After I eagerly signed up for the ACA health insurance for next year on the first day of open enrollment, I received a letter from the health insurance exchange saying we were only “conditionally eligible.” The letter asked me to submit a number of documents for each one of us in order to make our enrollment final:
- Proof of citizenship
- Proof of income
- Proof of having no other coverage
This is odd because we are already on ACA health insurance right now. When I enrolled us after I left my job, they just let us in. We weren’t asked for these documents. How come they are asking for these now, when we are only trying to continue for another year?
The difference is I gave an estimated income for next year that qualifies for premium assistance, whereas when I enrolled earlier this year our income didn’t qualify for premium assistance. If you are paying the full freight, they just let you in. If you ask them to pay part of your premium, now they are more careful in checking to make sure you are eligible for the money.
I have two choices, either (a) submit the documents as requested, and hope they are satisfied with those documents; or (b) just pay the full premium during the year and get any eligible premium tax credit at tax time. If I choose (a), I imagine there might be a few rounds of back and forth when they say the documents I sent aren’t good enough and they want something else.
It dawned on me that option (b) not only makes our enrollment simpler but actually we are better off financially with just paying the full premium anyway.
How could we be better off financially when we pay the full premium versus a reduced premium? Doesn’t forking out the money first and getting it back at tax time make us give the government an interest-free loan when we can earn interest on that money ourselves?
If we pay the reduced premium, we will have to pay taxes during the year on our income. If we pay the full premium, we can reduce the taxes we pay during the year because the anticipated tax credit will lower our tax liability. So it really becomes a wash. Either we pay more taxes or we pay more in health insurance premium.
In addition, we can pay the insurance premium by credit card and earn rewards. If we pay taxes by credit card we will have to pay a fee. In a round-about way, paying the full premium is like paying taxes by credit card without a fee. We are better off by a couple hundred dollars when we pay the full premium.
So I updated our ACA health insurance application with a higher estimated income, above the cutoff that qualifies for premium assistance. Our enrollment status changed immediately to “eligible.” No more headaches or stress in submitting documents back and forth to the exchange. We save some administration cost for the exchange as well. They don’t have to review those documents and tell us which ones are not good enough. Win-win.
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David Ann Arbor says
The disadvantage of not getting the premium subsidies now is also that if you accidentally get more premiums than you were supposed to get, there was a cap on how much of that premium you actually had to pay back in taxes. The cap varies based on income, but I think on the upper end it is around $750.
Harry Sit says
The repayment cap is listed on page 16 of Form 8962 instructions. For married filing jointly it’s:
– $600 for income < 200% FPL
– $1,500 for income < 300% FPL
– $2,550 for income < 400% FPL
– unlimited for income >= 400% FPL
Your estimated income has to be like $20k lower than the actual income (but still within 400% FPL) to have that much excess premium subsidy.
Heather says
This is really interesting. How are you supposed to prove a negative (having no other health insurance)? What documentation can be submitted for that other than a written statement saying, “I have no health care anywhere.” LOL Honestly, I don’t understand that one…
Interesting comparison though – definitely food for thought.
Harry Sit says
They wanted a letter from an employer or a government agency stating the coverage ended with the date it ended.
PAUL COLLINSON says
Very interesting and thought provoking.
Looking forward to hearing how this all shakes out come tax filing time!
Mark says
If you don’t go for the subsidies now, you also won’t get the subsidized prescription drug costs. And there is a cap on how much you have to pay back if your income estimate is off. Definitely better off justifying your income to them now.
Harry Sit says
What are the subsidized prescription drug costs? Do you mean the cost sharing reductions for enhanced Silver plans? That only applies for income 250% FPL or below. Our estimated income is higher. The repayment cap won’t apply unless your income estimate is quite a ways off. See reply to comment #1.
dan23 says
Interesting that they ask for the proof in the 250-400% level also (if I understand your post correctly, you ultimately put in >400% income to not have to go through proof process). I would think that absent some kind of misbehavior in prior years, they would only do it when you get the extra deductible copay adjustments in the plan itself that happens <250% for silver plans. I also wonder how strict they can be with the proof when someone is near the 250 level and that makes a difference between getting copay/deductible adjustment, where they do not make you whole after filing taxes if you miss the cutoff.
In case you know the answer to this, what happens if you put in for an <250% silver plan that has the adjusted deductibles copays etc., and you end up underestimating your income (and end up over 250%). Is there extra repayment beyond the premium subsidies. Does this change as you get closer to 400 (example: estimate 240%, end up 390%)?
Harry Sit says
I originally gave an estimate slightly under 400% FPL. I updated it to above 400% FPL.
I don’t know how rigorously they validate or challenge the income estimates or whether they give extra scrutiny at different FPL thresholds for cost-sharing reductions. Because 250% FPL only gives you 73% Actuarial Value versus the normal 70%, it’s not that a big deal. The more substantial reductions come at 200% FPL and 150% FPL, when you get 87% and 94% Actuarial Value. Anyway as long as they approve your estimate, you are not required to repay the cost-sharing reductions no matter how high your actual income becomes.
Eric says
My story is the same to a tee, and I also elected to defer the tax credit in order to collect credit card rewards. Since our annual premium is about $30,000 the points and awards were a nice bonus.
John says
I think if you don’t go for the subsidies now, your deductible may be higher. At least it is true for Washington state.
Harry Sit says
Only if your estimated income is at or below 250% FPL and only if you choose a Silver plan. Our estimated income is higher and we are choosing a Bronze plan.
Brian says
I haven’t fully wrapped my mind around the scenario you’ve proposed, but I’m gonna enter both scenarios into our tax program – (1) take the advance premium tax credit now compared to (2) defer the tax credit until later – to see if the ultimate tax liability results in a wash.
My wife and I have used the ACA Exchange since the beginning. Through tax-efficiently withdrawing from our investments, we’ve kept our MAGI below the 250% FPL to qualify for really good rates (for Silver HMO plans at $108/mo this year).
However, to pay the full amount each month (this year for example) to defer the subsidy would’ve required us to pull an additional $1,500/mo (the subsidy amount) in order to pay the full premium, which would have resulted in us failing the MAGI thresholds. At tax filing time we would’ve claimed that higher MAGI, which would then disqualify us from getting a reimbursed premium.
I’ll have to read through your scenario again to see what I might be missing.
(As I indicated, we’re in our fifth year using Healthcare.gov, & providing estimated income each year, but never have received that “conditionally eligible” notice, nor having to submit additional evidence. Just lucky, I guess.)
Harry Sit says
If you qualify for cost-sharing reductions because your income is under 250% FPL and you prefer a Silver plan, you can only get the cost-sharing reductions by qualifying up front. As noted in reply to comment #5, the better cost-sharing reductions come when you make your income 200% FPL or below. So maybe do some bunching: make it close to 400% FPL for one year and make it 200% or below for the next 3-4 years as opposed to staying between 200% and 250% FPL every year.
KD says
Harry, in the past you have shown that loss of ACA subsidy is basically a 10% tax on marginal dollar increase of income. Can you please also investigate the age effect and illustrate that this tax rate is much higher as you age because the age rating of ACA premiums? Basically, lowering income during 55 to 65 age band results in higher subsidy than say 45 to 55 age band for the same plan. Hence, early retirees/ career pivotees are better off with managing higher income in initial years. Of course, we hope that ACA willl remain the law of the land in the future. I played around and found for 42 yr old cheapest bronze plan for 40K income with 2 people household and only one on ACA was 100 bucks a month but the same plan was zero dollars if change age to 52 and keep everything else the same
Harry Sit says
Between 300% and 400% FPL, you are expected to pay about 10% of your income toward the 2nd lowest Silver plan. The remainder will be your premium tax credit. Within that income range, for every $10 in more income, your premium tax credit is reduced by $1. This doesn’t change with age, or whether you choose a Bronze plan or Silver plan. At different income ranges, the percentages are different; the principle is the same.
What you observed in pricing can happen depending on the relative pricing between a Bronze plan and the benchmark Silver plan. Between an older person and a younger person of the same income, the older person will receive a higher premium tax credit than the younger person because the unsubsidized premium is higher for the older person. When the higher premium tax credit is enough to pay the entire cost of a Bronze plan, the Bronze plan is free to the older person. When the older person increases his or her income by $10, the premium tax credit is reduced by $1 but it still may be enough to cover the cost of the Bronze plan. When that happens, the older person doesn’t face the equivalent 10% tax for increasing income if he or she chooses the Bronze plan.
So if they choose a Bronze plan, an older person can afford to increase income (but still stay under 400% FPL) more than a younger person. However, because an older person is expected to have more medical expenses, he or she may spend more in deductible and co-insurance than the younger person when they choose a Bronze plan.
John says
Harry,
You mentioned citizens but I believe ACA subsidies are also available to permanent residents? Also is the 250% FPL important because you are then eligible for Medicare?
Harry Sit says
It’s possible they asked for citizenship documents because I said we were citizens. They would ask for other documents if I chose a different status.
https://www.healthcare.gov/immigrants/lawfully-present-immigrants/
Medicare is available only to people 65 or older. Medicaid tops out at 138% FPL in states that expanded it, lower in other states. ACA is still relevant when you are under 65 with income above 138% FPL.
Alexander Farber says
I think you may be leaving some of the Foreign TC on the table with this. I understand that you get this credit only if you paid taxes and not the other way around. Hence, underestimating the income (but still less than <400%) and owing the tax credit back allows you to collect higher FTC.
Harry Sit says
Non-refundable credits such as the foreign tax credit are applied before the refundable credits such as the ACA premium tax credit. Therefore the amount of ACA tax credit you receive doesn’t affect the amount of foreign tax credit you get.
KD says
Harry, thanks for pointing this out. I believe this will be something I will need to remember when we get to ACA marketplace in the future.
KR says
I wonder what they will accept as proof of income. Let’s say I quit working at the end of 2018, so I won’t have any W-2 income in 2019. If I am only living off of dividends/income and portfolio distributions, what proof can I give on income?
Charlie says
Similar to KR, we were asked to “prove income” for a future period.
Background: We first signed up for ACA about a year ago, our first year in ACA is 2018. I had left a job late in 2017 and projected about 40K income for 2018 which would be mostly IRA withdrawals/conversions, etc. I had W-2’s for 2017 and prior years. I could take SS, but will try to wait until my FRA.
Since the source of our income is my IRA, I submitted a copy of my IRA brokerage statement and wrote on the top page “Projected Income = $40,000 to be Withdrawn During 2018” along with my application number. After they reviewed it we were approved, no other issues. Our income will probably be higher so I anticipate having to pay back a small amount of the premium tax credit. I knew that going in.
In the meantime, for 2018 we had an HSA eligible Bronze plan with ZERO premium and it has 6K/12K deductible which is fine for us. My COBRA would have been 18K in PREMIUMS alone! So ACA was a no-brainer for us. The HSA eligible plan allows me to take 7,900 out of my IRA and contribute to HSA. This is subtracted from MAGI for ACA (and tax) purposes.
We were not asked to prove citizenship nor lack of other health insurance for 2018. We haven’t submitted for our 2019 plan, so we shall see. Looks like we will probably go with the same plan, project a higher income (50-55K) and pay around $150/month premium. I could keep the income lower, but am trying to do Roth conversions during the next few years so I will be closer to the 400% FPL only for this reason.
Thanks for the article and great discussion!
KR says
Thank you, Charlie!! I am guessing you probably had other income as well (e.g.: interest/dividends from taxable accounts), but it’s good to know they were satisfied with just the IRA comment!
Charlie says
KR,
Absolutely correct on some other income sources from taxable accounts. The bulk, however, will be the IRA Distributions and knowing how government contractors operate, sometimes less is more 🙂 – part of the KISS method.
On a semi-related topic, I keep reading how great these silver plans are that have CSR’s. Maybe that depends on geography and age, but I really haven’t come across anything close to being of interest to us. Maybe others have had success. Ones I’ve seen have higher premiums with some limited additional benefits. I guess I’ll continue to self-insure for our 6K/12K deductibles.
Charlie says
Here’s a little update. I just went through the re-enrollment process for 2019. As soon as I clicked “Submit” I got a notice to verify income used in the application (just like last time). I’ve done the same as last time, submitted a copy of my IRA statement and a short letter explaining the estimated income will come from distributions from the IRA.