The relationship between Covered California and the IRS health insurance Premium Tax Credits
Unless you work for Covered California or are an insurance agent, the relationship between the health insurance tax credits and the IRS can be perplexing at best. While Covered California does a great job of marketing their services as an individual and family health insurance marketplace, the ultimate connection of reporting health insurance coverage to the IRS is not a central part of Covered California consumer education.
This is a high level overview of the connections between Covered California and the IRS for taxpayers.
Covered California and the IRS
First, The Affordable Care Act (ACA) created the health insurance Premium Tax Credit to be taken by consumers when they file their taxes. Based on the taxpayer’s household income, they can receive a tax credit to make their health insurance premiums more affordable. My analogy is that the Premium Tax Credit (PTC) is like the Child Tax Credit (CTC) that families can take on their federal income taxes. Families can reduce their tax liability with a $1,000 credit for each qualifying child they claim on their 1040 tax return.
Covered California uses the family’s ESTIMATED annual income to determine a monthly subsidy or Advance Premium Tax Credit to lower the health insurance premium. The IRS doesn’t care what the family estimated as their income with Covered California. The IRS only cares about the final income amount when calculating if the family was eligible for any Premium Tax Credit, additional refund credit, or if the family has to repay excess APTC.
Tax Credits at the end of the year or monthly
The big difference between the Child Tax Credit and the Premium Tax Credit is that the CTC is taken at the time the household files their tax return after the tax year has finished, while ACA allows individuals and families to realize the health insurance PTC during the year before they file their taxes. The mechanism of forwarding part of the PTC every month on behalf of the taxpayer is called the Advance Premium Tax Credit (APTC). It is like the Child Tax Credit of $1,000 being divided into twelve parts, one for each month, and distributed to the family every month. But in the case of the PTC, the estimated tax credit is being forwarded to the consumer’s health plan to lower their monthly premium.
Consumers don’t have to accept the monthly subsidy
But an individual or family does not have to accept the APTC every month. As long as they purchase their health insurance through a state or federal marketplace exchange, such as Covered California or Healthcare.gov, they can take the PTC when they file their taxes, just like the Child Tax Credit. Individuals and families can also enroll in a qualified health plan directly with a health insurance company. They will not be eligible for the PTC, but they will avoid the Shared Responsibility Payment for not having health insurance during the year.
Covered California calculates monthly subsidy
Second, the ACA established health insurance exchanges, like Covered California for California residents, to help enroll individuals and families in qualified health plans and determine a household’s eligibility for APTC. Covered California has two primary missions:
- Confirm that the health plans being offered are ACA compliant meaning they are a qualified health plans that make their members eligible for the PTC.
- Determine a consumer’s eligibility for the APTC and how much monthly APTC a consumer can receive based on their estimated household income.
The monthly subsidy or APTC is forwarded to the household’s selected health plan to reduce the monthly premium the individual or family must pay.
The IRS does not calculate the monthly subsidy
However, the final arbiter of the PTC is the IRS. The IRS does not run the health insurance exchanges. The IRS only allows a taxpayer to reconcile the APTC they were awarded from Covered California with the amount of PTC the taxpayer is entitled to based on his or her final Modified Adjusted Gross Income.
It is an estimate of FUTURE income
Finally, the income a consumer estimates on their application through Covered California is not tied to their past taxable income or what they may actually earn during the year. The estimated income for the APTC is between the consumer and Covered California. This means that some taxpayers may be entitled to a greater PTC when they file their taxes because they over-estimated their income when applying through Covered California. Conversely, some taxpayers may have to repay some or all of the APTC if they under-estimated their income.
IRS doesn’t care about your monthly income
The IRS doesn’t care what your monthly income will be or has been. Covered California does care about your monthly income. If a consumer reports their monthly income too low, then they will be deemed eligible for Medi-Cal and ineligible for the APTC to purchase private health insurance.
For example, a consumer who is self-employed may earn their taxable income through two different contracts that are paid in March and August. The combine amount of taxable income would exceed the Medi-Cal limits for the year. But if they apply through Covered California and estimate their monthly income as $0 for January, that consumer would be tracked into Medi-Cal. When the consumer goes to file their taxes, their income would clearly be over the Medi-Cal limits.
On the other end of the spectrum, a consumer could estimate an income far above the income limits for the APTC. But when they file their taxes their Modified Adjusted Gross Income might actually be lower, within the range for the PTC, and they would receive the Premium Tax Credit on their 1040. The downside is they missed the APTC to lower their monthly health insurance during the year and they may have missed out on qualifying for Enhanced Silver plans that have reduced cost sharing amounts such as lower deductibles and copayments.
Form 1095-A reports the Advance Premium Tax Credit
The estimated income and APTC relationship is between the consumer and Covered California. After the calendar year has ended, Covered California issues a form 1095-A to consumers who purchased health insurance. The 1095-A reports how much APTC the taxpayer received during the year. The information from the 1095-A and the taxpayer’s final Modified Adjusted Gross Income is then entered on to IRS form 8962 Premium Tax Credit reconciliation.
Form 8962 determines the REAL Premium Tax Credit amount
It is on IRS form 8962 where the final calculations are made to determine how much health insurance Premium Tax Credit the taxpayer’s household is eligible for. The IRS doesn’t care if the consumer over-estimated or under-estimated their income. The IRS doesn’t care if Covered California advanced too much APTC to a consumer or too little based on the estimated income. The IRS doesn’t care if the consumer earned $50,000 one month and didn’t qualify for the APTC or made $0 and should have been on Medi-Cal. The IRS only cares about the final income amount.
Covered California has avoided talking too much about the IRS and taxes. This has developed some myths about the exchanges. Covered California cannot see a taxpayer’s federal tax return. They can only compare the consumer’s estimated income to the past Adjusted Gross Income on a federal tax return. If the two values are more than 10% different, Covered California may require a consumer to provide proof of their current income.
Consumers ESTIMATE their income for the subsidy
I can’t emphasize enough that the Covered California stated income for the APTC is an ESTIMATED amount. It is not based on what the consumer earned last year, but what the consumer expects to earn in the current tax year for which they are applying. Consumers are not penalized for making no money in the previous year. That was last year. While the last year’s tax return can help verify the current estimated income, the APTC is not calculated on the previous year’s taxable income. It is based on the estimate the consumer provides at the time they are filling out the Covered California application.
Taxpayers must work with two different government organizations – the health insurance exchange and the IRS. The IRS supersedes Covered California when it comes to determining the final amount of the Premium Tax Credit regardless of what Covered California approved for the taxpayer. Consequently, most individuals and families should do a little income forecasting and tax strategizing when entering into Covered California and applying for APTC. If the household is $1 over the income limit for the Premium Tax Credit (400% of the federal poverty level for the household size) they must repay ALL the APTC when they file their tax return.
Estimating income is stressful for ethical people
The genesis for this post is the number of families I have talked to who agonize over the income section of the Covered California application. There are many misconceptions about the relationship between Covered California and the IRS. People really want to be honest but feel the Covered California income section is pushing them to be unethical when it comes to reporting their monthly income. But when people realize that Covered California is only trying to help them accurately estimate their income, and that the IRS will be the final arbiter of their PTC, they can honestly report an estimated income to Covered California and not feel as if they are running afoul of the IRS.
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