What happens if my income changes and my premium subsidy is too big? Will I have to repay it?

January 15, 2021

Q: What happens if my income changes and my premium subsidy is too big? Will I have to repay it?

Use our calculator to estimate how much you could save on your ACA-compliant health insurance premiums.

A: Monthly premium subsidy amounts (ie, the advance premium tax credit – APTC – that’s paid to your insurer each month to offset the cost of your premium) are estimated based on prior-year income and projections for the year ahead, but the actual premium tax credit amount to which you’re entitled depends on your actual income in the year that you’re getting subsidized health insurance coverage.

If recipients end up earning more than anticipated, they could have to pay back some of the subsidy. This can catch people off guard, especially since the tax credits are paid directly to the insurance carriers each month, but if overpaid, they must be returned by the insureds themselves.

The issue of reconciling APTCs was explained in a 2013 IRS publication (see the final column on page 30383, continued on page 30384) which clearly explains that they do expect people to pay back subsidies that are in excess of the actual amount for which the household qualifies.

But the portion of an excess subsidy that must be repaid is capped for families with incomes up to 400 percent of federal poverty level (FPL). Details regarding the maximum amount that must be repaid, depending on income, are in the instructions for Form 8962, on Table 5 (Repayment Limitation). These amounts are adjusted annually, but for the 2020 tax year, the repayment caps range from $325 to $2,700, depending on your income and your tax filing status (single filer versus any other filing status). GOP lawmakers considered various proposals in 2017 that would have eliminated the repayment limitations, essentially requiring anyone who received excess APTC to pay back the full amount, regardless of income. But those proposals were not enacted.

There are some scenarios in which repayment caps do not apply:

If a person projected an income below 400 percent of the poverty level (and received premium subsidies during the year based on that projection) but then ends up with an actual income above 400 percent of the poverty level (ie, not eligible for subsidies), the entire subsidy amount that was paid on their behalf has to be repaid to the IRS.
If a person projected an income at or above 100 percent of the poverty level (and received premium subsidies) but then ends up with an income below the poverty level (ie, not eligible for subsidies), none of the subsidy has to be repaid. This is confirmed in the instructions for Form 8962, on page 8, in the section about Line 6 (Estimated household income at least 100% of the federal poverty line). But there are new rules as of 2019 that make it less likely for people with income below the poverty level to qualify for premium subsidies based on income projections that are above the poverty level. This is explained in more detail here.

Is there any help for me if I have to repay premium subsidies?

The IRS noted that they would “consider possible avenues of administrative relief” for tax filers who are struggling to pay back excess APTC, including such options as payment plans and the waiver of interest and penalties for people who must return subsidy over-payments. If you find yourself in a situation where you must pay back a significant amount of the premium subsidies you received during the prior year, contact the IRS to see if you can work out a favorable payment plan/interest arrangement.

It’s also worth noting that contributions to a pre-tax retirement account and/or a health savings account will reduce your ACA-specific modified adjusted gross income, which is what the IRS uses to determine your premium tax credit eligibility. If you had HSA-qualified health coverage during the year, you can make HSA contributions up until the tax filing deadline the following spring. And IRA contributions can also be made up until the tax filing deadline. You’ll want to talk with your tax advisor to see what makes the most sense given your specific circumstances, but you may find that some pre-tax savings end up making you eligible for a premium subsidy afterall, or reduce the amount that you’d otherwise have to repay.

The COVID pandemic caused widespread financial uncertainty and employment upheavals throughout much of 2020. Additional federal unemployment benefits were provided to millions of people, but there are concerns that the premium tax credit reconciliation could be particularly challenging during the 2021 tax filing season, with many people having to repay subsidies that were paid on their behalf during a time they were unemployed in 2020.

In December 2020, insurance commissioners from 11 states sent a letter to President-elect Biden, recommending various immediate and long-term actions designed to improve access to health coverage and care. One of the short-term recommendations is to provide relief from subsidy claw-backs for the 2020 tax year. Even in the best of times, it can be challenging to accurately project your income for the coming year, but the uncertainty caused by the COVID pandemic made this much more challenging than usual. So it’s possible that the Biden administration and/or Congress might be able to take action to provide some relief in this area, for at least the 2020 tax year.

What if you get employer-sponsored health insurance mid-year?

Most non-elderly Americans get their health coverage from an employer. Individual health insurance is great for filling in the gaps between jobs, but what happens if you start off the year without access to an affordable employer-sponsored health insurance plan, and then get a job mid-year that provides health coverage?

If a premium subsidy was paid on your behalf during the months you had individual market coverage, you may end up having to repay some or all of the subsidy when you file your tax return. It all depends on your total income for the year, including income from your new job. If your total income still ends up being in line with the estimate you provided when you applied for your subsidy, you won’t have to pay that money back. But if your actual income for the year ends up being substantially higher than you initially projected, you may end up having to repay some or all of that subsidy when you file your taxes.

It doesn’t matter that your income was lower when you were covered under the individual market plan. In the eyes of the IRS, annual income is annual income — it can be evenly distributed throughout the year, or come in the form of a windfall on December 31. (As noted above, insurance commissioners have urged the Biden administration to consider ways of providing relief on this issue for the 2020 tax year, given that it was even more challenging than normal to accurately project an annual income during the COVID panemic).

Once you become eligible for an affordable health insurance plan through your employer that provides minimum value, you’re no longer eligible for premium subsidies as of the month you become eligible for the employer’s plan. But premium tax credit reconciliation is done on a month-by-month basis, so as long as your total income for the year is still in the subsidy-eligible range, you’ll almost certainly still be eligible for at least some amount of subsidy for the months when you had a plan that you purchased through the exchange.

Finally, if you’re offered health insurance through an employer that you feel is too expensive based on the share you have to pay, you can’t just opt out, buy your own health plan, and attempt to snag a subsidy. The fact that an affordable plan (by IRS definitions) is available to you renders you ineligible for money toward your premiums. Unfortunately, the cost of obtaining family coverage is not taken into consideration when determining whether an employer-sponsored plan is affordable, which leaves some families stuck without a viable coverage option.

How many people have to repay premium subsidies?

For 2015 coverage, subsidies were reconciled when taxes were filed in early 2016. The IRS reported in early 2017 that about 3.3 million tax filers who received APTC in 2015 had to repay a portion of the subsidy when they filed their 2015 taxes; the average amount that had to be repaid was about $870, and 60 percent of people who had to pay back excess APTC still received a refund once the excess APTC was subtracted from their initial refund. [IRS data for premium tax credit reporting is available here; as of 2019, data had only been reported for the 2014 and 2015 tax years.]

But on the opposite end of the spectrum, about 2.4 million tax filers who were eligible for a premium tax credit ended up receiving all or some of it when they filed their return. These are people who either paid full price for their exchange plan in 2015 but ended up qualifying for a subsidy based on their 2015 income, or people who got an APTC that was less than the amount for which they ultimately qualified. The average amount of additional premium tax credit paid out on tax returns for 2015 was $670.

[The IRS noted that it was very uncommon for people to pay full price for their coverage and wait to claim their full refund on their return: 98 percent of the people who claimed a premium tax credit on their return had received at least some APTC during the year.]

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.

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Does the IRS change how much I’ll have to pay for my health insurance each year?

January 15, 2021

Q. I’ve seen that the percentage of income I have to pay for my health insurance seems to change each year, based on IRS guidance. Does this change the actual amount that I pay for my coverage each year?

A. Maybe. But there’s a lot more to it than just the percentage of income that the IRS says you have to pay for the benchmark plan. It also depends on how your income changes relative to the federal poverty level (FPL, which changes every year), how your health plan’s premium changes, whether you make a change to your coverage during open enrollment, and the fact that you continue to get older each year. Let’s take a look at how it all works:

The ACA has a lot of moving parts. Various aspects of the regulations have to be updated annually, including the affordability rules. Initially, the IRS laid out guidelines detailing the percentage of tax filers’ income that they would be expected to contribute towards their own premiums, assuming their income doesn’t exceed 400 percent of the poverty level. (For premium subsidy purposes, income means an ACA-specific version of modified adjusted gross income, and subsidy eligibility is based on how that income compares with the prior year’s FPL.)

Applicable percentages increased each year from 2015 through 2017

Then in July 2014, the IRS released Revenue Procedure 2014-37, in which they explained the changes to the percentage of income that subsidy recipients would have to pay (known as the applicable percentage) if they selected the second-lowest-cost Silver plan in the exchange in 2015.

A few months later, in November 2014, the IRS published Revenue Procedure 2014-62, which laid out the changes to the applicable percentage for 2016. And in 2016, they published Revenue Procedure 2016-24, which detailed the changes for 2017.

For 2015, 2016, and again for 2017, there was a slight increase in the applicable percentage numbers. Because the applicable percentage climbed each year, there was often an assumption that everyone who gets subsidies was paying more for their health insurance (after subsidies) in each successive year. But that’s not necessarily the case, as we’ll see in a minute.

Applicable percentages decreased for 2018

For 2018, the applicable percentages decreased slightly when compared with 2017, meaning that the percentage of income that people had to pay (after subsidies) for their coverage was slightly lower at all income levels than it was in 2017. (See Revenue Procedure 2017-36 for 2018 numbers.)

This means that before accounting for other factors (including age and income changes), people buying coverage for 2018 had to pay a slightly smaller portion of their income for the second-lowest-cost Silver plan than they paid in 2017.

In 2018, people who were eligible for premium subsidies had to pay between 2.01 percent and 9.56 percent of their income for the benchmark plan in their area. Of course, people don’t have to pick the benchmark plan – they can pick a higher-cost plan and pay more, or they can pick a lower-cost plan and pay less.

Applicable Percentages increased for 2019 to the highest they’ve ever been

For 2019, the applicable percentages went back up again, and were the highest they had ever been. Even though the applicable percentages increased again for 2021, they’re still lower than they were in 2019.

But as described below, people who were subsidy-eligible and whose income hadn’t increased since 2014 were paying less in after-subsidy premiums in 2019 than they were paying in 2014 (assuming they selected the benchmark plan in both years), due to the annual growth in the poverty level since 2014.

The details for 2019’s applicable percentages are in Revenue Procedure 2018-34. For 2019 coverage, people who were eligible for premium subsidies paid between 2.08 percent and 9.86 percent of their income for the second-lowest-cost silver plan, after subsidies.

Applicable percentages decreased again for 2020

For 2020, the applicable percentages decreased again. The details are in Revenue Procedure 2019-29, which was published in July 2019. For 2020 coverage, people who are eligible for premium subsidies paid between 2.06 percent and 9.78 percent of their income, after the subsidy was applied, for the second-lowest-cost silver plan (ie, the benchmark plan).

Applicable percentages increased for 2021

Although they’re still lower than they were in 2019, the applicable percentages are higher in 2021 than they were in 2020. So at each income level, people will pay a slightly larger percentage of their income for the benchmark plan. But again, it’s important to remember that the poverty level also increased (the 2020 poverty level numbers are used for 2021 subsidy eligibility determinations), meaning that you’d have to get a raise in order to remain at the same percentage of the poverty level. If you don’t get a raise, your income as a percentage of the poverty level would be lower, resulting in a smaller amount that you’d have to pay for your health coverage after the subsidy is applied.

The specifics for 2021 are in Revenue Procedure 2020-36. For 2021 coverage, subsidy-eligible enrollees who buy a plan in the exchange have to pay the following percentages of their income, after the subsidy is applied, for the benchmark plan:

Income less than 133% of poverty = 2.07%
At least 133%, but less than 150% = 3.10% to 4.14%
At least 150%, but less than 200% = 4.14% to 6.52%
At least 200%, but less than 250% = 6.52% to 8.33%
At least 250%, but less than 300% = 8.33% to 9.83%
At least 300%, not more than 400% = 9.83%

[And on a related note, employer-sponsored plans are considered affordable in 2021 as long as the employee’s portion of the premium, for employee-only coverage (not including family members) doesn’t exceed 9.83 percent of the employee’s household income. This amount is always the same as the applicable percentage for people at the highest end of the subsidy-eligible income range.]

Making sense of applicable percentages

Those numbers might make your eyes glaze over. But the following examples will show how they actually affect premiums from one year to the next. The first set of examples show how Bob’s premiums changed from 2014 to 2021, if his income increases each year to keep pace with increases in the federal poverty level. Below that, you’ll see what happens if Bob’s income hasn’t increased since 2014. Yes, there’s math involved, but never fear — it’s pretty straightforward.

Example: Bob’s premium changes from 2014 to 2021, if he gets annual raises that keep his income at 200% of the poverty level

Bob’s MAGI (modified adjusted gross income as calculated for the ACA’s premium tax credits) is equal to 200 percent of poverty. In 2014, his applicable percentage was 6.3 percent, for 2018, it was 6.34 percent, for 2019, it’s 6.54 percent, for 2020 it was 6.49 percent, and for 2021, it’s 6.52 percent, assuming that he gets a raise each year so that his MAGI remains at 200 percent of poverty throughout that time frame.

For subsidy purposes, poverty level determinations are based on the year during which open enrollment begins. Since the open enrollment period for 2021 coverage took place in 2020, the government uses 2020 poverty level guidelines for determining subsidy-eligibility for any plans that have 2021 effective dates. (poverty level numbers are published by HHS in January each year, but that’s after open enrollment for that year’s coverage has already ended).

2014: $1,448 in premiums, with an income of $22,980

If Bob was earning 200 percent of poverty level when he got his 2014 plan, his MAGI was $22,980 (based on the 2013 poverty level) and his applicable percentage (the amount he had to pay for the second-lowest-cost silver plan) was 6.3 percent. So he had to pay $1,448 in annual premiums in 2014 ($22,980 x 0.063). His subsidy paid the rest of the premium, assuming he selected the second-lowest-cost silver plan (ie, the benchmark plan).

2018: $1,529 in premiums, with an income of $24,120

But for 2018, if Bob was still earning 200 percent of poverty level, his MAGI had increased to $24,120, since the poverty level has increased. His applicable percentage was 6.34 percent, which equaled $1,529 in annual premiums ($24,120 x 0.0634). That’s about $81 more in annual premiums than he had to pay in 2014. But in order to maintain his percentage of poverty level at 200 percent, he’s earning $1,140 additional dollars per year.

So while his net premium had increased, his income was also increasing (and note that this is comparing his premiums in 2014 with his premiums in 2018; if we just look at 2017 versus 2018, the slight decrease in the applicable percentage for 2018 nearly exactly offsets the increase in the poverty level, making his net premium just about exactly the same in 2018 as it was in 2017).

2019: $1,588 in premiums, with an income of $24,280

For 2019, the applicable percentage increased again, and the poverty level has also increased. (2018 poverty levels were higher than they were for 2017.) If Bob is still earning 200 percent of the poverty level when he signs up for 2019 coverage, it means his income has grown to $24,280. He’ll have to pay 6.54 percent of that for the second-lowest-cost Silver plan, which will come to $1,588 in annual premiums ($24,280 x 0.0654). So Bob is paying $140 more in annual premiums in 2019 than he was paying in 2014 — but his income is $1,300 higher than it was in 2014, since we’re assuming he’s stayed at 200 percent of the poverty level.

2020: $1,621 in premiums, with an income of $24,980

For 2020, the applicable percentage decreased, but the poverty level continued to increase. To keep Bob at 200 percent of the poverty level, his income had to grow to $24,980 for 2020 (based on 2019 poverty level numbers, since that’s what’s used for the 2020 coverage year). He’ll pay 6.49 percent of his income for the benchmark Silver plan, which will amount to $1,621 in annual net premiums. That’s $33 more in annual premiums than he paid in 2018, and $173 more than he paid in 2014. But his income in 2019 is $2,000 higher than it was in 2014.

2021: $1,664 in premiums, with an income of $25,520

For 2021 coverage, both the applicable percentage and the poverty level are higher than they were for 2020 coverage. For Bob’s income to stay at 200 percent of the poverty level, it had to increase to $25,520 in 2021. And he’ll have to pay $1,664 in after-subsidy premiums for the benchmark silver plan, since that’s 6.52 percent of his income. So his net premiums for the benchmark silver plan will amount to $43 more in 2021 (compared with what he had to pay in 2020), but his income has increased by $540.

What if Bob doesn’t get a raise?

But what if he doesn’t get a raise, and his MAGI is still $22,980 in 2021? That means his income will be 180 percent of poverty level, instead of 200 percent, so his applicable percentage will be less than the 6.52 percent that would have applied if his income had grown to keep pace with the increases in the poverty level ($22,980 divided by $12,760 is 1.8; that means Bob’s income is 180 percent of the 2020 federal poverty level, which we use to calculate 2021 subsidy eligibility).

The calculation

To calculate applicable percentages for incomes that are somewhere within each range on the chart, you can use the formula that’s explained in CFR 1.36B-3. (Scroll down to just underneath the applicable percentage chart, and look at example 2.) In the case of Bob, it looks like this:

Part 1

180 – 150 = 30
200 – 150 = 50
30/50 = 0.6

Basically, you look to see what income range you’re in. (Bob is between 150 and 200 percent of poverty range.) Then you just figure out how far along the income range you are. In this case, Bob’s income is 60 percent of the way along the range that goes from 150 to 200 percent of poverty.

Part 2

6.52 – 4.14 = 2.38
2.38 x 0.6 = 1.43

4.14 + 1.43 = 5.57

The second part of the calculation is to look at the applicable percentage range for 2021 coverage that corresponds to Bob’s income range (4.14 to 6.52 percent — meaning that the percentage of income he’ll have to pay for the second-lowest-cost silver plan is somewhere between those two percentages). And then you just figure out what number is 60 percent of the way along that applicable percentage range. In Bob’s case, it’s 5.57 percent.

His applicable percentage for 2021 is 5.57 percent, and his net premium (after his subsidy is applied) is actually lower in 2021 than it was in 2014. It ends up being 5.57 percent of $22,980, which is $1,280 in annual premiums. That’s about $168 less than he had to pay in 2014 for the second-lowest-cost Silver plan.

In 2020, with the same $22,980 income, Bob would have been at 183 percent of the poverty level and his applicable percentage was 5.68 percent. So his net premium for the benchmark silver plan was $1,305 in 2020 — lower than it was in 2014, 2018, and 2019. And as we saw above, it’s even lower in 2021, despite the fact that the applicable percentages increased across all income levels. Despite the increase in the applicable percentage, Bob would still see a decrease in the total dollar amount that he has to pay for the benchmark silver plan in 2021. Because Bob’s income hasn’t kept pace with the poverty level, the amount he has to pay in net premiums is declining over time.

Applicable percentages increased for 2019 and again for 2021, but so did the poverty level – and you have to consider them together

There are a lot of moving parts here. Although the applicable percentages for 2019 were the highest they’ve been since this system was implemented (and increased from 2020 to 2021, albeit not quite to 2019 levels) the poverty level has continued to increase each year. So people whose incomes have not increased in several years could find that they’re paying less in total premiums in 2021 than they were paying a few years earlier.

How the applicable percentage is calculated — it’s changed a bit in recent years

The general idea behind the adjustment to the applicable percentage table is to keep up with changes in premium growth as they relate to changes in income. If health care costs increase faster than income, we all have to pay a larger chunk of our income for health care. But if the economy does well and the ACA’s efforts to curb healthcare spending are successful, it’s also possible for the applicable percentage to decrease — as was the case for 2018 and for 2020.

The formula for the adjustment to applicable percentage is just premium growth since 2013 divided by income growth since 2013. But the methodology for calculating each of those numbers has changed over time.

Premium growth used to be based on average per-enrollee premiums for employer-sponsored plans, in terms of how much those premiums had changed since 2013. But for 2020, HHS finalized a methodology change that incorporates premium changes in the individual market, as well as premium changes for employer-sponsored plans.

This was widely expected to result in an increase in applicable percentages for 2020, but when the numbers were published in July 2019, the applicable percentages for 2020 were lower than they had been for 2019 (without the methodology change, applicable percentages would likely have decreased even more for 2020, as the estimation was that they would be 2.7 percent higher in 2020 with the new calculations that incorporate premium changes in the individual market).

Income growth was based on changes in GDP per capita for plan years 2014 through 2016, but HHS finalized a new formula that has been used to calculate income growth since 2017. The new formula calculates income growth based on per-capita personal income (PI) rather than per-capita GDP. The two methods would likely generate similar numbers, but HHS considers per-capita PI changes to be a more accurate reflection of how per-capita income changes from one year to the next.

The IRS also added a provision that allows for an additional adjustment for years after 2018 to reflect the premium growth rate relative to the growth in the consumer price index [the additional adjustment is described in §36B(b)(3)(A)(ii)(II)]. But the next section in that code [§36B(b)(3)(A)(ii)(III)] says that the additional adjustment is only needed if the total amount the government spent on premium subsidies and cost-sharing reductions in the previous year was more than 0.504 percent of the previous year’s gross domestic product. For 2019, 2020, and again for 2021, the IRS determined that the additional adjustment is not necessary.

Since subsidies are also a function of the poverty level — which generally adjusts upward each year — there’s a built-in factor that essentially ensures that people who are impacted by a higher applicable percentage are also enjoying at least a modest increase in income that outweighs the additional premiums.

Average benchmark premiums dropped in 2019, 2020, and 2021 so subsidies are smaller

Premium subsidy amounts are based on the relationship between an applicant’s income and the federal poverty level, but they’re also highly dependent on the premium that the applicant would have to pay for the benchmark plan. The formula described above is how subsidy amounts are determined in every state (keeping in mind that Alaska and Hawaii have their own poverty level numbers).

But what if you don’t buy the benchmark plan? Many areas have dozens of plans available for sale in the exchange, and only one of them is the benchmark plan (it changes from year to year, but it’s always the second-lowest-cost silver plan). If you buy a plan that’s not the benchmark plan and you’re eligible for a subsidy, you still get the same subsidy amount that you’d have received if you had purchased the benchmark plan, but it’s applied to the price of the plan you select instead.

Nationwide, overall average premiums in the individual market increased slightly in 2019, decreased slightly in 2020, and increased slightly in 2021 (overall, premiums are much more stable than they were in 2017 and 2018, when they grew rapidly in most areas). But average benchmark premiums have decreased in all three years. The decrease in benchmark premiums happened in some areas because an existing insurer lowered their rates, but in other areas it’s because a new insurer joined the market and began offering lower-priced silver plans than the ones that were already available.

Since premium subsidy amounts are based on the cost of the benchmark plan’s premium in each area, it’s not surprising that premium subsidy amounts have been dropping over the last few years. Across all HealthCare.gov enrollees who are receiving premium subsidies, the average subsidy amount was $550/month in 2018, dropped to $539/month in 2019, and dropped again, to about $492/month in 2020.

But as we saw above, the whole point of premium subsidies is to cover the difference between the actual cost of the benchmark plan and the amount the enrollee is expected to pay for that plan based on a specific percentage of their income. So even if the amount the enrollee is expected to pay remains unchanged, the premium subsidy amount will go down if the full-price cost of the benchmark plan goes down. For some enrollees, premiums are higher in 2021, but other enrollees have lower premiums in 2021 — and there are several factors involved in how much the net premium changes.

The best course of action is to actively shop for your coverage each year during open enrollment. Never let your plan automatically renew without checking first to make sure that it’s still the best option. And if you become eligible for a special enrollment period mid-year due to a qualifying event, make sure you actively compare all of the plans available to you before making a decision about whether to keep your existing coverage or make a change.

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