If my income changes and my premium subsidy is too big, will I have to repay it?

Q. What happens if my income changes and my premium subsidy is too big? Will I have to repay it?

But for all other years, if the premium subsidy that’s paid on your behalf during the year ends up being too big, you’ll generally have to repay some or all of it when you file your tax return.

Monthly premium subsidy amounts (ie, the advance premium tax credit – APTC – that’s paid to your insurer each month to offset the cost of your premium) are based on your projected income for the year ahead, but the true amount of your premium tax credit depends on your actual income in the year that you’re getting subsidized health insurance coverage.

If recipients end up earning more than anticipated, they could have to pay back some of the subsidy. This can catch people off guard, especially since the tax credits are paid directly to the insurance carriers each month, but if overpaid, they must be returned by the insureds themselves.

The issue of reconciling APTCs was explained in a 2013 IRS publication (see the final column on page 30383, continued on page 30384) which clearly explains that people do have to repay subsidies that are in excess of the actual amount for which the household qualifies.

There are some scenarios in which repayment caps do not apply:

• Under the original ACA rules, if a person projected an income below 400% of the poverty level (and received premium subsidies during the year based on that projection) but then ended up with an actual income above 400% of the poverty level, the entire subsidy amount that was paid on their behalf had to be repaid to the IRS. But the American Rescue Plan temporarily changed this for some enrollees, and this has been extended through 2025 by the Inflation Reduction Act. To clarify, the rule changes allow some enrollees with income above 400% of the poverty level to qualify for premium subsidies, because the “subsidy cliff” has temporarily been eliminated. But if a person received excess premium subsidies (ie, more than they should have received, once their final income is solidified) and their income is above 400% of the poverty level, they do have to repay all of the excess. In other words, subsidies are now available to some people with income above 400% of the poverty level. But there’s no excess subsidy repayment cap for people in this income range.
• If a person projected an income at or above 100% of the poverty level (and received premium subsidies) but then ends up with an income below the poverty level (ie, not eligible for subsidies), none of the subsidy has to be repaid. This is confirmed in the instructions for Form 8962, on page 8, in the section about Line 6 (Estimated household income at least 100% of the federal poverty line). There were new rules as of 2019 that made it less likely for people with income below the poverty level to qualify for premium subsidies based on income projections that are above the poverty level, but these rules were reversed in 2021 due to a court decision. This is all explained in more detail here.

What if you get employer-sponsored health insurance mid-year?

Most non-elderly Americans get their health coverage from an employer. Individual health insurance is great for filling in the gaps between jobs, but what happens if you start off the year without access to an affordable employer-sponsored health insurance plan, and then get a job mid-year that provides health coverage?

If a premium subsidy was paid on your behalf during the months you had individual market coverage, you may end up having to repay some or all of the subsidy when you file your tax return. It all depends on your total income for the year, including income from your new job. If your total income still ends up being in line with the estimate you provided when you applied for your subsidy, you won’t have to pay that money back. But if your actual income for the year ends up being substantially higher than you initially projected, you may end up having to repay some or all of that subsidy when you file your taxes.

It doesn’t matter that your income was lower when you were covered under the individual market plan. In the eyes of the IRS, annual income is annual income — it can be evenly distributed throughout the year, or come in the form of a windfall on December 31.

Once you become eligible for an affordable health insurance plan through your employer that provides minimum value, you’re no longer eligible for premium subsidies as of the month you become eligible for the employer’s plan. But premium tax credit reconciliation is done on a month-by-month basis, so as long as your total income for the year is still in the subsidy-eligible range, you’ll almost certainly still be eligible for at least some amount of subsidy for the months when you had a plan that you purchased through the exchange.

Finally, if you’re offered health insurance through an employer that you feel is too expensive based on the share you have to pay, you can’t just opt out, buy your own health plan, and attempt to snag a subsidy. The fact that an affordable plan (by IRS definitions) is available to you renders you ineligible for any premium subsidies.

From 2014 through 2022, the cost of obtaining family coverage was not taken into consideration when determining whether an employer-sponsored plan is affordable, which left some families stuck without a viable coverage option. But the IRS has proposed a fix for this “family glitch” that’s expected to be in place by the fall of 2022, in time for the open enrollment for 2023 health plans. This will make some families newly eligible for subsidies in the exchange.

The IRS has noted that it is very uncommon for people to pay full price for their coverage and wait to claim their full refund on their return: Virtually everyone who is eligible for a premium tax credit receives at least some of it upfront, paid directly to their health insurer throughout the year.

Subsidy repayment amnesty for the 2020 plan year

It’s challenging to accurately project annual income in a normal year, but the COVID pandemic made it particularly challenging for 2020.

To address this, Section 9662 of the ARP clarified that for 2020 only, people did not have to repay excess premium subsidies. This was true regardless of whether their total household income exceeded 400% of the poverty level (which was the income limit in place to qualify for subsidies in 2020), and it was true regardless of the reason their income ended up being larger than projected.

The IRS issued guidance explaining exactly how this would be handled for the 2020 tax year. People who would otherwise have had to repay some or all of their advance premium tax credits were able to simply skip Form 8962 (premium tax credit reconciliation form) altogether. And for people who had already filed their 2020 return and repaid some or all of their advance premium tax credit, the IRS automatically issued refunds — these folks did not need to contact the IRS or file an amended return.

Although premium tax credit reconciliation resumed with the 2021 tax year, the health insurance exchanges have not been discontinuing premium tax credits for auto-renewed policies when a person had failed to reconcile a prior year’s premium tax credit with the IRS. That leniency was in effect for 2021 and 2022, and it will continue to be in effect for 2023. But that just means that a person who hasn’t reconciled their premium tax credits for a prior year won’t automatically lose their premium tax credits for 2023. It does not mean that people don’t have to reconcile their premium tax credits. They do, for all years other than 2020.

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.