5 Must-Fix Items in the Affordable Care Act: Premium Repayment

The promise of the Affordable Care Act is to make health insurance less expensive for American families.  The promise is based on premium assistance from the federal government for people who qualify.  But there is a surprise in store for many families.  If you didn’t know you might have to repay the premium subsidy you already used, you aren’t alone.

Required Fix #4 – Revise the Subsidy Repayment Tax

The Affordable Care Act offers advanced tax credits to help offset health insurance premium expenses.  At the end of the year, the ACA requires you to reconcile payments you receive against your actual eligibility.  If the tax credit amount you used is more than you should have received, you must repay the excess as additional tax (Source: IRS Revenue Bulletin 2012-24, TD 9590).

Originally, the Affordable Care Act limited repayment to a minimal amount.  In fact, the amount was roughly equal to what someone might pay if he or she did not buy insurance.  However, after the law was first passed, a series of amendments created a scaled repayment requirement for families with incomes less than 400% of the Federal Poverty Level (“FPL”).

For families with incomes less than 200% of FPL, the Affordable Care Act caps repayment at $300 for an individual or $600 for a family.  Between 350% and 400% of FPL, people must repay $1,250 for an individual or $2,500 for a family.  For incomes above 400% of FPL, families must repay the entire premium subsidy.

Here’s an example of what might happen to a typical family.  Numbers are from the Kaiser Family Foundation Health Reform Subsidy Calculator (http://bit.ly/OHJxOx).

Last year, Brent and Janet earned a combined $88,000.  This year, Janet receives a small raise.  In December, Brent receives a $4,000 bonus bringing their income to $94,000.

This is where the Affordable Care Act gets interesting.  Affordable Care Act worryBrent and Janet’s health insurance premium for the year was $18,858.  Their income allowed them $8,498 in Affordable Care Act premium assistance.  Each month the state health insurance exchange gave them a $708 credit toward their premium.

When they filed their tax return in April, the IRS looked at the tax credit they received and compared it to what the family’s income allowed.   At $94,000, Brent and Janet were unable for premium help during the prior year.  Because their income is greater than 400% of FPL, they must repay the full amount of their tax credits.  Consequently, they now owe the IRS $8,498.

We commented earlier in this series that it isn’t just in upper income ranges where the repayment tax rears its head.  For example,

Glen is single and made $32,000 last year.  He is eligible for $1125 in ACA tax credits.  During the spring, Glen changes jobs, and his income increases to $40,500 for the year.  At his new income level, Glen is only eligible for $114 in annual premium help.  Consequently, the IRS says he owes an additional $1011 in tax.

We haven’t tried to explain here how the repayment caps work.  The IRS devotes more than a dozen examples on its website trying to illustrate it.  Many of the examples look like a college math test.

To be fair, some of the rules about when people have to report changes in family status or income are still emerging.  However, some things are evident.

  • Health insurance exchanges will have unprecedented access to personal information.
  • People will have to report life events more often to federal or state agencies.
  • People will struggle to pay the lump sum tax increase.
  • More people will incur the repayment tax than predicted.

What do you think?  Join in with your thoughts and questions.

For more information about how the Affordable Care Act might affect you and your business, leave a comment or contact us at Soter Healthcare.



4 responses to “5 Must-Fix Items in the Affordable Care Act: Premium Repayment”

  1. Gerald Degonia Avatar
    Gerald Degonia

    For sure, you read that right. No one understands this was in the law. I’m eager for reading through on your subsequent post. Keep up the good work!

  2. Lance B Johnson Avatar
    Lance B Johnson

    As being involved with a non profit health and welfare fund, I have no profit motive in this. However, I think your premise is wrong that the federal government should pay more for healthcare. If the ACA fails to take fraud and inefficiency out of the system, we are all in trouble. The best part of the ACA is the choice people will have to avoid one size fits all plans.

    The ACA is after all a tax law as so stated by the Supreme Court.

    So, if we don’t each make healthier life style choices, we will all pay higher taxes.


    1. David Mair Avatar
      David Mair

      Lance, thanks for taking the time to comment. I think you may have missed our point, though. What we are concerned about is the fact that people will not realize they may have to repay the premium subsidy they receive well after it is spent. For example, someone’s 2014 premium subsidy will be based on 2012 reported income. The tax credits will be reconciled in 2015. It’s a long time in which changes in income can happen, and neither the ACA nor the IRS are quite sure what to do with that problem.

  3. Gregory Timmons, CEBS Avatar
    Gregory Timmons, CEBS

    This is incredible stuff. I had no idea this was the case. It sure sounds different from what America was sold.

What do you think?