Judging income, and tax credits, can get messy
One year into Obamacare, many Californians are still confused about how their income will affect their coverage costs. As Emily Bazar recently reported, some consumers have had their plans canceled after reporting income changes to Covered California.
Why? Because individuals or families who make between 138 and 400 percent of the Federal Poverty Level (FPL) qualify for federal income tax credits through Covered California, the state’s health insurance exchange. This year, 400 percent of the FPL is $46,680 for an individual and $95,400 for a family of four.
When you enroll in a Covered California plan, you have to estimate your income for the coming year. That’s what tax credits are based on. But what if you can’t be certain what that amount will be, or your income changes midway through the year?
Here are some examples from Ask Emily readers. Their income-related concerns run the gamut.
Dianne Durica of Orangevale, near Sacramento, owns a small business, which causes her income to vary from year to year.
To qualify for ACA for 2014 we used our 1040 from 2013. It looks like our income will be higher for 2014. How will this work? Will they “back charge” me for 2014?
If you make less than your projected income for the year, you may be entitled to more tax credits, and therefore a refund on your taxes. However, it goes both ways: If you make more than your estimate, you could be required to pay back some, or all, of the tax credits you received during the year.
Norm Perreault of the Bay Area purchased health coverage while unemployed, and qualified for tax credits based on his income level with that in mind.
Now I’m employed and earning a nice paycheck — and I’m concerned that it’s too nice. Even with just three months of employment, I’m concerned that my 2014 income will now increase to >400% of poverty. Will I be expected to pay back 9 months of tax credits because I finally landed a nice job with a great salary?
There is a cap on the amount you would have to pay if, at the end of the year, you make more than the income you project. But it depends on your income. For example, if a family’s annual income ends up at 200 percent of the federal poverty level or less, repayment is capped at $600.
Those who make 400 percent or above, however, are required to pay back the full amount. Norm may be one of them.
What about people who have a Covered California plan, but see their income drop so much that they qualify for Medi-Cal midway through the year? Those who make under 138 percent of the FPL are generally eligible for Medi-Cal, California’s version of the federal Medicaid program, rather than a subsidized Covered California plan. If a person’s income is close to the 138 percent threshold, it could be very easy to swing between one and the other throughout the year.
Tom Freker, a Fountain Valley insurance agent, said one of his clients was placed on Medi-Cal this year after leaving her job:
Between the job and unemployment she will gross about 30k for the year. Because her income has ended, she was placed on Medi-Cal instead of a plan. I questioned the scenario with Covered California but was assured that was the correct action. I’m really nervous because she will still report 30K for the year and I’m worried that they will ask for some sort of repayment. I understand the logic, she has zero income right now. But I’m very concerned about the post year analysis and the potential for a problem.
Freker, who has enrolled over a hundred clients in Covered California plans this year, says this situation has occurred several times.
For those who may be hoping to avoid repayment, remember, the IRS will reconcile your projected income with your actual income at tax time.
Be prepared for things to get messy.