Before 2020, the ACA health insurance subsidy, aka the premium tax credit, was set up such that, for the most part, it didn’t matter how much you received upfront when you enrolled. The upfront subsidy was only an estimate. The final subsidy would be squared up on your tax return. If you didn’t receive the subsidy when you enrolled but your actual income qualified, you would get the subsidy as a tax credit when you filed your tax return. If the government paid more subsidy than your actual income qualified for, you would pay back the difference on your tax return.
The American Rescue Plan Act, aka President Biden’s COVID stimulus package, broke this pattern for the year 2020. It used the upfront income estimate as the basis for the final subsidy. If you estimated your income low, you got to keep the high upfront subsidy no matter how high your actual income turned out to be. If you estimated your income accurately, you wouldn’t receive anything extra beyond the amount you already received.
Although this change was only for one year, it showed the government’s inclination to consider the upfront income as more than merely an estimate.
Repayment Cap in 2021
The repayment waiver was only for 2020. For 2021, 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) relative to the Federal Poverty Level (FPL) 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.
|MAGI||2020 Coverage||2021 Coverage|
|< 200% FPL||Single: $0|
|< 300% FPL||Single: $0|
|< 400% FPL||Single: $0|
|>= 400% FPL||$0||Unlimited|
Source: IRS Rev. Proc. 2020-45
The repayment cap in 2021 applies only when your higher income is below 400% of FPL. If your actual income exceeds 400% of FPL, there’s no repayment cap — you will have to pay back 100% of the difference between what you received and what your actual income qualifies for.
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 the $1,520 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 $3,127, but because your repayment cap is $1,350, you only need to pay back $1,350. You get to keep the other $1,777. 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: You should try to estimate your income conservatively and qualify for as much subsidy as you can upfront when you enroll. Maybe it won’t help. Maybe it will.