Consumers are shocked when their Covered California subsidy takes a nose dive during the year after reporting an increase of income change. The Covered California Shop and Compare Tool that estimates the health insurance Premium Tax Credit subsidies indicates it should be a higher amount of subsidy. The difference between what Covered California estimates and the new subsidy revolves around your new estimated income and how much subsidy you have already received.
The first thing to understand is that the Covered California Shop and Compare Tool is estimating your total Premium Tax Credit subsidy for the year, 12 months, based on the income amount you put into the tool. It then takes the estimated annual subsidy and divides it into monthly amounts, deducts that amount from the health insurance rate, to show you your estimated health insurance premium after the subsidy.
Annual v Monthly Subsidies
Unfortunately, the Shop and Compare tool does not show you the total annual estimated subsidy. All of this is based on federal and state income tax calculations. Neither of these agencies care about your monthly subsidy, they only care about your final Modified Adjusted Gross Income for determining the Premium Tax Credit. If your income changes in the middle of the year, that changes the subsidy.
Increasing Income and Dramatically Decreased Subsidy
Let’s look at the example of Joe and Jan, a married couple who are both 55 years old. When they entered Covered California for health insurance for January 2020, they estimated their household income at $25,000. That entitled them to a federal annual Premium Tax Credit subsidy of $14,400, or, $1,200 per month to lower their health insurance premiums
Jan picks up a new contract that will boost the household income to $55,000 per year. They plug the new income into the Shop and Compare Tool and their annual subsidy drops to $10,200. The tool assumes a 12-month enrollment period and displays a monthly subsidy of $850 per month ($10,200 divided by 12.) However, the Shop and Compare Tool doesn’t know how much subsidy you have already received.
Greater Subsidy Used In Early Months With Lower Income
Joe and Jan report the income change to Covered California in June so the new lower subsidy will take affect July 1. Much to their surprise, instead of a $850 subsidy, they only receive a $500 subsidy. Their health insurance premium will double! Why? Because they already used $7,200 of the new lower $10,200 subsidy at the higher income amount.
Consequently, there is only $3,000 left of the Premium Tax Credit to reduce their health insurance premiums.
If Joe and Jan had waited until August to report the income change, they would have used all of the subsidy at the higher income amount and they would have to pay the full health insurance premium. If Joe and Jan had a loss of income in the middle of the year, resulting in a higher Premium Tax Credit subsidy, their subsidy would spike up.
All Covered California is doing is advancing one-twelfth of the estimated Premium Tax Credit to your health insurance plan to reduce your premium. The goal of Covered California is that after advancing the estimated Premium Tax Credit to your health plan, when you do your income tax return you will not owe any repayment for excess subsidy and you will not receive any additional subsidy. It will all equal out. The downside is potentially nasty increases in the monthly health insurance premium if your income goes up in the middle of the year.