How a Health Insurance Subsidy Could Cost You Big Time

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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 Income 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 Your Risk

Like 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 April 15th, 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 next April 15th; 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.

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 this 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.