One of the weird quirks about Affordable Care Act health plans (also called ACA or Obamacare) is that most people don’t pay the full sticker price. 86% of ACA planholders in 2019 were eligible for an income-based discount, called a subsidy.
But if you overestimate your income for Obamacare, you may have to pay your government healthcare subsidy back. This cautionary tale has a suitably frightening name: the IRS calls it a “clawback.” Mwa ha ha!
Does that mean you should fear the subsidy? Not at all. If you can’t afford to pay your full subsidy back, you generally won’t have to.
Subsidy Overpayment: A Common Problem
The Affordable Care Act virtually ensures that you won’t have an accurate subsidy. That’s because your ACA subsidy is determined by your best guess of your coming year’s annual income.
You can make an educated guess using last year’s income, but there’s no way to truly enter the correct amount in advance. After all, it’s impossible to know the future. It’s normal for most people to overestimate or underestimate their ACA premium tax credit by a small amount.
There’s no added penalty for taking extra subsidies. The difference will be reflected in your tax payment or refund.
(You can instead pay your monthly premiums in full, then receive your accurate subsidy in your tax refund. This is not common since there aren’t additional penalties for overpayment outside of very rare fraud cases.)
The IRS will reconcile subsidies – for better or worse – using Form 8962, “Advance Payments of the Premium Tax Credit”. You’ll submit this with your taxes if you or someone in your tax family received any subsidies.
The 2021 American Rescue Plan has temporarily altered the structure of how subsidies are calculated to strengthen the ACA and improve access and affordability. However, the way subsidies are calculated will only be in place for two years before rolling back to pre-2021 guidelines. While short-term, the new subsidy expansion is more generous.
- ACA subsidies will be extended to higher-income individuals and families who do not currently qualify for a subsidy in 2021 and 2022.
- ACA subsidies for lower-income people who already qualify for 2021 and 2022 with be increased for more premium savings.
- ACA subsidies for individuals that receive unemployment benefits in 2021 could make monthly premiums $10 or less (even free).
- Taxpayers who misestimated their income in 2020 will not have to repay excess premium tax credits at tax time. This is for one-year only.
In the future, subsidy corrections will get trickier when ACA subsidy rules fall back to the income-level-based structure. This is when the IRS clawback could become a future issue.
Potential ACA Subsidy Repayment Caps for Fiscal Year 2021:
Maximum Clawback Repayment in 2022:
|MAGI (Taxable) Income % of Federal Poverty Level||Single Tax Filer||All Other Filers|
|Less Than 200%||$325||$650|
|400%+||Entire Subsidy||Entire Subsidy|
If the subsidy mandate reverts back to pre-2021 rules, you can expect these guidelines to be similar, but not the exact same, for the taxes you pay in 2022 (Fiscal Year 2021) and beyond.
These general guidelines do not apply in a few special circumstances. If you are recently divorced, filing separate returns, sharing a plan between families, received subsidies from two different tax families during the year, did not receive a subsidy that you should have qualified for, or have other tax questions, then you’ll want to read IRS Form 8962 and accompanying Publication 974 closely to understand your special situation.
Subsidies and Lawful Immigrants Ineligble for Medicaid
According to the IRS, “Certain aliens with household income below 100% of the federal poverty line are not eligible for Medicaid because of their immigration status. You may qualify for the PTC if your household income is less than 100% of the federal poverty line if you meet all of the following requirements:
- You or an individual in your tax family enrolled in a qualified health plan through a Marketplace.
- The enrolled individual is lawfully present in the United States and is not eligible for Medicaid because of immigration status.
- You otherwise qualify as an applicable taxpayer (except for the federal poverty line percentage).
What if You Overestimated Your Income for Obamacare Subsidies?
Lower Than 100% FPL
If your household is making $0 – or something close to it – you should probably apply for Medicaid right away. It’s essentially free health insurance.
If your income levels qualify you for Medicaid, don’t avoid it. Not only is it a bad idea to keep paying for ACA coverage, even if you would have gotten full ACA payment help by making a little more.
Fortunately, there are preset limits to how much you have to pay back, and you can also change plans at this time with ease. You need to call your federal or state Marketplace and let them know your income has changed. They can help you switch to Medicaid too.
While it’s also possible for some people to get $0 per month ACA health insurance with subsidies, you’d still have to pay coinsurance and copayments on ACA plans. These fees are not a part of Medicaid. Medicaid lasts for 1 year in most states, even if you get a job later.
Editor’s Note: The American Relief Plan has updated this rule in the short-term. Those with incomes from 100% to 150% FPL are eligible for $0 coverage for a Silver benchmark plan.
What if You Underestimated Your Income for Obamacare Subsidies?
Editor’s Note: FPL percentages have been updated to reflect the expansion of subsidies under the 2021 American Relief Act, provided by Kaiser Family Foundation.
More Than 400% FPL
If you received a subsidy that you make too much for, you may have to pay it back starting in 2022 (2020 has payback forgiveness). Depending on how much you overestimated by, you may have to pay back the entire subsidy you received.
Depending on your age, if you make nearly 700% of the federal poverty level, it’s extremely important to speak with an accountant to present your taxes in the most advantageous way.
If you underestimated your income, call your state or federal marketplace to adjust your subsidy. You can do this at any time of the year.
Less Than 400% FPL
You’ll make additional payments on your taxes if you underestimated your income, but still fall within range. Fortunately, subsidy clawback limits apply in 2022 if you got extra subsidies. in 2021 However, your liability is capped between 100% and 400% of the FPL. This cap ranges from $650 to $2,700 based on income.
It’s generally a mistake to stay with Marketplace ACA coverage if you don’t get subsidies. If you make less than 100% of the FPL, then there are better programs available. If you make more than 400% in 2021-2022, then you can get nearly identical ACA plans on private exchanges, without the added cost of subsidizing others.
If you receive subsidies for Obamacare, always report significant income changes. Your taxes will catch up with you when it comes to penalties, but your health insurance may not catch up with regard to payment help.
The year 2021 should be easier for those who suffered financial hardship in 2020 and need health insurance coverage thanks to the American Relief Plan. However, if you do have a clawback in coming years – especially if you overestimated your income – your payment will probably just lower your tax return. You may not have to actually write a check.
No matter which way your income changes, it will likely open up a Special Enrollment Period for you to change plans without penalty.