It is wonderful that California created an additional health insurance subsidy through Covered California in 2020. Even though most Covered California consumers realized lower health insurance premiums because of the extra State subsidy, it can make the reconciliation of the subsidies on the two different income tax returns complicated and confusing.
Estimated reading time: 7 minutes
While the California Premium Assistance Subsidy closely mirrors the federal Premium Tax Credit, California has different income ranges for receiving the subsidy. The problem for most individuals and families is that the estimated Modified Adjusted Gross Income (MAGI), upon which the monthly subsidies are based, can be very different from the final MAGI when they go to prepare their income tax returns. The net result is different federal and California subsidy credits and repayments of excess subsidy received.
Comparing Subsidy Credits and Repayments for Different Income Levels
I looked at five different scenarios involving a couple whose estimated income differs from their final MAGI. The couple are each 55 years old living in Region 1 of Northern California. The premium tax credit subsidy estimates were all pulled from the Covered California Shop and Compare tool. The underlying assumptions were that the couple enrolled in the same health plan for the full twelve months and the health insurance premium rate was larger than the estimated subsidy they were eligible for.
In the first scenario, the couple entered Covered California with an estimated MAGI of $55,000. Their annual federal Premium Tax Credit was $21,115 ($1,760/month) and the California Premium Assistance Subsidy was $376 ($31/month). However, when they did their federal income tax return for 2020, their final MAGI was $65,000. This reduced their annual federal subsidy to $20,137 and the California subsidy to $144. They have to repay $978 to the federal government ($20,137 – $21,115) and $231 back to California ($376 – $144).
Scenario II has the couple’s income drop from the estimated $55,000 down to a final MAGI or $25,000. The lower income means they are eligible for an additional $4,375 in federal Premium Tax Credit on their federal income taxes. Unfortunately, the $25,000 income for a household of two is in the zone where California does not offer any subsidy – between 138 and 200 percent of the federal poverty level. The couple must repay the $376 they received from California on their State income tax return.
Subsidy Repayment Limitation
In scenario III, the income situation is reversed. The couple estimated a MAGI of $25,000, but ended up with a final MAGI of $55,000. However, they don’t have to repay all of the $4,375 excess federal Premium Tax Credit they received from the federal government because there is a repayment limitation. In their case, they only have to repay $2,700. The higher income puts the couple into the California subsidy income zone and they get to claim a $376 tax credit on their California income tax return.
The nightmare for tax payers is if their income exceeds 400 percent of the federal poverty level. Scenario IV shows the consequences of an estimated income of $55,000 and the final MAGI of $75,000, approximately 444 percent of the FPL. The couple must repay all of the Premium Tax Credit of $21,115. There is no repayment limitation for incomes over 400 percent. At the State level, the couple is eligible for an additional $16,037 ($16,413 – $376) because California’s subsidy goes up to 600 percent of the FPL.
The last income scenario has the couple estimating a high income of $75,000, which is not eligible for any federal subsidy, but receiving a California subsidy. Their final MAGI is $55,000 that is back in the zone for a federal subsidy. The couple can claim a $21,115 Premium Tax Credit on their federal income tax return. Unfortunately, the couple must repay ALL of the California Premium Assistance Subsidy they received. There is no repayment limitation in these situations.
Check the Check Mark Box
If the “Repayment cap may not apply” is check marked, according to the instructions for 3895 states, “Check this box for individuals who indicate a household income above 400% of the federal poverty line for the entire year.” This means that if the household entered Covered California and indicated their estimated income was over 400 percent – not eligible for any federal Premium Tax Credit – they will not be subject to any repayment limitation in most situations, if the final MAGI is below 400 percent and they gain the larger federal Premium Tax Credit.
The sole purpose of this repayment cap is make sure that the California repayment limitation does not give some tax payers extra monetary benefit greater than the cost of the health insurance. In most instances, if the final MAGI is below 400 percent, the federal Premium Tax Credit will be larger than the full amount of California Premium Assistance Subsidy that must be repaid to California. The California tax payer should be eligible for the much small California subsidy if the final MAGI is between 200 and 400 percent of the FPL.
Unfortunately, the instructions for form 3849 are not entirely clear on this topic as to why the repayment limitation may not apply. When a person uses tax preparation software, and check marks box on line 28 of Part III of 3849, any repayment limitation applied, vanishes. If you are calculating the numbers by hand using the tax forms, the instructions don’t mention having an income over 400 percent for the entire enrollment period in Covered California as a condition that voids the repayment limitation.