Along with the many other issues surrounding the implementation of the Affordable Care Act (also referred to as Obamacare), there are questions about the federal subsidies that might be available to those earning less than 400 percent of the federal poverty level.
What Are Subsidies?
For people who earn less than 400 percent of the federal poverty level, there are subsidies available to help defray the cost of health insurance under the Affordable Care Act. These premium subsidies result in a lower premium cost, as well as lower copayment and deductible amounts.
These subsidies are allowed to be used immediately as a credit toward any health insurance costs, thus causing your monthly premium and coinsurance amount and deductibles to decrease immediately. The amount of your subsidy (or tax credit) is paid directly to the company that is insuring you, and you are responsible for any remaining premium after the subsidies are paid.
How Are Subsidies Calculated?
Premium subsidies are calculated by using the 2014 modified adjusted gross income (MAGI) of the family or individual applying for coverage. If your MAGI is less than 400 percent of the federal poverty level (for an individual, the amount is about $46,000 and for a family of three it is approximately $78,000), you qualify for a subsidy. How much you qualify for depends on how far below the poverty level you are.
In order to decide how much the subsidy is, the government uses a benchmark plan to make the calculations. The plan they use is the second-least expensive Silver plan. The subsidy amount is determined based on the premium amount for that plan per individual or family.
Even though the plan used to calculate the subsidy is one of the Silver plans, it does not mean you are obligated to purchase that plan. For example, if your subsidy amount is $500, you can choose any plan available—you will just be responsible for the remaining premium. So, if you choose a Gold plan that costs $800 per month, you are responsible for the remaining $300 per month.
By the same token, you can choose a lower plan like a Bronze plan and have most or even all of your premium covered as long as the plan price is $500 or less.
How Do I Calculate My Income to See If I Qualify?
Depending on where you live, you can either use the information on your tax return from the previous year (your adjusted gross income is the amount of taxable income listed on your tax returns) or you can estimate your annual income. Once you have estimated your income or supplied your actual AGI from the previous tax year, your subsidy amount will be calculated.
What If I Estimate My Income Incorrectly?
This is where the real problems with subsidies lies. If you estimate your income incorrectly and you end up earning less than you projected, no problem; you will not receive any additional monies in subsidies, but neither will you be required to pay anything back. This also includes scenarios where you lose your job and your income decreases, or you have to take a lower-paying job.
However, if you estimate incorrectly and make more than you thought, you could find yourself in trouble financially. Whether you calculate wrong or for some reason end up making more than you anticipated, the end result is that you may have to pay back the amount you received in subsidies. How much you have to pay back depends, again, on your income.
For example, say your 2013 income is $46,123, which is 200 percent of the federal poverty level. For your 2014 coverage, you estimate that you will earn $47,105. You receive a premium subsidy of $200 per month, or $2,400 for the year. When you file your 2014 taxes, you realize that you actually made $48,987, which means you should have only received a premium subsidy of $75 per month. You will then have to repay the difference ($125 per month, or $1,500). You will be required to reimburse the federal government no more than $2,500. If your income was less than 200 percent of the federal poverty level, your tax payment cannot exceed $600.
If you miscalculate your income and receive the full subsidy amount, and your AGI turns out to be above 400 percent of the poverty level, there is no cap on how much you may be required to pay back. This is where you can get yourself into real financial trouble. There are instances where the final tax bill could end up being upwards of $6,000!
How Can I Avoid Making This Mistake?
The most effective way to avoid a whopping tax bill for receiving subsidies you did not qualify for is to be meticulous about reporting your income. Keep in mind that assets such as your home and automobiles are not considered income, while money you earn from any kind of employment is.
The best thing to do is to either enter in your exact AGI from the prior year (unless there have been substantial changes in your income, either up or down) or err on the side of caution and estimate your income to be higher than you think it will end up being. You may qualify for less subsidy, but that is a better scenario than being faced with a tax bill you cannot pay.
You also have the option of not using the entire subsidy amount available to you. For example, if you qualify for $500 in subsidies, you have the option of only using $300 of it to pay your premiums. This way you can almost guarantee that you will not have to pay the government back for overage.
Speak With a Personal Advisor Before Buying!
I have said it many times before: if you don’t qualify for a subsidy, your best bet all the way around is to avoid making a purchase on any of the health exchanges at all. However, if you will be qualifying for a subsidy, your insurance agent will submit your application through the exchange to make sure you receive it. Also, if you go through a licensed insurance professional, you benefit from years of experience and training instead of simply making a less-informed choice based on cost alone. Read more advice here on how to make the best decisions on your subsidies.
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.