For the most part, the ACA health insurance subsidy, aka the premium tax credit, is set up such that it doesn’t matter how much you receive upfront when you enroll. The upfront subsidy is only an estimate. The final subsidy is squared up on your tax return. If you didn’t receive the subsidy when you enrolled but your actual income qualifies, you will get the subsidy as a tax credit when you file your tax return. If the government paid more subsidy than your actual income qualifies for, you will have to pay back the difference on your tax return.
If you aren’t short on cash, there are some advantages in estimating a high income during enrollment and not receiving the subsidy upfront. When you don’t ask for the subsidy, you don’t have to submit any document to prove your income. Your enrollment goes through very easily. You will earn credit card rewards when you pay the full premium to the insurance company. That’s worth much more than receiving the subsidy sooner. I always choose to pay in full and wait for any subsidy until I file my tax return. If I qualify for the subsidy, I’ll get it then. If I don’t qualify, nothing changes. See ACA Health Insurance: Ask For Premium Assistance Or Not.
However, in some cases you’re better off submitting income documentation and trying to qualify for the subsidy upfront.
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% FPL, the Silver plan with the CSR has a $700 deductible and a $1,800 out-of-pocket maximum. That’s a big difference.
The CSR is only available on Silver plans, and you get into the better Silver plan only when you can justify upfront that your estimated annual income will be at 250% 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 your estimated income is 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. If your income isn’t that low, the CSR doesn’t apply to you.
Minimum Income Threshold
In addition to the maximum income to qualify for the premium tax credit, ACA also 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 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.
If you ask for the subsidy upfront, and your income ends up higher than your estimate, you’ll have to pay back some of the subsidy. There’s a cap on how much you need to pay back. The cap varies depending on your Modified Adjusted Gross Income (MAGI) and your tax filing status. It’s also adjusted for inflation each year. Here are the caps on paying back the subsidy for 2020 and 2021. The caps are the same in both years due to rounding.
|MAGI||2020 Coverage||2021 Coverage|
|< 200% FPL||Single: $325|
|< 300% FPL||Single: $800|
|< 400% FPL||Single: $1,350|
|>= 400% FPL||Unlimited||Unlimited|
The repayment cap applies only when your higher income still qualifies you for the premium tax credit. If your actual income exceeds the 400% of FPL cutoff and you don’t qualify for the subsidy anymore, there’s no repayment cap — you will have to pay back 100% of the advance subsidy you received.
The caps are also set sufficiently high such that unless there’s a big difference between your actual income and your estimated income at the time of enrollment, the amount you need to pay back will fall below the cap. For example, suppose you’re married filing jointly and you estimated your income would be $50,000 in 2021 when you enrolled. Suppose by the time you file your tax return, your income turns out to be $60,000. Because your income is $10,000 higher than you originally estimated, you qualify for a lower subsidy now. You will be required to pay back $1,133 as the difference. Because this difference is well under the $2,700 repayment cap, the cap doesn’t really help you.
In addition, because you’re required to notify the healthcare exchange of your income changes during the year in a timely manner so that they can adjust your advance subsidy, normally the difference in the advance subsidy you received and the subsidy you finally qualify for should be well under the cap. The cap helps only when your income increases close to the end of the year to make it too late to adjust your advance subsidy.
Still, a late income change can happen, and the change can be large enough to make the difference in the health insurance subsidy higher than the repayment cap. This is true especially when you’re single with a lower repayment cap. For example, suppose you’re single and you estimated your income would be $30,000 in 2021 when you enrolled. Suppose in December 2021 you decide to convert $20,000 in a Traditional IRA to a Roth IRA. This pushes your income to $50,000. The extra $20,000 income lowers your health insurance subsidy by $2,578, but because your repayment cap is $1,350, you only need to pay back $1,350. You get to keep the other $1,228. In this case, you’re better off asking for the subsidy upfront during enrollment. If you only wait until you file your tax return, you won’t benefit from the repayment cap.
Bottom line: in most cases the repayment cap doesn’t make any difference. However, if you think there’s a chance your income will increase a lot late in the year to make you benefit from the repayment cap, you should try to qualify for the subsidy upfront when you enroll. Maybe it’ll help. Maybe it won’t.
If you’re far from qualifying for the Cost-Sharing Reductions, falling below the minimum income threshold, or benefiting from the cap on repaying the subsidy, and your cash flow can afford the full premium upfront. you might as well save yourself some paperwork hassle and wait to claim your premium tax credit at tax time. That’s the case for me. I simply pay the full premium upfront, and I don’t worry about having to pay back any subsidy.