One of the most important parts of the Affordable Care Act (ACA), also known as Obamacare, is the health insurance premium subsidy. For lower-income individuals and families, premium subsidies are crucial for making health insurance affordable.
Most people get their subsidies in advance, which reduces the cost of their monthly health insurance bill. But what many don’t realize is that this subsidy is speculative – if your financial situation changes, so does your premium subsidy. This could mean that you’re paying too much for health insurance – or not enough.
If this happens, your best course of action is to report income changes to your marketplace so you don’t end up with any surprises on your tax return come April.
How health insurance premium subsidies work
When you apply for a marketplace plan (whether you’re buying it through Healthcare.gov, your state marketplace, or a third-party site like PolicyGenius), you’ll be asked some basic information about your projected income for the next year. Your subsidy – both your premium subsidy and your cost-sharing reduction, if you qualify – will be based on this information, as well as where you live and whether you are applying as an individual or for a family. Typically, you’ll qualify for a premium subsidy if you earn between 100% and 400% of the Federal Poverty Level (FPL) in your state, and a cost-sharing reduction if you earn between 100% and 250% of the FPL.
Because the premium subsidy is based on your projected income for next year, it’s actually a tax credit that you can choose to receive in advance (that’s why it’s often referred to as an advanced premium tax credit). But while you can receive the credit in advance, it’s not technically finalized, so to speak, until you do your tax returns for that year. For example, while shopping for a health insurance plan in 2016, you could’ve gotten a subsidy for 2017, which wouldn’t technically be finalized until you do your 2017 tax return in 2018.
What exactly do we mean by "finalized?" Well, if your actual income does not match the projected income you stated when you applied for health insurance, your subsidy will naturally change. When you do your taxes for the year you received a subsidy, the IRS will figure out exactly how much you should have received as a subsidy, and either charge you or refund you accordingly.
For many people, their projected income is either exactly or practically the same as the income they actually received. They see no major difference when they do their tax return. However, if your income significantly increased or decreased sometime during the year, your tax return could be radically different from what you expected.
This is probably of most concern to people who received more income than they expected – perhaps because of a raise, job change, lottery winnings, or other unexpected influx of cash – who would end up having to pay most or all of their subsidy back to the government with their tax return.
Note, however, that this is all moot if you decide not to get your subsidy in advance. You can choose to wait and receive a subsidy as part of your annual refund instead, which would prevent you from ever being in a position where you owe money because you received too much of a subsidy. However, most people choose to receive their subsidy in advance, because without it, they could not afford the monthly premiums.
How to report income changes and other life changes before your tax return
The best way to avoid a surprising tax bill next year is to report any income or life changes to your health insurance marketplace when they happen. Some life changes, such as moving, marriage, birth, death, or a change in your disability, tax filing, or citizenship status can affect both your health insurance coverage and the subsidy you receive. (For a full list of which life changes to report to your health insurance marketplace, click here.)
When you report income changes to the marketplace, your existing subsidy will change to match your projected net income for the year. For example, if your income rises from $25,000 to $35,000 in the middle of a year, you won't earn a full $35,000 that year—you’ll earn somewhere in between. The next year, however, you’ll earn a full $35,000 and your subsidy will change again to reflect that.
Some of life changes, besides changing your subsidy, may also qualify you for a Special Enrollment Period, where you’ll be able to choose and enroll in a new health insurance plan.
If you purchased your health insurance plan through Healthcare.gov, log in to your account and choose "Start a new application or update an existing one." From there, choose your application for the current year, and click "Report a life change" to get started. The Healthcare.gov website will walk you through any changes to your subsidy.
You can also call Healthcare.gov at 1-800-318-2596.
If you purchased your health insurance plan from your state marketplace, sign into your account at your state marketplace. You should see similar options to Healthcare.gov. If you need help, contact your state’s support line.
If you purchased your health insurance plan through a third party, you should still be able to get help by contacting Healthcare.gov or your state’s marketplace. You can also contact the third party marketplace for further details on how to update your application.
Premium tax credits help millions of people afford health insurance, and you definitely should take them if you qualify. But you still have to make sure that your subsidy doesn’t negatively affect your tax return. Remember to always report income and life changes to your marketplace, however, and you’ll be in the clear.