Another case (see below)* addresses a couple receiving an advance Premium Tax Credit (PTC) of a large amount and having to pay it all back. They also note that if they had known they would have to pay it back, they would not have taken the insurance. The cost of the insurance for this California couple was 20% of pre-tax household income. That’s a lot!
For context, if this couple lives in San Jose, rent for a one-bedroom apartment starts at $2,000/month or 33% of the couple’s pre-tax income!
The case is a reminder of flaws with the Premium Tax Credit, such as:
- Individuals only get it if they buy insurance on the exchange AND their household income does not exceed 400% of the federal poverty line. For 2016, this is $47,080 for a single person and $63,720 for a family of two.
- The PTC is based on the cost of the second lowest cost silver plan. So, one’s age and location are factored in. Insurance costs more as you age. But, despite this fact, the eligibility for the credit is still tied to 400% of the federal poverty line. Since people don’t automatically make more money as they age, it makes it less likely that older individuals will be able to obtain affordable insurance (until they are old enough for Medicare).
Despite flaws, the PTC has at least one good point – it offers a tax savings. It’s not as good as what about 60% of employees get who work for an employer who subsidizes their health coverage. If your employer pays part or all of your health insurance, it is tax-free income. AND there is no limit on this tax benefit regardless of how much your income exceeds 400% of the federal poverty line. So while the PTC is not as good of a benefit, it is at least of some help for individuals without the employer provided tax-free subsidy.
One proposal for some relief is S. 1529 (115th Cong.), Addressing Affordability for More Americans Act of 2017. This bill would increase eligibility for the PTC to individuals with household income of 800% or less of the federal poverty line (rather than 400%). The change is proposed starting for 2018. It still isn’t as good as the tax-free employer provided subsidy though.
What do you think?
*Here is a summary of the recent case: (see my 7/20/17 post for another case on this topic)
McGuire, 149 TC No. 9 (8/28/17) – The McGuires received an advance Premium Tax Credit (APTC) in 2014 of $591 per month ($7,092 for the year). The monthly premium on their Silver plan was $1,182. This was arranged through Covered California in 2013. Still in 2013, Mrs. M started working and “promptly notified Covered California.” This was a significant change because it caused the couple’s household income to exceed 400% of the federal poverty line (FPL) for 2014 making them ineligible for the PTC. It was not until mid-June 2014 that Covered California (CC) acknowledged their reported change in household income. This letter also stated:
“The Covered California website shows how much your premium assistance lowers your premium. Your premium assistance is based on our records and the income you put on your application that you expect this year. If you take the full premium assistance to pay the premium, and your income is higher, you may have to pay some back at tax time.”
The court noted that it was not clear whether the couple could have changed to a plan with a lower premium. The court also notes that it would not have mattered what was in the letter because the couple never received the letter. Per the court, the couple made several attempts to alert CC about the change in their income, but to no avail. CC also did not react to the couple’s request to change their address. The McGuires also never received Form 1095-A from CC.
On their 2014 Form 1040, the couple checked the box on line 61 to indicate they had coverage for every month of the year. They did not include Form 8962 on the PTC or indicate receiving an APTC of $7,092. The IRS received the Form 1095-A and issued a notice of deficiency.
The court agreed with the IRS. Because the McGuire’s household income exceeded 400% of the FPL, they are not entitled to a PTC and must pay back the APTC. The couple noted that they would not have taken the coverage if they had known they had to cover the entire cost. While the court was sympathetic, it noted that there was nothing it could do. We “are not a court of equity, and we cannot ignore the law to achieve an equitable end.”
The court did waive the negligence penalty and found reasonable cause to waive the substantial understatement of tax penalty. The McGuires did not receive the Form 1095-A and did not receive the APTC directly so were not completely aware of the additional benefit or amount. Also, they attempted a few times to get CC to correct the APTC. In addition, the couple relied on a CPA to prepare their return.
Questions? Contact Annette!