[First published in 2018. Completely rewritten in 2021.]
When you enroll in health insurance through the ACA exchange (healthcare.gov or the one run by your state), you have two choices with regard to your income: (a) Give an estimate of your annual income and submit documentation to support your estimate; or (b) Skip the income estimate and pay the full premium.
If you choose (a), and the exchange accepts your documentation, you may qualify for a premium subsidy upfront. When you ask the government to pay part of your premium, they have to check to make sure you are eligible for the money. If you choose (b), you don’t have to submit any documentation when you enroll. They just let you in when you’re paying the full freight. If you qualify for a premium subsidy based on your actual income when the year is over, you’ll get it as a tax credit when you file your tax return.
I always chose (b) before because when I paid the full premium to the insurance company, I could use the expected tax credit to reduce my taxes. Paying more to the insurance company and paying less to the government became a wash. It was a lot easier to pay the insurance company than paying taxes. The insurance company takes credit cards. They automatically charge the card every month.
This choice backfired big time in 2020. The American Rescue Plan passed in March 2021 said if you received a subsidy upfront in 2020, you got to keep 100% of it, no matter how high your income turned out to be. The lower you estimated your income when you enrolled, the more subsidy you received, and you didn’t have to pay back any of it. However, if you didn’t ask for any subsidy upfront, and your actual income disqualified you, you would receive nothing on the tax return.
Although this change only affected one year, it showed that the government treated the income estimate given at the time of enrollment more than merely an estimate. They were willing to base the subsidy only on the income estimate. If you’re able to justify a low income estimate, you should jump through the hoops to justify it.
Even if you aren’t short on cash, there are other advantages in estimating a low income during enrollment and receiving the subsidy upfront.
Cap On Repayment
Not having to pay back the excess subsidy was a deal only for 2020. Starting again in 2021, when your actual income is higher than your estimate, you’ll have to pay back the difference between what you received and what you actually qualify for on your tax return. But there’s a cap. If your actual income is a lot higher than your estimate, you’re only required to pay back up to a limit. You get to keep any additional subsidy above the payback limit. See Cap On Paying Back ACA Health Insurance Subsidy Premium Tax Credit.
You should get as much subsidy as possible upfront just in case you have a large unexpected income. You may be able to benefit from the repayment cap.
If your income is at 250% of the Federal Poverty Level (FPL) or below, you qualify for Cost-Sharing Reductions (CSR) in the form of a lower deductible, lower co-pays, and/or a lower out-of-pocket maximum on your health insurance. CSRs come in three tiers. You get a small reduction at 250% of FPL. Larger reductions come in at 200% and 150% of FPL. For example, a normal Silver plan in my area has a $4,500 deductible and an $8,500 out-of-pocket maximum. If your income is under 200% of FPL, the Silver plan with the CSR has a $700 deductible and a $1,800 out-of-pocket maximum. That’s a big difference.
|Regular Silver Plan||$4,500||$8,500|
|Silver Plan with CSR||$700||$1,800|
You get into the better Silver plan with CSR only when you can justify upfront that your estimated annual income will be at 250% of FPL or below. You won’t get your deductible or out-of-pocket maximum adjusted after the fact if you wait until you file your tax return. If you can justify an income estimate at 250% FPL or below, don’t wait.
250% of FPL for a household of two people in the lower 48 states is about $43,000 in 2021.
Minimum Income Threshold
ACA premium subsidy has a minimum income threshold. The minimum threshold is 100% of the Federal Poverty Level (FPL) in states that didn’t expand Medicaid and 138% of FPL in states that did. See which states expanded Medicaid in Status of State Medicaid Expansion Decisions: Interactive Map from Kaiser Family Foundation.
100% FPL for a household of two people in the lower 48 states is $17,240 in 2021. 138% is $23,791. If there’s any chance that your income will fall below the minimum threshold, you should get your subsidy upfront at the time of enrollment. If you received the subsidy upfront and then your income unexpectedly falls below the minimum, you’ll still qualify for the premium tax credit on your tax return. If you didn’t receive the subsidy upfront, you won’t qualify for the premium tax credit on the tax return when your income is below the minimum threshold.