy when you file your taxes.]

If you underestimated your income for the year, then the subsidy the government paid in advance to your insurer was more than it should have been. You’ll have to reconcile that by​ paying back the excess when you file your taxes. If the amount you have to repay is $15, it probably isn’t that big of a deal. But, if it’s $1,500 and you have to come up with it unexpectedly on April 15th, it’s a much bigger deal.

Even worse, if your income winds up being even one dollar above the cutoff limit for receiving the premium tax credit health insurance subsidy, you’ll have to pay back the entire subsidy amount when you file your taxes. This could be thousands of dollars if you badly underestimated your income or if you live in an area of high health insurance premiums. Since you wouldn’t have been getting a health insurance subsidy if you were rolling in money, coming up with thousands of dollars unexpectedly is going to hurt.

The IRS Has a Cap on How Much You Have to Repay

But as long as your income doesn't end up being over the cutoff amount for subsidy eligibility (ie, 400 percent of the poverty level), rest assured that the IRS has limits on how much of your overpaid subsidy you'll have to repay. Form 8962 is used to reconcile premium tax credits, and the IRS explains how the repayment process works: Depending on your income and your tax filing status, the maximum amount you'd have to pay back varies from $300 to $2,550, assuming your income makes you eligible for at least some amount of premium subsidy. That's true even if your subsidy was $10,000 for the year and it turns out that it should have only been $5,000—they won't make you pay it all back unless it turns out that you shouldn't have received any subsidy at all.

Contributing to your IRA Might Help You Avoid Having to Repay Your Premium Subsidy

It's also important to understand that "income" means Modified Adjusted Gross Income (MAGI) and the calculation for that is specific to the ACA—it's not the same as general MAGI calculations that are used for other tax purposes. So if it's looking like your income is going to be higher than you anticipated, know that a contribution to a traditional IRA (and/or an HSA if you have HSA-qualified health insurance) will reduce your MAGI and help you avoid having to pay back your premium subsidy.

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