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