Health Care Reform, Premium Tax Credit & Advance PTC, Taxes, Fees & Penalties

What if an Employee gets a Tax Credit but Shouldn’t have been Eligible for It?

What if an individual receives a premium tax credit to buy health insurance in the Exchange, but it turns out the individual actually wasn’t eligible for the premium tax credit, or was only eligible for a smaller amount than the employee received? The answer under the Affordable Care Act (ACA) is that the individual must repay the tax credit amount, but there are limits on how much such individuals must repay.  Many people may be surprised to learn just how little some individuals will have to repay if they received tax credits for which they were not really eligible.  This article explains what those limits are.

Background

The ACA provides premium tax credits for individuals who purchase health insurance in an Exchange and whose household incomes are between 100% and 400% of the federal poverty line (FPL).  Individuals are eligible for this tax credit only if they do not have employer-provided coverage available that is both affordable and provides minimum value. Additionally, employees who enroll in employer-provided coverage will not be eligible for tax credits even if the coverage does not meet these requirements. It matters to applicable large employers whether or not their full-time employees receive tax credits to buy insurance in the Exchange because if a large employer does not offer affordable coverage that provides minimum value to an adequate percentage of its full-time employees, it will be liable for a penalty under Code section 4980H if any full-time employee buys coverage in an Exchange and qualifies for a subsidy.

What are the Caps on Subsidy Repayments?

As noted above, the ACA places limits on the amount certain individuals will have to repay if they received premium tax credits for which they were ineligible.  The cap increases as household income increases.  (Household income is the amount reported as “modified adjusted gross income” or MAGI on the individual’s federal income tax return for that year.)  Households with incomes at or below 200% of the FPL will not be required to repay more than $300 if they received tax credits for individual coverage and $600 if they received tax credits for family coverage. These are annual amounts, even though the actual tax credits received could easily amount to $400-$500 per month for individual coverage and $1000 or more per month for family coverage. Taxpayers with household incomes at or above 400% of the FPL must repay the entire amount of any excess tax credit received. A household income of 400% of the FPL (for 2014) is $46,680 for an individual, $62,920 for a couple, and $95,400 for a family of four.

The chart below shows the limits on repayment of excess premium tax credits.

Income Level Shown on Annual Tax Return Maximum Amount  of Repayment
Individual Family
Less than 200% of FPL $300 $600
At least 200% but less than 300% of FPL $750 $1,500
At least 300% but less than 400% of FPL $1,250 $2,500
400% of FPL or greater Entire amount of  overpayment

Source:  Federal Register, “Internal Revenue Service; Health Insurance Premium tax Credit; Final Regulations.” May 23, 2012.

Why Does This Matter to Employers?

Some employers were surprised earlier this year (after the close of the first Exchange open enrollment period) when some full-time employees asked to drop employer-provided coverage because they obtained premium tax credits to buy health insurance in the Exchanges, at a lower cost than the employer-sponsored coverage that was offered to them—even though that employer coverage was affordable and provided minimum value.  Employers were concerned that—if this happened again in 2015—they would be required to pay penalties even though they had offered affordable minimum value coverage.  (The “employer mandate” provisions become effective in 2015 for large employers with at least 100 full-time employees or full-time equivalents.)

This should not be the case in 2015, given the information reporting requirements that will apply as of January 1, 2015. (These are under Code section 6056.)  In fact, the outcome should be that employees who received premium tax credits for which they were not eligible must repay those amounts, up to the limits shown in the chart above.

The cap on tax credit repayment amounts applies not only to individuals who were not eligible to receive any amount of premium tax credit, but also to individuals who were eligible to receive some amount of premium tax credit but who received more tax credits than they were eligible for.  This could occur, for example, if the individual’s household income for the year was higher than initially projected.

Next Steps for Employers

Employers are not required to advise their employees on subsidy repayment rules or limits on repayment amounts, but many employers will likely find it helpful to educate their employees about these rules.

PDF of this article: 11-24-14 Cap on Subsidy Repayment