The following is an announcement from The Finance Buff:
2024 2025 Cap on Paying Back ACA Health Insurance Subsidy
[Updated on August 30, 2024.]
The ACA health insurance subsidy, aka the premium tax credit, is set up such that, for the most part, it doesn’t matter how much subsidy you receive upfront when you enroll. The upfront subsidy is only an estimate. The final subsidy will be squared up when you file your tax return next year.
If you didn’t receive the subsidy when you enrolled but your actual income qualifies, you get the subsidy as a tax credit when you file your tax return. If the government paid more subsidies than your actual income qualifies for, you pay back the difference on your tax return.
Repayment Cap
There’s a cap on how much you need to pay back. The cap varies depending on your Modified Adjusted Gross Income (MAGI) relative to the Federal Poverty Level (FPL) and your tax filing status. It’s also adjusted for inflation each year. Here are the caps on paying back the subsidy for 2024 and 2025.
| MAGI | 2024 Coverage | 2025 Coverage |
|---|---|---|
| < 200% FPL | Single: $375 Other: $750 |
Single: $375 Other: $750 |
| < 300% FPL | Single: $950 Other: $1,900 |
Single: $975 Other: $1,950 |
| < 400% FPL | Single: $1,575 Other: $3,150 |
Single: $1,625 Other: $3,250 |
| >= 400% FPL | No Cap | No Cap |
Source: IRS Rev. Proc. 2023-34, author’s calculations.
No Cap Above 400% of FPL
The repayment caps in 2024 and 2025 apply only when your actual income is below 400% of FPL. There’s no repayment cap if your actual income exceeds 400% of FPL — you will have to pay back 100% of the difference between what you received and what your actual income qualifies for.
Large Change in Income
The caps are also set sufficiently high such that the amount you need to pay back will fall below the cap unless there’s a big difference between your actual income and your estimated income at the time of enrollment.
For example, suppose you’re married filing jointly and you estimated your income would be $50,000 in 2024 when you enrolled. Suppose by the time you file your tax return, your income turns out to be $60,000. Because your income is $10,000 higher than you originally estimated, you qualify for a lower subsidy now. You will be required to pay back the $1,596 difference. The cap doesn’t really help you because this $1,596 difference is well under the $3,150 repayment cap.
In addition, because you’re required to notify the healthcare marketplace of your income changes during the year in a timely manner so that they can adjust your advance subsidy, normally the difference between the advance subsidy you received and the subsidy you finally qualify for should be well under the cap. The cap helps only when your income increases close to the end of the year to make it too late to adjust your advance subsidy.
Easier for Singles
Still, a late income change can happen, and the change can be large enough to make the difference in the health insurance subsidy higher than the repayment cap. This is true especially when you’re single with a lower repayment cap.
For example, suppose you’re single and you estimated your income would be $30,000 in 2024 when you enrolled. Suppose in December 2024 you decide to convert $20,000 from a Traditional IRA to a Roth IRA. This pushes your income to $50,000. The extra $20,000 income lowers your health insurance subsidy by $2,866, but because your repayment cap is $1,575, you only need to pay back $1,575. You get to keep the other $1,291. In this case, you’re better off asking for the subsidy upfront during enrollment. If you only wait until you file your tax return, you won’t benefit from the repayment cap.
Bottom line: You should try to estimate your income conservatively and qualify for as much subsidy as you can upfront when you enroll. Maybe it won’t help. Maybe it will.
Comments
-
-
Hi Harry,
1) I am running the numbers for Alameda county single person age 44. With a $30K income the deductible is $3700 and with $40K income the deductible is $4K. So the difference does not seem as large for Cost-Sharing Reductions?
2) Also if at end of year my income increases, does it change the deductible amounts of the plan? Eg: if my deductible was $3700 and now with new income in dec it should ideally be $4K; do I need to also pay back the plan for the deductible difference? Or is it only subsidy repayment with cap that I need to worry about.
3) I also noticed that Gold plans have no deductible. If I know some procedures are needed which will result in coinsurance; would Gold in such circumstances be the right plan considering the difference in premiums between Silver and Gold is still less than the deductible in Silver (while Gold has no deductible)
-
Cost-Sharing Reductions come in three tiers. You only get a small reduction at 250% of FPL. Larger reductions come in at 200% and 150% of FPL. You’ll see a larger difference when your income is $25,000 or $19,000. The CSRs don’t have to be paid back. If you notify the exchange of your higher income and there’s still time to adjust your plan, they’ll move you to a different plan going forward. It won’t affect your past. As GMShedd said in comment #1, if you’re not receiving the CSR or you’re only receiving a small reduction, the Gold plan can be a better value.
-
-
Hi Harry,
Very educational article! Thanks!
In 2019, I took full premium up front (around 13K total) assuming my 2018 AGI would be about the same at 25K. I also converted 30K from IRA to Roth. Unfortunately this transaction pushed my 2019 over 55K, and I was advised to pay back every penny of APTC = 13K. Does the ‘Payback Cap’ mentioned in the article applied in this case?-
If you were a household of one person in the lower 48 states in 2019, $55k was above 400% of FPL. Your payback cap was unlimited. That’s why you had to pay back every penny of your premium subsidy. Had you converted $20k instead of $30k, you would’ve had a lower payback cap.
-
-
-
-
Outstanding article! A question for you now along these lines. I went on Medicare last year and ended up with several months of “overlap” ACA insurance while on Medicare because of a miscommunication with the ACA. Assuming I am <400% of FPL for the year and the over-lap was $1500/mo. for three months, how is the amount that I must pay back calculated, assuming it must be paid back?
Thanks!
-
Very informative. I had a question regarding taxes. I had to repay all of my subsidy due to extra income from annuities, Social Security and IRA’s at the end of the year. Since I essentially paid the premiums by myself, can I include these costs as medical premiums if I itemize deductions on my taxes. Thanks!
-
You can, but if you aren’t self-employed, the first 7.5% of your AGI isn’t deductible. From the IRS:
-
-
-
-
What if I only had a marketplace plan for 6 months of the year? Am I still responsible for paying back the full contribution based on my income?
For example, I made $32,000 and am expected to contribute about 9% or $2,880 per year to the cost of the health insurance premium. However, if I was only covered six months, shouldn’t this contribution be reduced to $1,440? I’ve prepared a tax return and it looks like I’m still expected to pay back the full cost of the annual contribution.-
Yes, your expected contribution is prorated by the number of months. When you’re entering your 1095-A into tax software, fill out the month-by-month rows. If you read the instructions carefully, you’ll see you use the totals only when you were covered for all 12 months and the numbers for each month are the same.
-
-
I made below income and recieved tax credit for 2 years. I now have no income and applying for SSI. I cannot afford any premiums and now am worried. I was not eligible for medicaid as I have no dependents. So now what? How do I obtain insurance with no or very little income?
-
Many states don’t require a dependent to qualify for Medicaid. If yours still does, maybe moving is an option?
https://www.healthcare.gov/medicaid-chip/medicaid-expansion-and-you/
-
-
-
-
Harry I have a horror story. My spouse and I both became unemployed in March. We informed the Market place of the income change to zero. I filed for unemployment, my spouse found temporary work with varying hours. We were not sure how much income either of us would make for sure. Unemployment was approved for $214.00 a week after taxes. But pandemic payments became unpredictable increasing the payments. After my 26 week unemployment ended, I informed the Market place of our income status. In November my spouse was offered full time employment. I told the Market place but the 10k made put us over the amount for subsidies. We now must pay back over 12000.00. We briefly stepped across the poverty line and now must pay a hefty penalty.
-
You may also be able to open up an HSA for you and your spouse.
-
-
This isn’t insurance, but……Is there an FQHC (Federally Qualified Health Center) near you? Those centers provide health services on a sliding fee scale based on income, family size, etc.
They often provide services for individuals with no income if that can be verified (through a self declaration form or some other official agency records, e.g., written statement from a landlord or other person outside the household having knowledge of the applicant’s financial situation).
You should look into an FQHC in your community.
-
-
-
You’ll have to do some careful math on this, but can you open a deductible IRA for just the right amount of dollars to lower your 2020 modified AGI enough to briefly step back across that threshold for subsidies and avoid having to pay that hefty penalty? Or are you too far above that threshold?
-
Thank you so much for the article. I also have a horror story. My husband and I own an electrical contracting business. We qualified for the PPP loan last year. My husband and I don’t generally take a regular paycheck. I put us both on the payroll to satisfy the requirements of the PPP loan. We have been doing our taxes and have discovered we now owe $28,000 in penalties for the Obama Care Insurance. Please help! Is there anything we can do?
-
Is there a chance I can now take that 28,000 and add it to my deduction on my health insurance premiums?
-
As Brian mentioned in comment #12, depending on how much your income is over the 400% FPL cutoff, you may be able to bring it below the cutoff by contributing $6,000 to a Traditional IRA for each of you ($7,000 each if both of you are 50 or over). That lowers your income by $12,000 or $14,000. And if your health insurance was an HSA-eligible plan (Bronze plan more likely), you can contribute another $7,200 to an HSA. That also lowers your income for the subsidy qualification.
Finally, yes, self-employed health insurance is deductible. If you’re using tax software, be sure to enter it in the right place. When your health insurance was that expensive, deducting part of the health insurance by itself may bring your income below the cutoff. See how to do it in TurboTax and H&R Block software.
-
Or, could I put 26,000 into a 401K for 2020 and use it as a reduction of income for 2020?
-
Thanks Harry! We have already contributed to our IRA for last year, if we put it into an IRA for next year would it still count towards lowering our 2020 income? We ended up at $99,000 on our income. There is just the two of us. We are over 50
-
A little late for the 401k if you didn’t already have one set up for your business before December 31, but you can do a SEP-IRA for each of you. You can contribute 25% of your respective payroll to the SEP-IRA. That also lowers your income for the subsidy qualification.
-
Contributing to a Traditional IRA for 2021 won’t lower your income for 2020. Look into the SEP-IRA. A household of two in the lower 48 states in 2020 needs to have income below $67,640 to receive a premium subsidy. Even though your $99,000 income is quite far from it, lowering your income by all means plus deducting some of your self-employed health insurance may still make you qualify for _some_ subsidy.
-
-
-
-
Was interested in knowing what happens when your estimated income ends up being higher due to unemployment payments and lottery winnings during 2020? Estimated income was $19,000 but ended up being $33,000. Will health care subsidy need to be paid back?
-
News reports said the forthcoming stimulus law will make $10,000 in unemployment benefits in 2020 not taxable. After taking that into account, if your actual income is still higher than your estimate, you will pay back part of the subsidy, subject to the cap.
-
Oh, wait. It looks like the entire repayment requirement will be waived for everyone for 2020. You keep whatever advance subsidy you already received no matter how high your income is. If you qualify for more subsidy because your income is less than you originally estimated, you can still get more. Hang in there for another week until the official text of the law comes out to know for sure.
-
-
We are a family of 4 with AGI of about $57,000 (2 married adults & 2 children).
We co-own a small business.
I’m always afraid that our business will show a larger profit (s-Corp) & we will have to repay the subsidy.
Is there a chart or slide scale that shows what a family of 4 qualifies for before repayment in each tier?
It worries me to the point I think of dropping insurance. Of course, I’d like to make more money in my business, but not if it ends up costing me in the end.-
This calculator shows your estimated subsidy:
https://www.kff.org/interactive/subsidy-calculator/
You give your estimated income first, say $57,000. Then you enter a higher income, say $67,000. The difference between the two results is the amount you’ll need to pay back when your business makes more money.
That said, it looks like the payback requirement will be waived for 2020 and the subsidy formula will change for 2021 and 2022. The calculator will have to be updated to the new law, but it still gives you a general idea.
-
-
-
-
Good information Harry. My problem is I retired in March 2020 and didn’t include this income when calculating my years income. Earlier you talked about your income is durning the time frame when recieving your ACA insurance. As of now I would pay back all my subsidies 8000. Should my tax man know what to file? Also sounds like we may not have to pay any back which is great news if it is true. Our tax office did let me know this news yesterday.
-
It’s true. You keep whatever advance subsidy you already received no matter how high your income was in 2020. If you qualify for more subsidy because your 2020 income was less than you originally estimated, you can still get more. Because the law is only a few days old, the IRS and the tax software vendors still need time to update their systems. Once that’s done, you can file your 2020 tax return and not have to pay back the subsidy.
-
-
If you overestimate your AGI, I understand that the government refunds the premium tax credit – however it is my understanding that they do not refund any of the CSRs. For example, you may have paid an OOP of $9,000 (versus $1,000 if you had estimated your AGI accurately). You will never get back the $8,000 difference if you had indeed paid/met your OOP. Is my understanding correct?
-
That’s correct. If you have a shot in qualifying for the CSR, you should try to justify your lower income estimate and get it upfront. If your estimate turns out too low you’ll keep the CSR. If it’s too high you won’t get CSR retroactively.
-
-
-
What would happen if i’m in a state that didn’t adopt the medicaid expansion and my income fell below the poverty level to receive a subsidy. In other words, I am on the line of making too little for a subsidy but i go ahead and claim the subsidy throughout the year. Will I have to repay the subsidy if my income drops too low?
-
If the ACA exchange accepted you at the time of enrollment and they paid the subsidy upfront to the insurance company and then your income unexpectedly falls below the minimum, you’ll still qualify for the premium tax credit. If you didn’t get accepted upfront at the time of enrollment, you won’t qualify for the premium tax credit on the tax return when your income is below the minimum threshold.
-
-
Need advice for 2021 taxes with unemployment and Obamacare. Husband lost job Dec 2020, been on unemployment ever since but with his severance pkg he received 28 weeks of insurance thru former employer so it wasn’t until this month, June, that he signed up for Obamacare. We estimated our income (I work part-time an only cover myself for insurance) but I was reading something about “If someone receives unemployment benefits during 2021, their income will be treated as no higher than 133 percent of the FPL. (married file jointly I guess this is $23,169) This means that those who receive unemployment benefits can receive maximal subsidies for ACA coverage, including no-premium coverage.”
So if I said my income might be $26,500 and his 13,700 for a total of $40,200 what would that mean? And also another HUGE mistake I made was take out money accidently on margin in 2020 and had to repay Feb 2021 with $38,922 capital gains. We can put money in traditional IRA but how much will we need to in order to be under the 400% of $69,680.-
If your job offers coverage for spouse and family members and the insurance meets certain standards, which most employers’ plans do, he’s not eligible for the premium tax credit if he enrolls in a plan through the ACA exchange. The government wants you to add him to your insurance.
-
-
Hi. I just discovered your site and have been reading for the last hour. I’ve recently signed up for insurance through the marketplace. My income is commissions only, so I’ve stated my income pretty low. There is a very good chance that my income will be higher than the 400% of FPL (family of 4).
You stated in this article the following: “If your actual income exceeds 400% of FPL, there’s no repayment cap — you will have to pay back 100% of the difference between what received and what your income qualifies for.”
I have read in other places that there is a cap of 8.5% of MAGI. I’ve been looking at that as my worst case scenario of payback.
Do you believe that to be the case? As I said, I’ve only been on your site for an hour, but I’ve not seen anything about the 8.5%.
Thanks for the help!
-
The 8.5% is part of the formula that determines how much subsidy your actual income qualifies for. It’s the worst case if your low estimate gives you 0% in the formula and your actual income gives you 8.5%. See the example toward the end of this post:
2020 2021 2022 ACA Health Insurance Premium Tax Credit Percentages
-
-
Harry,
Thanks for this information. I would guess there is a lot in the ACA that people don’t understand about how variations in estimated income can greatly affect what a person pays for a deductible, co-pays, etc. when choosing a silver plan with cost sharing reductions. When insurance agents are assiting low/moderate income people, they should be aware that modest changes in estimated income can mean large changes in the cost sharing reductions – especially from year to year since the cost sharing reductions can change significanly on any particular plan and between companies. So there is much more involved than simply having to pay back any advance premium tax credit (or get a refund) if the person’s income changes from what is estimated for the application.
As you said in response to comment #4, “The CSRs don’t have to be paid back.” That is, even if the person’s income rises above what is estimated. That is VERY important.For example, on the Colorado Exchange plan finder (https://planfinder.connectforhealthco.com/), at the lower annual income levels ($20,000 to around $30,000), while the advance premium tax credit is gradually reduced as income increases, there is a huge difference between 2022 silver plan cost sharing reductions over that income range (and also from from 2021 to 2022 plans). With one major carrier silver plan for a single person, deductible going from $100 to $2300, maxium out of pocket from $2000 to $6950, and similar large differences in office visit and procedure copays. So as the estimated income level increases in that range, the cost sharing deductions decrease significantly.
Therfore, with low/moderate income people, an insurance agent (or person doing the application themselves) would be well served to specify as low an income as is reasonable on the application. For example, a person who had a taxable AGI that varied from $20K to $30K in the past five recent years should specify the lowest level of that range when applying to take full advantage of the cost sharing reductions. (Colorado’s “look back” period in their application actually allows the person to choose from two to five years of annual income.) The repayment of any excess advance premium tax credit may well be totally offset by the savings from the cost sharing reductions at the lower estimated income level.
-
Harry,
Can you tell me if I have this correct? When I signed up for ACA for 2021 my subsidy from the government was $1400/mo. I listed my income as $36000. It is just my husband and I. If I convert an IRA into a Roth and bring my income up to $60,000 and the 400% FPL is $68,960, does that mean I will only have to pay back $2700 of the premium subsidy?-
That’s correct.
-
-
Harry,
1) I assume the 400% FPL cliff is calculated after Standard deduction, IRA contributions and capital losses ($3K) are all factored in?
2) If ACA income declared was $40K and it now is $45,500; what are the pros and cons of doing IRA to Roth conversions to reach the $51,520 limit. Is the $1,350 repayment cap (single CA filer) the only amount to be paid?
3) Since interest payments, dividends, etc. are estimates as of now and if the finally tally pushes one above the 400% cliff; can the conversions be reversed next year before April to avoid paying the massive ACA premiums with loss of subsidy?
4) Any other tax strategies in terms of capitals gains to take advantage of the low income tax bracket am currently in?-
The 400% FPL cutoff is on MAGI, which is basically AGI plus tax-exempt muni bond interest. It’s before the standard deduction. Use a tool featured in this post to evaluate the impact of additional Roth conversion and/or realizing capital gains:
Roth Conversion and Capital Gains On ACA Health Insurance
Roth conversion can’t be reversed.
-
-
Harry,
I was not aware of the 8.5% of MAGI cap on premiums that was added mid-year. My husband and I purchased health insurance on Washington’s marketplace (WAHealthplanfinder.org) and paid well over 8.5% of our MAGI on premiums. However, since our income is well above 400% of the FPL, I failed to check the box that said I wanted to be considered for credits when we originally enrolled for our plan. IRS Form 8962 does not appear to have any reference to the cap. Does this mean it’s too late to apply for this credit when filing my tax return?-
Form 8962 references it on Line 7, which points you to Table 2 in the Form 8962 Instructions (page 9). If you use tax software or a tax preparer, the software will automatically calculate your eligible credit.
-
-
Thanks for the tip. I was able to easily complete this form and get the credit on my return. Hopefully they’ll extend this cliff negation in future years, especially since I know how to fill out the form now!
-
Very thorough work. Two minor remarks: (a) the repayment caps predated TY 2020, and have been available since the early days of the ACA (the post could be misunderstood as suggesting they came about in TY 2020); (b) it is indeed best to estimate income conservatively and maximize the advance PTC payment, but if you experience an income surge at the end of the year (and esp. if your actual income may end up at or above 400% FPL), do estimate your repayment amount before the end of the year. That way, you’ll have more mechanisms at your disposal to offset the surge (i.e., beyond deductible retirement or HSA contributions which can wait until Apr 15) (e.g., realizing an unrealized capital loss by Dec 31); or, if you cannot bring your income back down, make an estimated tax payment by Jan 15 to avoid underpayment penalties and a cash crunch at filing time.
-
for FY 2024/25 does the repayment cap STILL apply for those whose MAGI is > 400% FPL?
2) is there any penalty if multiple years one’s estimate of MAGI were say $30k when it ends up being $50-60k from the sale of something in early December?
possibly penalty for under-payment of estiamted taxes, or not being allowed to use the APTC for following years , or ? (I’m inclined to just allow my ACA plan to rollover, and not touch the ACA website, from past bad experiences.
-
There was never a repayment cap for MAGI above 400% FPL. I don’t know what the penalty is when you consistently exceed the income estimate you gave at the time of enrollment by a large amount or a large percentage. You should update your income after you realize a large capital gain. If you don’t want to use the website, you can call the toll free number or have a broker update the income for you.
-
thanks for the reply, I had meant to ask, if for 2024/25 one is above 400% FPL, is there a repayment cap, or only for those below 400% FPL.
I’m wondering if the large capital gain, were in December, is that somehow different than doing it in January, with regard, to needing to register a “change in life circumstances” ?
re: the website, was referring more to the annual open enrollment period, where one declares income then picks a plan, one year, while doing that, I was surprised that all the sudden, my plan immediately changed, despite, it ostensbily being something I was declareing for NEXT year …
-
No repayment cap for income above 400% FPL. That’s the case in the past, present, and the foreseeable future.
No difference in when your income increases above your estimate, whether it’s in January, December, or any other month.
No difference in when you don’t want to use the website either, whether during open enrollment or outside open enrollment. You can call the toll free number or go through a broker.
-
during open enrollment, when one estimates their income for the following year (2025), is that the same as registering a “change in income” for 2024 if it done Nov 1 through Dec 15 2024? I believe this happened to me years past, when I was immediately changed to a Medicaid program for the final month of the year, while doing what I thought was an estimate for the following year.
If so, and I’m doing an update to my 2024 income, in Dec, 2024, and it is also doubling as my income estimate for 2025, when it is meant only for 2024, when would I put in an a new estimate of income for 2025 or call it a “change in lifestyle” ?
And then possibly do the same thing in Dec, 2025, when I may or may not realize a lump extra income of $10-$20k ?
I wish it was less confusing. I’m trying to make a plan to get me to Medicare age.
-
When your income changes by a large amount between one year and another, call the marketplace customer service and tell them the two numbers. They can make sure to differentiate which income applies to which year.
-
-
Hi Harry,
Thanks for the informative and well-written discussion of repayment limits on PTC credits. It’s a subject that I have seen very little written about and none with the clarity you provide.Your articles have saved me a good deal of money. In my situation my final YE MAGI income for 2023 was about $30K more than I initially projected. The calculated overpayment of my subsidy will be about $6,000 but because of the cap my repayment will be limited to $3,000. Nice.
-
Hi Harry,
Is there a way I can determine what the cost of the SLCSP in my area is before receiving my 1095?
Could I review the ACA website for all (non-dental/vision) silver plans offered and just take the list price for whichever is the second lowest cost offered? That seems like an obvious answer, but I want to make sure that I am not missing something in the calculation.Thanks for all you do to keep this information updated. I find this and other columns you post extremely helpful and make my financial life so much easier. Awesome.
-
That works. KFF’s Health Insurance Marketplace Calculator also works when you set a high household income (say $500,000). The displayed “Your cost for a silver plan” is the cost of the SLCSP. Both get you close but it may not be to the exact dollar. The exact cost only comes in the 1095 form.
-
What happened to the “Family Glitch” that prevented dependents of employees with employee-only company coverage from accessing APTCs?
In this article
- What was the ACA’s ‘family glitch?’
- Biden administration rule change fixed the family glitch
- Who was affected by the ‘family glitch?’
- The ‘glitch’ and employer-sponsored plans
- How was the family glitch created?
- Previous (failed) legislative efforts to fix the ‘family glitch’
- How does fixing the ‘family glitch’ help families?
Most employers that offer health insurance tend to be quite generous when it comes to subsidizing the cost of their employees’ premiums. And although many also pay a large portion of the cost to add dependents to the plan, it’s not uncommon to see a plan that requires significant employee contributions to cover dependents. The IRS notes that 12% of workers pay more than $10,000/year in premiums for employer-sponsored family health coverage.
From 2014 through 2022, these families were generally ineligible for financial assistance if they wanted to purchase their own health coverage instead, through the exchange/marketplace. But that changed as of 2023. The IRS finalized a new regulation to replace a 2013 IRS regulation that created the “family glitch.” Under the new rules, some families became newly eligible for marketplace premium subsidies as of 2023.
What is the ACA’s ‘family glitch?’
The “family glitch” refers to the fact that from 2014 through 2022, when the affordability of an employer-sponsored health plan was determined, it was based on just the cost for the employee. The cost to add family members was not taken into consideration. But the affordability determination was then applied to all members of the family who could be added to the employer-sponsored health plan.
A person is only eligible for premium subsidies in the exchange if they are not eligible for affordable employer-sponsored health insurance. So if a family’s employer-sponsored coverage offer was considered “affordable” (based on the cost to cover just the employee) and provided minimum value, the entire family was ineligible for subsidies in the exchange.
It didn’t matter how much the employee would have had to pay to purchase family coverage. The family members were not eligible for exchange subsidies if the employee could get employer-sponsored coverage just for him or herself, for less than 9.61% of the household’s income in 2022 (this threshold is indexed annually; it’s 9.12% in 2023). As long as the employee’s portion of the premium is affordable, the cost for the family could have ended up being 25% — or more — of their household income and they still had no access to premium subsidies. They could either pay full price in the individual market, or pay whatever the employer required to cover the family on the employer’s plan, despite both options being financially unrealistic.
(In 2023, employer-sponsored coverage is deemed “affordable” if it costs less than 9.12% of household income. The Build Back Better Act called for the affordability threshold to be reset to 8.5% of household income, but that legislation stalled in the Senate after passing the House in November 2021. Although some parts of the Build Back Better Act were ultimately included in the Inflation Reduction Act that was enacted in August 2022, this provision was not among them.)
Employer Health Plan Affordability Calculator
Biden administration rule change fixes the family glitch
Soon after taking office, President Biden issued an executive order to protect and strengthen Medicaid and the ACA. It called for “policies or practices that may reduce the affordability of coverage or financial assistance for coverage, including for dependents,” which hinted that the Biden administration would be open to a regulatory approach to fixing the family glitch.
In the fall of 2021, the Office of Management and Budget (OMB) noted that the Treasury Department and IRS were proposing regulatory changes related to that executive order. As of March 2022, a proposed rule was under review by OMB, and the details of the proposed fix were published in early April.
The IRS finalized the rule change in October 2022, a few weeks before the start of the open enrollment period for 2023 individual/family health coverage.
The rule change is fairly simple and straightforward: Instead of basing the affordability determination for a family’s employer-sponsored health insurance on just the cost to cover the employee, the determination will now be made based on the cost to cover the employee plus family members, if applicable. Here are the important points to understand about this:
- The family glitch fix is in effect as of 2023. So when families applied for 2023 coverage during the open enrollment period in the fall of 2022, the new rules were used to determine whether anyone in the household qualified for a premium subsidy.
- If a family has to pay more than a certain percentage of household income (9.12% in 2023) for the employer-sponsored plan, they will potentially be eligible for premium tax credits in the marketplace. The same would also be true if the coverage offered to the family does not provide minimum value. So if an employer offers, for example, separate coverage to family members that is affordable but that doesn’t provide minimum value, the family members would potentially still be eligible for a subsidy to buy a marketplace plan.
- There is a separate affordability determination for the employee (based on self-only coverage), and for family members (based on the total cost of family coverage). So depending on how an employer subsidizes the cost of family coverage, it’s possible that coverage could be considered affordable for the employee but not for family members. In that case, the family members would potentially be eligible for a premium tax credit in the marketplace, but the employee would not.
- Nothing has changed about the ACA’s employer mandate. Large employers still have to provide affordable, minimum-value coverage to their full-time employees, and offer coverage to those employees’ dependents (offering coverage to spouses is optional). But there continue to be no affordability requirements as far as the coverage that’s offered to dependents. The employer mandate penalty is only triggered if an employee’s coverage is unaffordable and they receive a premium tax credit in the marketplace. There is no mechanism for triggering the penalty based on an employee’s family members receiving premium tax credits in the marketplace.
- If a family has some members on a marketplace plan and others covered under one or more employer-sponsored plans and/or Medicare, the family’s total premium costs could still be somewhat unaffordable. Premium tax credits currently ensure that households don’t have to spend more than 8.5% of household income to buy the benchmark plan, but that’s only applicable to the marketplace premiums. Premiums for other coverage are not factored in, as described here with regards to households with one spouse on Medicare and the other on a marketplace plan. This is discussed in more detail below.
- The cost to cover non-dependent family members is not taken into consideration. So for example, young adults can remain on a parent’s health plan until they turn 26, but are generally not considered a tax dependent for the last few years of that window. So if they enroll in the family plan, the cost to cover them is not counted when the affordability of the family plan is determined. (Young adults in this situation can already apply for premium subsidies in the marketplace based on their own income, and the fact that they have the option to be added to a parent’s employer-sponsored health insurance is not taken into consideration.)
- In the final rule change, the IRS notes that “new take-up of Exchange coverage may be modest relative to the size of the newly eligible population” even with the family glitch fix in place. This is due to a variety of factors, including the way subsidies are determined with respect to household income (described in more detail below), the multiple deductibles and out-of-pocket maximums that a family would have if they keep the employee on an employer-sponsored plan and enroll the rest of the family in a marketplace plan, and the fact that families might want to keep the benefits and provider network offered by the employer, instead of switching to individual market coverage.
- Historically, there have been roughly 5 million people affected by the family glitch. When the rule change was proposed, the White House published a statement indicating that they expected about 200,000 uninsured people to gain coverage as a result of the proposed family glitch fix. And they anticipated that “nearly 1 million Americans would see their coverage become more affordable” under the new rules. (As described below, fixing the family glitch does not result in subsidies for everyone who was caught by the family glitch; some will still find coverage to be unaffordable.) In the final rule, the IRS noted some wide variability in the projections for how this rule will impact enrollment: Somewhere between 600,000 and 2.3 million newly-eligible people are expected to enroll in coverage through the exchange/marketplace, and somewhere between 80,000 and 700,000 uninsured people are expected to gain coverage.
The family glitch relied on minuscule bits of text within the ACA rather than the broad scope and intent of the law. The overarching goal of Obamacare was to expand access to health insurance, and to make it affordable. Yet the 2013 rule (used for coverage effective from 2014 through 2022) on what constitutes “affordable” employer-sponsored coverage did nothing to make health insurance affordable or accessible for low- and moderate-income families whose employers didn’t subsidize a significant portion of dependents’ coverage. The Biden administration’s goal was to change that. The new IRS rule change highlights the fact that the goal of the ACA is to make coverage more accessible and affordable, and that the new rules are necessary in order to make that happen.
How was the family glitch created?
The “family glitch” was clarified by the IRS in a final rule published in early 2013, based on the language of the ACA. There are two main sections of the law that were involved: 36B deals with subsidies, and 5000A deals with the individual mandate and penalty.
In 36B, the law states that an employer plan is affordable as long as the employee’s required contribution doesn’t exceed 9.5% of income (that’s indexed annually; it’s 9.12% in 2023). And to clarify “required contribution” the statute refers us to the definition in 5000A, which states that it’s the amount that must be paid for self-only coverage.
When the IRS issued its rule in 2013, the agency noted that some commenters had suggested that the earlier proposed regulation be modified to define the employee’s contribution as the total amount the employee must pay for family coverage. But ultimately the rule was issued without changing the definition of the employee’s required contribution.
Health Affairs explains that this was not an accident or oversight — it was carefully considered and the final regulation was delayed while the Government Accountability Office and the IRS analyzed the impact of the decision. There were concerns that employers would increase the contributions required to enroll family members, which would push more people off employer plans and into the exchanges, driving up the total cost of subsidies. Ultimately, those concerns prevailed and the “family glitch” was born.
But even at the time, it was clear that there was a lot of ambiguity in terms of how affordability of employer-sponsored plan should be determined. In the proposed fix that was published in 2022 (see page 11), the IRS notes that a Joint Committee on Taxation report in 2010 initially indicated that affordability would be based on the cost for the type of coverage that was applicable to a particular employee (ie, self-only, family, etc.) but that the wording was later changed to indicate that the cost of self-only coverage would be used regardless of the employee’s circumstances.
And in the final rule that the IRS published in 2022, fixing the family glitch, they note that original (2010) projections on the cost of premium tax credits had been too high, based on what proved to be incorrect assumptions about “how the economy would change and how people and employers would respond to the law, and that, to a lesser extent, the differences were caused by judicial decisions, statutory changes, and administrative actions that followed the ACA’s enactment.” In other words, exchange enrollment and premium tax credit costs have been lower than expected.
The ‘glitch’ and employer-sponsored plans
Under the ACA, employers with 50 or more full-time equivalent employees are required to offer coverage to their employees and to their employees’ children, but not to spouses – although it’s still relatively rare for companies to exclude spouses. If an employer plan doesn’t cover spouses at all, the spouse was already eligible to get subsidies in the exchange based on income. There was no “glitch” for the spouse if the employer coverage simply wasn’t available to the spouse.
(But it should be noted that the spouse’s premium subsidy eligibility would still be based on the entire household’s income, which we’ll address in an example in a moment — the short story is that the spouse, applying for coverage on their own, might not end up being eligible for subsidies even with a fairly modest household income.)
If large employers don’t make the coverage affordable for the employee (self-only coverage) and the employee then obtains a subsidy in the exchange, the employer is subject to a penalty. So there is an incentive for employers to make sure that they are subsidizing a good chunk of the employee’s premium.
But while large employers are required to offer health coverage to employees’ children (and most also do so for spouses), there is no requirement that the employer pay for that coverage, because the cost of the dependents’ coverage is not factored into the “affordable” calculation. Many companies go above and beyond, subsidizing a large portion of dependents’ health insurance premiums (in 2022, the average employer paid about 73% of total family premiums). But not all of them do.
And in conjunction with the family glitch fix, the IRS has clarified that employers could allow employees to make a cafeteria plan coverage election change to remove family members from an employer-sponsored plan as of January 2023, so that they could take advantage of newly-available premium subsidies in the marketplace. But it’s important to note that although the final rule on the family glitch fix indicates that “employees will be permitted under the notice to revoke coverage in an employer plan associated with a cafeteria plan beginning in 2023,” Notice 2022-41 actually just permits employers to allow this, but does not require them to do so.
But if your employer adopted the provisions in IRS Notice 2022-41 and the employer’s plan doesn’t follow the calendar year (so you normally would not be able to make a change to your coverage on January 1), you had the option to switch your family members to a plan purchased in the exchange during open enrollment in the fall of 2022, and remove them from your employer’s plan when the exchange plan took effect in January 2023.
Who’s affected by the ‘family glitch?’
Somewhere between two million and six million people have historically been impacted by the family glitch (a recent KFF analysis estimated that it was 5.1 million). They were disproportionately lower-income, because lower-wage workers have to spend a larger percentage of their income to pay for health insurance if subsidies aren’t available, and because higher-income workers are more likely to work for companies that heavily subsidize coverage for dependents.
Fortunately for many of the families caught by the glitch, the Children’s Health Insurance Program (CHIP) provides coverage for children with household incomes well over 200% of poverty in most states. But the KFF analysis notes that more than half of the people caught by the family glitch were children under the age of 18 who were not eligible for Medicaid or CHIP. So while Medicaid and CHIP provide a good safety net for many families (leaving just the spouse without affordable coverage), that was certainly not the case for all families caught by the family glitch.
Have there been legislative efforts to fix the ‘family glitch?’
In 2014, then-Senator Al Franken introduced the Family Coverage Act, which would have adjusted the law so that the affordability test would be applied to the entire premium that a worker must pay for family coverage, not just employee-only coverage. The bill never progressed beyond committees though, and lawmakers seemed hesitant to fix the family glitch, given the additional burden it would place on the taxpayer-funded subsidy program.
Hillary Clinton proposed fixing the family glitch as part of her 2016 presidential campaign, but she lost the election and Congress remained under GOP control after the 2016 elections. Various pieces of legislation have been introduced in Congress in the last few years to fix the family glitch, but none of them have been enacted.
However, the Biden administration has fixed the family glitch via the rulemaking process, as described above. The downside to this approach is that it could be undone by a future administration via another round of rulemaking, without input from Congress.
How does fixing the ‘family glitch’ help families?
Although the new IRS rules have helped to make coverage more affordable for some families, they don’t help everyone. It’s important to understand that the rule change has resulted in some employees’ family members becoming newly eligible for premium subsidies, but not the employees themselves.
That would mean the family has two different plans: The employer-sponsored coverage for the employee, and exchange/marketplace coverage for the rest of the family (alternatively, the employee could decline the employer’s plan and join the family on the marketplace plan, but without a subsidy).
Since the family glitch fix only makes the spouse and dependents eligible for subsidies, some families won’t see much in the way of relief, because of the way premium subsidies are calculated. As described above, the rule change finalized by the IRS calls for a multi-step approach: Affordability determinations will continue to be made for employee-only coverage, and also for family coverage. If the employee’s coverage is considered affordable, the employee will not be eligible for subsidies in the marketplace, even if the rest of their family is.
This leaves some families with difficult decisions in terms of their coverage options. For example, consider a household in Chicago with two 40-year-old parents and two young children (we’ll use 2022 premium amounts, since they’re available, even though the glitch fix doesn’t take effect until 2023). Let’s say they earn $85,000, so about 306% of the federal poverty level (FPL) for 2023 health coverage (the 2022 FPL numbers are used to determine 2023 subsidy amounts). The kids are CHIP-eligible in Illinois, and we’ll assume that one parent has access to affordable coverage from an employer. But we’ll assume that the family has to pay the full cost of adding the other parent to the employer’s plan, and that it’s not affordable for them to do that.
With the rules changed to allow that spouse to have access to premium subsidies due to the employer-sponsored plan being unaffordable for the spouse (which is what the new IRS regulations allow), they still don’t qualify for a premium subsidy in the exchange, even with the American Rescue Plan’s premium subsidy enhancements. That’s because their expected contribution amount for the benchmark plan is roughly $5,228 (that’s 6.15% of their $85,000 household income). And the benchmark premium, in this case, is only about $4,532 in annual premiums, which is 5.3% of their household income. So the spouse can buy a plan in the exchange, but they aren’t going to get any subsidies.
This would also be the case if the employer just didn’t offer coverage to spouses at all, which has often been proposed as a potential solution to the family glitch. It’s widely assumed that if the spouse isn’t eligible to participate in the employer’s plan and the family’s household income is in the subsidy-eligible range, the spouse would automatically be eligible for subsidies in the exchange. But oftentimes, that’s not going to be the case.
That’s because the exchange is going to be looking at the premium for just the spouse on their own, and comparing it with the applicable percentage of the whole household’s income. Depending on where they live and how old they are, they may not be eligible for a subsidy at all, even if the family’s income is modest. This is similar to what happens when one spouse moves onto Medicare and the other remains on a marketplace plan (which could be called the “Medicare glitch”).
This is in contrast to a situation in which the spouse was a single individual, age 40, earning 306% of the poverty level for a single person — about $41,585 when we’re considering 2023 coverage — and thus eligible for a subsidy of about $164/month. This is most likely what people are picturing when they assume that the spouse would be eligible for a subsidy in this case, but we have to keep in mind that the subsidy is going to be calculated based on the household’s income.
But on the other hand, consider the same scenario but the parents are both 60. Because the spouse’s individual market plan is much more expensive (since they’re 60 instead of 40), the spouse would get a subsidy of about $365/month in 2023 (this is larger than it used to be, due to the American Rescue Plan’s subsidy increases, which will continue to be in effect through at least 2025). This is because the full-price premium for the spouse, on their own, would be well over 6.15% of the household’s income.
And the impact of the family glitch fix will also vary from state to state, since the cost of health coverage varies by area. A recent multi-state analysis by Third Way found that in most states, total premium savings would be significant for a household earning 200% of the poverty level, and much less significant at 300% of the poverty level. And at 400% of the poverty level, none of the scenarios they examined would result in an overall premium savings under the proposed fix.
Clearly, there is no one-size-fits-all solution. As with other aspects of health care reform, it’s complicated.
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.
GMShedd says
As usual, Harry, you’ve done an excellent job of analyzing a complicated set of rules, and then presenting them in such a way that others can benefit from your digging. I’ll add a couple of points of interest for others who buy ACA insurance, and who are in the income levels where the benefits become most variable. In the earliest years of the exchanges, the Silver plans were by far the best bang for the buck for those who had incomes that qualified for CSR’s, but in 2017 the Trump administration discontinued the payments to insurers as reimbursement for the lower deductibles and OOP maximums (without changing the law that required the insurers to provide them), so the premiums for the Silver plans have shot up as a result (higher than Gold and Platinum in some cases), because the effective ratio of premiums to paid-out benefits for Silver plans was no longer simply 70% for everyone as intended, but more like 95% for those getting the largest CSR, and probably <70% for those who aren’t. People who don’t qualify for CSR’s are probably better off buying a non-Silver plan, where it’s easier for the insurers to calculate the deductibles and OOP maximum that will yield a 60% (Bronze) or 80% (Gold) payout ratio. One other potential bonus of buying an ACA plan is that when insurers make too much profit (less than 80% of revenue actually spent on healthcare), they are required to rebate the excess to customers–even if most of the premium was covered by a PTC and not by the policyholder.
Brian says
A very good and interesting article; you highlighted many cautionary areas that people need to be aware of.
Our experience with the ACA: We were on the ACA from 2014-2018 and usually chose the lowest cost silver plan each year. Each year we carefully estimated our annual income and received the premium tax credit up front, always being careful not to go below the minimum income threshold. (We never had to submit any documentation to prove our income. I don’t recall our ACA insurance companies offering credit card rewards when paying the full premium up front.)
Our income estimates were usually quite accurate. However, in 2017 we exceeded our income estimate due to unexpected income towards the end of the year; but due to the repayment cap only had to pay back $1,500 of the excess APTC we had received. (Note that even though a portion of the APTC may have to be repaid, the CSR subsidies received do not have to be repaid. That’s a feature of the ACA that needs to be considered when applying.)
After we learned the ACA process, we found that by strategically pulling money from different financial “buckets,” we could (usually) hit whatever MAGI we were targeting. In 4 of those 5 years we were able to push our MAGI below 250% of the FPL to get a very good APTC and to qualify for the other CSRs that you mentioned.
A major hiccup occurred however, when in 2016 the ACA co-op insurance company we had signed up with went bankrupt. (https://www.google.com/amp/s/www.bizjournals.com/columbus/news/2016/05/26/ohio-shuts-down-states-obamacare-nonprofit-co-op.amp.html) So, mid-year we had to signup with another ACA insurance company, and in the process lost all out-of-pocket expenses we had made with that bankrupted insurance company.
All things considered, the ACA worked very well for us, and came at a time when we had retired early and needed affordable coverage to bridge us to our Medicare years (which we’re on now).
Again, an excellent article that all should take note of. Thanks!
Paul says
Harry, do repayment caps also apply to an individual who fails to report a life change in the middle of the year. An example would be becoming eligible for group health insurance at work in the middle of the year.