Understanding Premium Subsidies and How to Avoid Owing the IRS Healthshare

Understanding Premium Subsidies and How to Avoid Owing the IRS

premium subsidiesLearning how premium subsidies are calculated and reconciled is about as complicated as the entire United States tax code. Although the IRS doesn’t plan on aggressively recovering tax penalties assessed for not having insurance, the same does not apply if you owe the IRS for overpaid premium subsidies. Rest assured – they will be coming after you! So how can you avoid this dilemma?

Subsidies for 2014 are calculated based upon financial information you provide to the federal exchange or state marketplace outlining what you believe is your estimated modified adjusted gross income for 2014.

Now we all know that if there is one thing for sure in life – it’s change! Nothing ever stays the same. You could get a new job, lose a job, have a spouse that begins working or stops working or have an increase or decrease in household size. All of these factors affect your premium subsidy. For example:

The Johnson family is a family of four from Denver, CO. Mr. Johnson is self-employed as an accountant and earns approximately $60,000 annually. This qualifies the family for a premium subsidy of $2,763 for 2014.

Mrs. Johnson begins a new job mid-year and earns $39,000 in 2014. This gives the family a combined annual income of $99,000. In this case, the family is ineligible for a premium subsidy and will have to repay any advanced premium subsidy they received in 2014 (subject to repayment caps).

How the IRS Fits into the “Premium Subsidy” Picture

Premium subsidies are reconciled once you file your federal tax return. The IRS will determine the appropriate premium subsidy based upon your modified adjusted gross income. If you chose not to receive your premium subsidy in advance, you will receive it in the form of a tax refund, less any taxes you might owe.

If you received an advanced premium subsidy and the IRS determines you should have received a higher subsidy, you’ll also receive it in the form of a tax refund, less any taxes you owe. If however, your subsidy should be lower or not at all, you will be required to repay all or part of your premium subsidy to the IRS.

Take Measures to Avoid Premium Subsidy Over or Underpayment

To avoid an unexpected tax bill, it’s best to notify the federal exchange or state marketplace in certain instances. By reporting these changes in a timely manner, advanced premium subsidies can be adjusted immediately to prevent inaccurate over or underpayments, which could result in you owing the IRS or getting a larger refund! You’ll want to report the following changes:

  • Increase or decrease in income
  • Change in household size (birth of a child, adoption, loss of family member)
  • Marriage or divorce
  • If you gain access to health insurance through your employer, Medicare or Medicaid
  • If you move

If you have any questions about your premium subsidy and how it affects your health plan, always contact your Personal Advisor. Our goal at HSA for America is to help you keep as much of your money in your pocket – and away from the IRS!

Do you have any questions about premium subsidies? Have you experienced a significant change that could affect your premium tax credit? We want to hear your story!

Wiley Long is President of HSA for America, and a passionate advocate for consumer-based solutions that will improve price transparency and lower health insurance and medical costs for people purchasing individual and family health insurance plans.
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  • Barbara Stockton

    What is ‘Modified Adjusted Gross Income’? My income last year was about $32,000 – for a one person household. But after rental income/depreciation & expenses my Adjusted Gross Income was It sounds as though Modified Adjusted gross Income is somewhere between these two? How do I calculate it?

    • Barbara,

      The federal exchange defines modified adjusted gross income as follows: The figure used to determine eligibility for lower costs in the Marketplace and for Medicaid and CHIP. Generally, modified adjusted gross income is your adjusted gross income plus any tax-exempt Social Security, interest, or foreign income you have.

  • Amy

    I have a question. In July of 2014 I left my job and became self employed, and therefore it is more challenging for me to estimate my income for 2015 at this time.

    If i overestimate my income, and purchase a plan on the exchange, then I could receive extra in the form of a tax refund for the additional subsidy amount I would have qualified for.

    Does this also apply to cost-sharing measures? For example, if I estimate my income to be a certain (lower) amount, I would receive a greater subsidy AND a lower deductible and out of pocket maximum. But if I estimate my income to be a little higher just to be safe, I get a little less in subsidy AND a higher deductible than the first way.

    So let’s say I do overestimate my income. When it comes to tax time and I receive the
    extra, say $30/month in subsidies that i qualified for, will I also receive a refund of, say, the extra $1000 in “out of pocket” money since I would have had an out of pocket max that was much lower due to ‘cost saving’? (Assuming that I met my out of pocket max for the year.)

    I hope my question makes sense! There are so many different individual situations that it is not always easy to understand how this will work.

    • Hi Amy,

      Great question. It is my understanding that you will receive any additional premium tax credit in the form of a tax refund (less any taxes you might owe) but that cost-sharing amounts are not re-calculated, repaid, or refunded.

  • Darlene

    My question is similar, but it involves the Medicaid breakpoint. My husband and I would most likely qualify for Medicaid on an income basis next year, but we do NOT want to be on Medicaid and have a lien put on our assets. What we’d really want is to qualify for a subsidy, which involves more income than we think we’ll have. The question is: What happens if we estimate our income to be just high enough to get us over the Medicaid bump, and it turns out to be less than that (ie, we should have been on Medicaid) when we file our taxes next year? What repercussions could there be? and liens to worry about in that scenario? BTW, we live in Maryland.

    • Hi Darlene,

      This could turn out to be an interesting subject, and I am asked this question frequently. For 2014 if this occurred you would be required to repay a portion of your advanced premium subsidy – which is limited based on income. However we do not know how the IRS/government will respond to this situation for 2015. The IRS has yet to have the opportunity to reconcile the first year of subsidies (2014) until Americans file their taxes after the first of the year. Once 2014 taxes and premium subsidies are reconciled, I fear the government will find a large number of individuals fall into this category, and we do not yet know how they will respond to decrease this occurrence – will they impose higher penalties or repayment demands? That is yet to be seen and of course those laws or changes can be made at any time.

      So although at the moment I can tell you that you would only have to repay a portion of your premium subsidy, those guidelines can be changed at any time for 2015 as rules regarding repaying subsidies and inaccurate income estimates for 2015 are far from being agreed upon or posted.

  • George Hollingsworth

    In the beginning of this year I had qualified for a subsidy and chose to have it applied to premiums. In early April my wife landed a job with benefits. By late April I had updated information in the marketplace for the change. I had contacted the insurance company to cancel the marketplace plan, but they informed me the cancellation would have to come from the marketplace. I had contacted the marketplace and the cancellation was processed for the end of May even though I had informed the representative that the employer plan started in April. The member handbook for the marketplace plan stated termination would occur the day before the new plan starts in this circumstance.

    I followed the guidance in the marketplace for timely notification. Will I be on the hook for the extra month of subsidy paid because of the end of May cancellation?

    • Hi George,

      It seems as though you got everything correctly. Based on my understanding of the situation I would think that you would not be responsible for it. However, you’ll need to verify this with the Marketplace. With this being the first year of Obamacare, there are many delays in getting things processed in a timely fashion unfortunately. Only time will tell how many of these situations will be handled. It’s likely they will ask you to pay or to remain “responsible” for this amount; however, I would certain protest or appeal this with the insurance company and marketplace—-it may take several attempts. Hopefully you kept records of the date, time and name of who you spoke to on those occasions–that will definitely be in your favor and assist with your appeal.

  • J R

    Hi Wiley, We are a family of four with significant medical needs as we have a sick family member. Currently our situation is high net worth and low income. Ages 53, 52, 22, 19. We will qualify for premium subsidies and lower out of pocket expenses w/ a Silver plan. For 2015 we anticipate our 22 year old son to begin work in September after graduation @ an income of $5,000 per month (60k annual). In September he will have access to an employers plan when his job starts. That $20,000 of his income (4 mos in 2015) will be earned when he is moved to the employers plan.
    My question is how to approach purchasing our insurance on the exchange now.
    I would like to avoid having to report our son’s income as it will significantly impact our subsidies as they relate to our out of pocket expenses. I was thinking about possibly purchasing insurance on the plan for him as a SEPARATE individual policy and no longer including him as a dependent. This way, his income earned late in 2015 will have nothing to do with my ‘family income; which would now be me , my spouse and other child.
    Ideally I would like to purchase a plan for all for of us, rather than him individually and receive the extra subsidy for him until he begins work and while he has no income….but I am thinking the IRS will just look at annual income regardless of when earned,etc.
    Do you know the best way to go about this? When you have a child who will begin to earn money late in the year and add $20,000 of income? Is it best to just let him buy his own plan? I would just not include him as a tax dependent for 2015.
    Again, since we are in high need of medical care right now, the impact to qualify for lower ‘max out of pocket’ is very significant. (and he is not the one in need of the medical care) Do you see any reason not to let him purchase his own insurance on the exchange for 2015, and not include him as a dependent for next year? I know I will lose some benefit tax-wise but it would be better not to include his earned income. Then I will just purchase the exchange product for the 3 remaining family members and maintain my lower income. Thank you Wiley, Joe Rath

    • Hi JR,

      Sorry for the delay. Hopefully you got this sorted out. I would list him on his own and not a household member or dependent if it made sense financially in the big picture.

  • jill

    Hi Wiley,

    I have a question similar to Amy. What if you underestimated your income for 2014 and you happened to have had lab work at no charge for out of pocket, but there might’ve been a charge for that plan in the higher income amount? I know you have to repay the premiums but would there be an issue for the cost-sharing part for lab work too?

    • Hi Jill,

      They do not have anything in place for reconciling cost sharing so you won’t pay anything back for it.

  • Gina Holt

    Here is my question: we picked a plan based on what we could afford to pay monthly (taking into consideration the subsidy amount). If our income increases and our subsidy decreases, we can no longer afford that insurance, but can’t change it in the middle of the year to a lower cost plan that we can afford? The bottom line is: we only have so much money to pay for insurance and no more….what do we do? Is there any recourse for us? Can we change our plan to something less costly?

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