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Be Aware of the Subsidy Trap

The Affordable Care Act’s advance premium tax credit (APTC) has been wildly successful. It’s helping millions of Americans pay for health insurance purchased through the individual Marketplace. However, something  that’s been confusing for many is the fact that it is an advance. The tax credit is based on the estimated amount that an individual believes they will earn in the coming year. This estimate must be made at the time of the insurance purchase, and, of course, the actual amount earned could ultimately be more or less than anticipated.

This means that any inconsistencies between estimated and actual household income will be reconciled during tax filing. An individual who ends up earning less than estimated will most likely be compensated for the “missed” APTC via a larger tax refund. And, vice versa, an individual who ultimately makes more than estimated will owe the difference in APTC  back to the government.

This reconciliation process was a surprise to many taxpayers during the most recent filing season. According to H&R Block, nearly “two-thirds of tax filers who received insurance via the state or federal insurance Marketplaces had to pay back an average of $729 of the Advance Premium Tax Credit (APTC), cutting their potential refund by almost one-third.”

The repayment amount for those who end up earning more than anticipated is capped at a maximum based on where household income falls in relation to the federal poverty level and filing status:

Subsidy trap blog chart

Source: Instructions for Form 8965: Health Coverage Exemptions (and instructions for figuring your shared responsibility payment)

Even with this cap in place, those who receive a smaller than expected refund, no refund at all or even owe money back to the government aren’t typically very happy about it, and this negative experience could deter them from claiming the tax credit next year. Also, remember that clients who are at 400% or more of the FPL may be responsible to repay all of their APTC, with no limit.

For brokers, it’s crucial to convey understanding of this process to clients and assist them in keeping the Marketplace informed of any changes. In fact, the IRS recently released a new tax tip entitled “Now is the Time for a Mid-Year Premium Tax Credit Checkup.” The table below includes some common life changes.

So how do your clients report these changes to the Marketplace? It’s actually pretty easy. If your clients live in FFM states, they can log in to their Marketplace accounts to report these changes online. Once logged in, the member simply selects his or her application and then chooses “Report a life change” from the menu on the left. They can also report changes by phone to 1-800-318-2596. Changes should not be reported by mail. If the change does not create a special enrollment period, making plan changes will not be possible. States with independent marketplaces may have different procedures.

Be the expert advisor your clients can trust! Arm them with the knowledge that’s going to keep them coming back to you, season-over-season.

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