Estimating Income for ACA: What happens if you are wrong?

This area is really murky when it comes to Cost Sharing Subsidies. But I am getting ahead of myself. First, let’s define the different types of subsidies and how they relate to income.

There are 2 different types of subsidies.

  • Premium – This is the subsidy that most people are aware of.  If you are eligible, the government will pay a portion of your premium to lower your effective premium.  You can choose to take the subsidy monthly where the government sends their portion of the payment to the insurance company or you can choose to receive the subsidy as a tax credit at the end of the year.  These subsidies may be available up to 400% of the FPL (Federal Poverty Level).  The closer you get to 400%, the smaller the amount of the subsidy.
  • Cost Sharing – This is the more complicated of the 2.  This subsidy is only available up to 250% of the FPL.  This type of subsidy provides insurance with lower deductibles and lower maximum out of pocket amounts at the same price as insurance plans with higher deductibles.  In this case, the insurance company and the government assign this cost sharing value an agreed upon dollar amount.  The government pays the insurance company this amount.  This amount is not disclosed to the policy holder.

All of these subsidy amounts or classifications are based on the income information you provide to healthcare.gov.  If you are like me and most other self employed individuals, we don’t know what we will make this year.  Our incomes can vary quite a bit.  Also, if you are unable to obtain employment that offers you full time employment, then it is also likely that you aren’t sure how much you will make this year.  So, what happens if you make MORE than what you estimate which, by the way, is the most likely scenario as most people won’t estimate their income high so they receive the highest subsidy possible?

With premium subsidies, it is pretty simple.  In the first quarter of 2015, 2014 tax forms will need to be completed.  The IRS will reconcile your MAGI with the amount you entered when initially qualifying for your subsidy.  In other words, the IRS is supplying a loan in the form of a subsidy.  You don’t actually earn the subsidy until you prove your income for 2014.  This is very similar to witholding taxes on your paycheck and then figuring out if the IRS took much of your paycheck.  If so, you get a tax return.  In this case, it is the other way around unless you setup your subsidy to be received at the end of the year in the form of a tax return.

With the cost sharing subsidy, it isn’t so clear.  I have asked a lot of people what happens if a person estimates their income too low and ends up making more than 250% of the FPL.  I have not found someone that knows the definitive answer.  I spoke with a well informed accountant and he assumes the same thing that I do:  The IRS hasn’t figured this part out yet, but will figure out a way to recover the cost sharing subsidy if someone makes more than 250% of FPL.

As always, more to come….  I will be covering information on public health insurance assistance in IL and how it will affect your eligibility for a subsidy as well as discussing why Rx copays are unnecessary for most people.

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