Marketplace health subsidies

In short

A friend of mine once skipped the Marketplace because she figured her pay was too high to qualify for help. She was wrong, and it cost her a year of coverage she could have had for much less. If you buy your own health plan, there is a tax credit that can lower your monthly bill, and it is worth a few minutes of your time. The credit is called the premium tax credit, and the Marketplace works it out from your expected income for the year. You have probably been guessing at your income, so write down a careful number before you shop. Use that number on your application, and update it if your pay changes. When tax season comes, the IRS compares your guess to what really happened. That is when you either keep the credit or pay some of it back.

The whole of it

What it is

If you are holding a plan from the Health Insurance Marketplace, or thinking about one, you should know what help is out there. The Marketplace is the place where people without job coverage buy private health plans. The main help comes in two forms. The first is the premium tax credit, which lowers what you pay each month for your plan. The second is cost sharing reductions, which lower what you pay when you actually see a doctor. These come through deductibles, copays, and a cap on your yearly out of pocket costs.

I once watched a neighbor sign up for a plan and pay the full sticker price, never knowing a credit was waiting. Plenty of good people do the same. The credit is not charity. It is a benefit set by law, and you are entitled to it if you qualify.

Here is the plain part. The credit is meant to hold down what you spend on a plan, based on how much you earn. If your income is lower, the help is bigger. If your income is higher, the help is smaller, and at some point it may phase out. The rules for that line change over time, so the exact cutoffs are not something to memorize from an old article.

How it works

You have probably heard people say the Marketplace is confusing. It does have moving parts, but the flow is simple once you see it. You apply and give your household size and your expected income for the year. The Marketplace checks that against the rules and tells you how much credit you can get.

The credit is built around a benchmark plan. That is the second lowest cost Silver plan in your area. The Marketplace figures out how much you are expected to pay toward that benchmark, based on your income. The credit covers the rest. Then you can pick any plan you like, and the credit applies to it.

You can take the credit two ways. You can have it paid straight to your insurer each month, which lowers your bill right away. Or you can pay full price and claim the whole credit when you file your taxes. Many people like the first way because it helps their monthly budget. Either way, you settle up on your tax return using IRS Form 8962, the form for the premium tax credit.

That settling up matters. Your credit was based on a guess about your income. At tax time, the IRS looks at your real income. If you earned more than you guessed, you may owe some credit back. If you earned less, you may get extra money back. Short story: guess carefully.

There is one more catch worth knowing. If you can get an affordable plan through your job, you may not qualify for the credit. Health coverage through work changes the picture. The Marketplace will ask you about it, so have that information handy.

The numbers, and where to find yours

I know a woman who kept every receipt in a shoebox, and she still got her income wrong because she forgot one side job. So let me tell you where to look. The figure that counts is called modified adjusted gross income, or MAGI. That is your adjusted gross income plus a few items added back, like untaxed foreign income and tax exempt interest. You can find your adjusted gross income on your tax return, on Form 1040.

For the credit, the Marketplace wants your expected MAGI for the coming year, plus the size of your household. Household means you, your spouse if you are married, and anyone you claim as a dependent. It is not just who lives under your roof.

Now for the limits that the law sets each year. The income range that qualifies you for help is the current figure, which the official source publishes each year. The share of your income you are expected to pay toward the benchmark plan is the current figure, which the official source publishes each year. The cap on how much credit you might have to repay if you guessed too low is the current figure, which the official source publishes each year. These can shift from year to year, so check the figures and the dates that the site shows next to them.

For the official word, go to HealthCare.gov and to the IRS page on the premium tax credit. Both are run by the government, and both will have the current rules.

A worked example

Let me tell you about a man named Daniel. He lives alone in a small town, works as a freelance carpenter, and buys his own health plan. He is the kind of fellow who shakes your hand like he means it. Daniel figures he will earn about 31,000 dollars this year, so he enters that on his application as his expected income.

The Marketplace uses that number to set his expected contribution toward the benchmark plan. For the sake of this story, say the benchmark Silver plan in his area costs 480 dollars a month. Say the Marketplace decides Daniel should pay about 150 dollars a month toward it, based on his income. The credit would then be the difference. We take 480 dollars and subtract 150 dollars. That leaves 330 dollars a month in credit.

Daniel picks a plan that costs 420 dollars a month. His credit is 330 dollars. So he pays 420 minus 330, which is 90 dollars a month out of his own pocket. Over twelve months, that is 90 times 12, or 1,080 dollars for the year. These figures are made up to show the math, not to promise what you will get.

Now the year ends. Daniel took on a few extra jobs, and his real income came out to 38,000 dollars. That is higher than his guess by 7,000 dollars. On his tax return, he files Form 8962. The IRS sees the real income and recalculates his credit. Because he earned more, his true credit is smaller than the 330 dollars a month he got. He may owe part of the difference back, though a repayment cap could limit how much.

Daniel was not careless. He just did not expect the extra work. Had he told the Marketplace when his income rose, his monthly credit would have shrunk a little at a time. That would have spared him a bigger surprise in April. Update early.

Where it goes wrong

You have probably heard a story about someone who got a bill at tax time that took the wind out of them. It happens, and it is almost always about income. The first trouble spot is guessing too low. If you earn more than you reported and you do not repay, you owe it later. The second is a change in your life that you never told the Marketplace about. A raise, a new job, a marriage, or a new baby can all change your credit. Report them.

Another snag is getting job coverage offered and not mentioning it. If your employer offers affordable coverage, you might not qualify, and the Marketplace needs to know. A related trap is dropping coverage in the middle of the year without telling anyone. Credits can keep flowing when they should have stopped.

Some folks also forget to file Form 8962. If you took the credit in advance, the IRS expects that form with your return. Skipping it can hold up your refund and put your tax filing in doubt. The IRS instructions for Form 8962 spell out what follows, so read them before you file. Do not skip it.

Last, there is the plan itself. A low monthly bill can hide a high deductible. The deductible is what you pay before the plan starts sharing costs. A cheap premium is no bargain if you cannot afford the first doctor visit. Look at both numbers before you sign.

Questions to answer before you leave this page

Have you written down a careful guess of your income for the year, and did you count every side job and bit of extra pay? Do you know who counts as part of your household, including anyone you claim as a dependent? Have you checked whether your employer offers coverage that might change whether you qualify? Will you take the credit each month or wait and claim it at tax time, and which one fits your budget better? Do you know the monthly premium and the deductible for the plan you are eyeing, not just the price after the credit? Have you looked at the current figures on HealthCare.gov and the IRS premium tax credit page, along with their dates? And if your income changes partway through the year, do you know how to report it so the credit stays right?