Without additional action from Congress, some Americans who purchased their own health insurance this year after losing employer-sponsored coverage may have to repay hundreds or thousands of dollars to the IRS next spring.
This is due to the way premium tax credit eligibility is determined and the volatile income situations that people found themselves in this year.
Millions of American workers have lost their jobs due to the COVID pandemic, throwing health coverage into jeopardy for many of them. Thankfully, the Affordable Care Act has served as a solid backstop for people who don’t have access to COBRA or state continuation of their group plan — or who cannot afford that option.
As a result of the ACA’s expansion of Medicaid, several million newly uninsured Americans have been able to enroll in Medicaid. And as a result of the ACA’s premium tax credits (subsidies) and guaranteed-issue rules, hundreds of thousands of people have enrolled in affordable self-purchased health coverage to see them through until they have employer-sponsored coverage again.
2021 Tax-Time Surprise?
But some of these people might face an unwelcome surprise next spring when they file their 2020 tax returns: The premium subsidies that are crucial for making coverage affordable during a time of lost income will have to be reconciled on tax returns. And the IRS does that by looking at the household’s total annual income, even if it wasn’t earned steadily throughout the year and even if premium subsidies were only paid on the person’s behalf for a few months. (Note that the ACA has a specific method of determining what counts as income, but for most tax filers it ends up being the same as their adjusted gross income).
(Related: ACA Definitions: Enrollment Period Basics)
Last spring, as part of the CARES Act, Congress created an extra $600/week federal unemployment benefit, and some people were eligible to receive $300/week in federal Lost Wages Assistance after the additional federal unemployment benefit ended. This money was crucial in getting families through what could otherwise have been an impossible financial situation. But it’s also counted as income in terms of determining eligibility for the premium tax credit.
The additional federal benefits were specifically excluded from income for determining eligibility for Medicaid. But no such exclusion was created for the premium tax credit eligibility. If a person needed individual market health coverage for a few months this year and projected a total annual income that didn’t exceed 400% of the poverty level (amounting to a little less than $50,000 for a single person, or $103,000 for a family of four), they likely qualified for an advance premium tax credit (APTC).
The APTC is paid on their behalf directly to their health insurance company, making health coverage much more affordable than it would otherwise be, and helping people avoid being uninsured during the pandemic. But if that person’s total income actually ends up going over 400% of the poverty level, they’ll have to pay back every penny of APTC that was paid on their behalf.