Too rich for Medicaid but too poor for a health care subsidy?

Many people in that position worry they'll have to repay their subsidy. They won't.

Published: November 25, 2014 01:15 PM

As the end of the year approaches, I'm hearing from many readers who worry they may have to pay back all or some of the tax subsidy they received in 2014 to help pay for health insurance. And it's not because they earned too much money this past year, but too little. My quick answer, to ease their minds: No, you won't. In fact, you may get a little extra subsidy at tax time this year.

To understand why they are worried, it helps to step back for a minute. Under the Affordable Care Act, people whose incomes are between 100 percent and 400 percent of the Federal Poverty Level can receive tax credits to offset the cost of health insurance. (Here’s a chart with the numbers.) The assumption was that people who made less than 100 percent of the poverty level would get insurance through expanded Medicaid coverage, which was also part of the health care law. But many states decided to not expand Medicaid after a Supreme Court decision gave them that option. And in those states, households with incomes below the poverty limit cutoff fall into the dreaded “coverage gap”—too poor to get tax credits but unable to get Medicaid.

The readers I'm hearing from live in those states that did not expand Medicaid. And as they tally up their 2014 income, they are realizing that they ended up making less than they expected, and their income for the year will be under Federal Poverty Limit. They're afraid that when they file their tax return and the government finds out how little they earned they'll be forced to pay back their premium tax subsidy.

But experts in the health law say not to worry. “The Internal Revenue Service has a special rule about this,” explains Tara Straw, at the Center on Budget and Policy Priorities, a Washington think tank. “If you bought coverage on the Marketplace, got tax credits, and ended up with an income below the poverty line, then you still get your credit. In fact, you’re going to get a refund because your credit was based on a higher amount than you actually earned.”

See our complete health insurance information. To find out how to apply for, select, and use health insurance, including Medicare, visit our main health insurance page.

You can see the rule yourself on the IRS’s draft of instructions for Form 8962, the form that taxpayers who got premium tax credits will use next year when they file their 2014 tax returns. It’s on page 5.

The next question is what to do about health insurance in 2015 if this is your situation. And that’s where things get a little murky.

One strategy, which seems to be perfectly legal, is to do nothing and just allow your current coverage to auto-renew, at the same subsidy level. That’s an option for anyone who received tax credits to buy Marketplace coverage in 2014.

Another is to go back in and re-apply for coverage, projecting a 2015 income above the poverty level. When you do that, will take an electronic peek at your 2013 tax return—the most recent one available. If your income that year was above the Federal Poverty Level, you'll be eligible for a subsidy, even if your 2014 income is below the poverty level. There’s always the chance that in 2015 you will once again end up earning less, but if you give the estimate in good faith and gives you a subsidy, you’re on solid ground—at least for one more year.

--Nancy Metcalf

Submit a question to Consumer Reports' health insurance expert. Be sure to include the state you live in so we can provide a more-detailed answer.

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