Last January people across the country began receiving subsidies as they signed up for health coverage through the Health Insurance Marketplaces set up by the Affordable Care Act (ACA). These subsidies help pay premiums for individuals enrolled in a Qualified Health Plan (QHP) through the Marketplace. In the first (2014) open enrollment period, 733,757 Texans enrolled in coverage through the Marketplace, and 84% received subsidies.
The amount a person receives in subsidies is generally based on the income they estimated they would earn in the year for which they are seeking coverage. For example, when applying in November 2013 for coverage in calendar year 2014, an applicant estimated what their 2014 income would be. Most often, this income is based on the most recent tax return on file. If the recent tax return does not accurately reflect the income the consumer expects to receive in the “coverage year”, they may submit other documentation of income, such as pay stubs.
When Marketplace enrollees who received subsidies file their taxes for 2014, they will be required to reconcile the amount of income they estimated they would receive with the actual income they report on their tax return. If their actual income was higher than the income they estimated, they may be required to pay back part or all of the subsidies received during the year. If their actual income was lower than the initial estimate, they may receive a larger tax refund. Individuals who enroll in coverage on the Marketplace can choose to wait to receive the subsidies until they file their taxes—pay full cost up front and get a subsidy refund later—but most Marketplace consumers are likely unable to afford full-price up-front coverage.
For families with income under 400% of the federal poverty level (FPL), the ACA capped the total amount individuals would be required to pay back if they under-estimated their income (see table below).
Originally the ACA capped the amount required to be paid back at $250 per individual and $400 per family for all income levels. However, in 2011, Congress passed a scaled structure based on income as part of negotiations for changes to physician payments (aka the ”doc fix”) related to the Medicare Sustainable Growth Rate (SGR), the method used to control Medicare spending (Pub.L. 111–309). The scaled structure may lead to consumer frustration as the amounts for subsidy repayments have increased.
Kaiser Report on Refunds and Repayments
The Kaiser Family Foundation recently released a report which estimates that as many as 50% of subsidy-eligible tax households will be required to pay back at least some of the subsidies they received in 2014, and 45% will receive a larger tax refund.
This is consistent with the preliminary numbers reported by large tax preparers. Jackson Hewitt reported that 53% of their early filing clients have had to pay back some of the subsidies they received. H&R Block stated that 52% had to repay part of their subsidies, while about one-third received a larger refund.
According to the Kaiser report, multiple factors influence the high percentage of individuals who must reconcile their subsidies on their tax return, such as:
- Estimates of income are often based on old information from previous tax returns. Most applicants would have used 2012 tax returns to estimate 2014 income during open enrollment.
- Family income fluctuates over the course of the year.
- Consumers are responsible for reporting life changes as soon as they occur. Both a change in income and a change in family size can impact the amount of subsidy for which a person is eligible.
What Families Can Do to Limit Their Tax Liability
Below are some strategies individuals can use in the future to help reduce the likelihood of repaying premium subsidies on their taxes.
- When applying for subsidies families should think about and adjust income estimates for changes in income that have occurred since their most recent tax return.
- During the year families should report changes in income and changes to family size to the Marketplace via Healthcare.gov as soon as possible.
- At renewal families should log on to Healthcare.gov and review income and family size information. In many cases, the Marketplace will “administratively renew” a person’s coverage in the same plan, receiving the same level of subsidies, if that individual does not actively renew their coverage.