Built into the Affordable Care Act is the loss of the health insurance subsidy when the household income exceeds 400% of the federal poverty line. For older adults whose income might be greater than 400% of the federal poverty line they face losing the Advance Premium Tax Credits that makes their health insurance premiums affordable. In some instances the health insurance premiums can shoot up to over 20% of their income.
Health insurance subsidy under 400% of federal poverty line
The Affordable Care Act recognizes that lower income households can shoulder a smaller percentage of their annual household income being spent on health insurance premiums. To accommodate this realization, individual and family income between 133% and 299% of the federal poverty line has a gradual increase in the percentage that the household is expected to contribute to health insurance. (In 2015, the federal poverty line (FPL) for the 48 contiguous states was $11,670 for an individual.) A household income of 133% of the FPL is expected contribute 3.02% of their Modified Adjusted Gross Income (MAGI) to health insurance. A family with a MAGI of 299% of the FPL is expected to contribute 9.53%. Household MAGI between 300% and 400% has a contribution percentage of 9.56%.
What is the Affordable Contribution?
In order to make health insurance affordable the Affordable Care Act allows the Marketplace exchanges such as Healthcare.gov and Covered California to make up the difference between premiums for the Second Lowest Cost Silver Plan and the household’s affordable contribution percentage. For example, if the household MAGI is 200% of the FPL they are expected to contribute no more than 6.34% of their income. But if the Second Lowest Cost Silver Plan premiums would amount to 8% of their income, then the family is eligible for a tax credit to cover the difference. For the affordable contribution (referred to as the Applicable Figure by the IRS) see Form 8962 Instructions.
Second Lowest Cost Silver Plan
In 2015, 200% of the FPL for a two person household was $31,460. The Second Lowest Cost Silver Plan in the Los Angeles area of zip code 90404, where each household member was 30 years old, was a Molina HMO plan at $461 per month or $5,532 annual. The Covered California Shop and Compare Tool determined this family would be eligible for a $292 subsidy to make their monthly premium $169 or $2,028 annually. The net annual premium amount of $2,028 is 6.45% of the household income which is comparable to the published 6.34% applicable figure from the IRS instructions for Form 8965 Premium Tax Credit. Without the $3,504 tax credit, the family’s health insurance premium percentage of their MAGI would be 17.6%.
Premium Tax Credits for incomes under 400%
If this couple made 400% of the FPL, $62,920, the annual premium of $5,532 for the Molina health plan would be under 9.56% of their income and they would be entitled to no Premium Tax Credits. Now, if both members of the household were 60 years old and because of the higher health insurance premiums for that age, the couple would qualify for a Premium Tax Credit. The Second Lowest Cost Silver Plan in zip code 90404 for a 60 year old couple was the Molina health plan at $1,102 per month or $13,224 annually. To make the health insurance affordable Covered California would have offered this couple $595 in a monthly subsidy. This would have brought their annual health insurance premiums down to $6,084.
Health insurance premium vary by region
If this same couple had a MAGI income of $63,000, or an income greater than 400% of the FPL, they would have been ineligible for the Premium Tax Credits and their health insurance costs would have been 21% of their income. If we move this same couple to San Mateo County, the Second Lowest Cost Silver Plan for two 60 year olds is Kaiser at $1,672 per month or $20,064 annually. This unsubsidized premium would equal 32% of their household income. If this couple were to earn $1,000 less, so their income was at or under 400% of the FPL, they would have been eligible for subsidy of $1,172 per month making their health insurance premium $500 per month or $6,000 annually. This would put their annual health insurance costs within 9.5% of their income.
Repayment of APTC over 400%
The prospect of exceeding 400% of the FPL, and thereby losing the subsidy, is one faced by lots of self-employed people all over the country. It is a particularly gut wrenching feeling when the family works on their federal tax return and realizes they made more than they originally estimated and must now pay back all the Advance Premium Tax Credits they received during the year. Under the ACA rules, if the household’s final MAGI exceeds 400% of the FPL, then they must repay all of the Advance Premium Tax Credits they received during the year. The loss of the significant health insurance credit has sent people scrambling to see how they can deflate their Adjusted Gross Income on their taxes.
Deflating income to under 400% FPL
The direct adjustments to a tax payer’s AGI are the deductions found on lines 23 – 35 on Form 1040. The IRS does allow taxpayers to contribute to an IRA after the calendar year has closed. Under certain conditions (always discuss this with your tax preparation professional) an IRA contribution may reduce the AGI and put the total MAGI under 400%, thereby making the household eligible for the Premium Tax Credits. For the 60 year old couple in San Mateo, a $1,000 IRA contribution would make them eligible for $14,000 in Premium Tax Credits.