Should I take my ACA premium subsidy during the plan year – or claim it at tax time?

 Q. I’ve heard that I can just claim my health insurance premium subsidy on my tax return instead of getting a subsidy throughout the year based on my estimated income. How does this work?

A. Yes, you can do that. Most people don’t wait, but it can be a good choice for people who have the money to cover full price premiums throughout the year, especially if they aren’t sure whether or not their income will actually be subsidy-eligible when all is said and done.

Most people choose to take at least some of their premium subsidy throughout the year. (The IRS reported in 2017 that 98 percent of tax filers who claimed the premium tax credit for 2015 had received at least some of the amount in advance.) That makes sense, given how expensive full-price health insurance can be. Paying full price each month and having to wait until the following tax season to recoup the tax credit would be unrealistic for most subsidy-eligible enrollees.

Premium subsidies offset a large portion of the monthly premiums for the majority of the people who enroll in plans through the health insurance exchange in each state: Eighty-six percent of exchange enrollees were receiving premium subsidies as of early 2020 (paid in advance to their health insurers each month), and those subsidies amounted to 85% of the average total premium amount.

But in order to claim your tax credit in advance, you do have to go through an eligibility determination process when you enroll in a plan through the exchange. This process can be simple or complicated depending on your circumstances – W2 versus self-employed, steady job versus variable income, etc. Some people prefer to skip that process altogether, pay full price for their coverage, and claim the premium tax credit in full when they file their tax return the following spring.

A few more premium subsidy considerations

Either option is fine, and the “best” option is a matter of personal preference. But here are some things to keep in mind:

• Regardless of whether you plan to take the premium subsidy throughout the year or claim the whole thing on your tax return, it’s only available if you enroll in a plan through the exchange in your state. You cannot get a premium subsidy if you enroll in a plan outside the exchange.
• HealthCare.gov (used in 36 states as of 2021) and the state-run exchanges have user-friendly plan comparison tools that you can use to estimate whether you’d qualify for a subsidy and if so, how much it would be. Depending on the size of the subsidy, you can decide whether you want to go through the subsidy eligibility determination when you enroll.
• For 2021 and 2022, premium subsidies are larger and more widely available as a result of the American Rescue Plan. These larger subsidies are retroactive to January 2021 for people who were enrolled in marketplace plans at that point, but they’ll be displayed on HealthCare.gov and the state-run marketplaces starting in April 2021. People who are eligible for the additional subsidies for the first few months of 2021 will be able to claim the additional amount on their 2021 tax returns. And people who don’t log back into their marketplace account in 2021 to activate the larger subsidy amounts will be able to claim the full additional premium tax credit when they file their tax return.
• If you’re going to claim the subsidy in advance (and thus pay lower premiums each month throughout the coming year — or the remainder of the year if you’re enrolling during a special enrollment period), you’ll select the option to see if you qualify for financial assistance. This will be early in the enrollment process. If you say yes, you’ll go through a series of questions to determine your eligibility for financial assistance (including Medicaid, CHIP, premium subsidies, and cost-sharing reductions). The exchange will compare your income projection with the records the government already has, and may or may not ask you to provide additional documentation to back up your income projection (especially if you’re in a state that hasn’t expanded Medicaid and you’re projecting a subsidy-eligible income but the government has records indicating that your income projection is too high, be prepared to submit documentation to back up your income projection).
• Everyone who enrolls in a plan through the exchange – regardless of whether they end up qualifying for a premium tax credit – receives Form 1095-A from the exchange after the end of the year (the form is available via the exchange website as of January, and is also mailed to enrollees, or delivered electronically if the enrollee selects that option). The information on this form is used to reconcile or claim the tax credit when enrollees file their tax returns. (People who are certain they don’t qualify for a subsidy can skip Form 8962 and don’t need to do anything with Form 1095-A.)
• Everyone who gets a premium tax credit – either in advance or claimed in full on their tax return – has to fill out the same form (Form 8962) on their tax return in order to reconcile or claim the tax credit.
• If you get your premium tax credit in advance and it ends up being too small (which is determined via Form 8962 after the year is over and your income is certain rather than estimated), you’ll claim the additional amount when your file your taxes. If your advance premium tax credit ended up being too big, you’ll have to pay back some or all of it when you file your taxes. However, for 2020 only, the American Rescue Plan stipulates that people do not have to repay excess premium tax credits to the IRS, but this is a one-time exception related to the COVID pandemic.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.