Reviewing New Healthcare Options for 2021 and 2022
The American Rescue Plan Act of 2021 (ARPA), Pub L. No. 117-2, significantly enhanced the availability of the Affordable Care Act’s (ACA) premium tax credit (PTC) to make healthcare acquired on the ACA’s Health Insurance Marketplace more affordable for 2020, 2021, and 2022. These changes could mean significant savings to taxpayers purchasing healthcare coverage on the Marketplace. Because many farmers and ranchers are self-employed or owners of small partnerships or corporations for which insurance plans may be costly, they may benefit from purchasing insurance on the Marketplace.
The ACA created the refundable PTC for those taxpayers purchasing insurance on the ACA Marketplace with household income between 100 percent and 400 percent of the federal poverty level. [www.healthcare.gov]. To qualify for Marketplace coverage, the taxpayer may not be eligible for affordable employer-sponsored health plans or other qualifying coverage.
Definition of the Premium Tax Credit
The PTC, which is often paid in advance through an “advance premium tax credit” (APTC), is generally equal to the premium for the “second lowest cost silver plan” (SLCSP) available through the Marketplace that applies to the members of a coverage family, minus the “applicable percentage” of household income.
Sam is single and earns $28,000/year. He is otherwise eligible for the PTC (eligibility rules are discussed below). Assuming that Sam’s applicable percentage is 8.33% and the premium for the second lowest cost silver plan is $650/month, his yearly PTC would equal $5,468 [($7,800 SLCSP minus his applicable percentage of household income (.0833 x $28,000=$2,332)]. This means that Sam would pay $2,332 for his Marketplace coverage, and an APTC would fund the balance.
Eligibility for PTC
Taxpayers are eligible for a PTC for months during which
- a member of their family is enrolled in a qualified plan offered through the Marketplace and
- they are not otherwise eligible for affordable “minimum essential coverage” through an employer or other source.
To be eligible for the PTC for a particular tax year, the premium must be paid by the due date of the return, not including extensions.
Other Affordable Coverage
If “affordable” employer coverage is offered to the taxpayer, the taxpayer is not eligible for a PTC. Affordability in 2021 is determined based upon whether an employer plan meeting the “minimum value” standard would cost the employee 9.83% or less of the household income. If so, the offer is for affordable coverage, and the employee is not eligible for a PTC, even if coverage is refused. Employees who accept the coverage are not eligible for the PTC, even if the employer coverage is unaffordable. Affordability is determined on a monthly basis.
Often called, the “family glitch,” affordability is determined based upon the cost of self-only coverage. In other words, even if the cost of the family policy is unaffordable, the members of the household are ineligible for a PTC if the cost of the self-only coverage for the employee is affordable and the employer “offered” a family option.
Ron and Riley have two children and farm in rural Nebraska. Ron works full-time on the farm, but Riley is a school teacher. Ron and Riley’s household monthly income is $7,000. Riley’s school district offers health care coverage for the employee and the family.
Self-only coverage through the school district would cost Jena $600 per month, but family coverage would cost $1,950 per month. Riley’s cost for the self-only coverage is 8.6% of the household’s monthly income. As such, she has been offered “affordable” coverage. Even though the cost of the family policy is 27.9% of the household income, the family may not receive a PTC to purchase coverage on the Marketplace for the other family members. The law considers only the cost of the self-only coverage in making the affordability calculation for the family.
Note: A plan meets the “minimum value” standard when it pays on average at least 60% of the actuarial value of allowed benefits under the plan. “Minimum Essential Coverage” includes all employer-provided coverage, government-provided health plans, and individual coverage purchased on the Marketplace. It also includes ACA-compliant plans purchased through the individual market, including grandfathered plans. Minimum essential coverage does not include health sharing ministry plans or limited benefit plans, such as those offering only dental, vision, or critical illness benefits.
Calculation of the PTC is dependent upon household income. Household income is “Modified Adjusted Gross Income” (MAGI), defined as “adjusted gross income” (line 11 on the Form 1040) minus untaxed foreign income, non-taxable social security benefits, and tax-exempt interest. It does not include SSI, but it does include SSDI. Taxpayers must consider their MAGI, and the MAGI of all dependents required to file a federal income tax return because their income meets the filing threshold. Household income does not include the MAGI of non-dependents in the household.
Federal Poverty Level
The PTC is generally available for those with household income between 100 and 400 percent of the federal poverty level (FPL). In states that have implemented Medicaid expansion, individuals with household income below 133%/138% of the FPL qualify for Medicaid and are not eligible for the PTC. In the 12 states that have not implemented Medicaid expansion, some individuals fall into the Medicaid “coverage gap,” meaning that their income is too low for the PTC, but they are not eligible for Medicaid. In these states, adults without children are not eligible for Medicaid, regardless of their income. In 2021, the FPL for the 48 contiguous states, including calculations for 100% - 400% of the FPL, is shown in this chart:
Second Lowest Cost Silver Premium
The SLCSP is the premium for the second lowest cost silver-level plan that covers all the members of the coverage family. At the time of enrollment, the Marketplace determines the SLCSP and calculates a PTC that enrollees can use in advance to lower monthly premiums (APTC). Individuals can look up the SLCSP based upon their demographics on healthcare.gov. [https://www.healthcare.gov/tax-tool/#/premium-tax-credit].
The “applicable percentage” of household income is the percentage of income that a taxpayer is expected to contribute toward healthcare premiums each year. The following chart shows the applicable percentage table that was in effect for 2021 before ARPA.
Within an income tier, the actual percentage is determined based upon a sliding scale, starting with the initial premium percentage and ending with the final premium percentage. This means that individuals with MAGI between 300% and 400% of the FPL had an applicable percentage of 9.83% and were required to contribute 9.83% of their income toward their premium.
Once household income is multiplied by the applicable percentage, the PTC comprises the balance of the SLCSP. If the taxpayer chooses a higher-priced plan, the PTC is not increased. The additional premium is funded by the taxpayer. The PTC can be claimed when a taxpayer files a return, or it can be paid, as an advance premium tax credit (APTC), to fund the coverage on behalf of the taxpayer throughout the year. Those with income at 400% or more of the FPL were not eligible for a PTC before ARPA.
Ben and Barb are 60 years old and married. Their MAGI is projected to be $70,000/year. Their SLCSP is $3,324.96. In other words, they would have to pay $39,899.52 a year to purchase the insurance. Ben and Barb's MAGI is just above 400% of the FPL. As such, they were not eligible for a PTC before APRA changed the law for 2021.
ARPA Expansion of the Premium Tax Credit for 2021 and 2022
For 2021 and 2022 only, ARPA removed the 400% FPL ceiling and allows many more taxpayers, regardless of income, to qualify for a PTC.
For tax years beginning in 2021 and 2022, the applicable percentages of household income have been lowered for all income levels, and taxpayers with income of 400% of the FPL or higher are eligible for the PTC (if they otherwise qualify). As shown in the following chart, the applicable percentage for all taxpayers with income at or above 400% of the FPL is 8.5 percent, regardless of income. This means that any taxpayers may qualify for the PTC in 2021 or 2022 if the SLCSP is more than 8.5% of their household income.
Note: Because taxpayers are eligible for the PTC only for months in which they are enrolled in Marketplace coverage, those signing up for Marketplace coverage in mid-2021 will not receive credit for the entire year. In 2022, however, continuing enrollees will be eligible for the PTC all year (if their circumstances do not change).
Bena and Barb from the last example benefit significantly from the ARPA change:
- MAGI - $70,000/year
- $3,324.96 – monthly cost of second lowest cost premium on the Marketplace
With 8.5% of Ben and Barb's monthly MAGI at $496, and the monthly cost of the SLCSP at $3,325, Ben and Barb are eligible for a monthly PTC of $2,829. This would be a yearly benefit of $33,948 if they had coverage all year. Ben and Barb's out-of-pocket cost for this coverage would be $5,950 a year.
Many More Eligible for PTC through 2022
Prior to ARPA, taxpayers with income at 400% or more of the FPL were subject to a “subsidy cliff,” meaning that they were required to pay the full premium for any Marketplace coverage they received. One dollar of extra income meant thousands of dollars of additional premiums. The ARPA removes this cliff for 2021 and 2022, restricting the required premium for these taxpayers to 8.5 percent of household income.
Automatic Application of Enhanced Premium Tax Credits
Taxpayers who were already receiving insurance on the Marketplace when ARPA was passed were receiving APTCs and paying premiums under the applicable percentage table in effect at the beginning of 2021. Because ARPA significantly change these percentages, the Center for Medicare and Medicaid Services (CMS) announced in July of 2021 that they would automatically adjust APTCs based upon the new percentages in September of 2021. Impacted taxpayers will see their required contributions decrease or disappear in response to the change. When filing the 2021 return, these taxpayers may receive additional amounts through the PTC to compensate for the higher premiums they paid earlier in the year.
Special Rule for Those Receiving Unemployment Compensation
ARPA also provides that taxpayers who received unemployment compensation for any week beginning during 2021 are automatically eligible for the PTC. ARPA allows these taxpayers to calculate the PTC as though household income does not exceed 133% of the FPL.
This 2021 change means that Marketplace-eligible taxpayers receiving unemployment benefits at any time in 2021 will have a full premium subsidy if they choose to enroll in the second-lowest priced silver plan. Other rules continue to apply, however, with respect to eligibility, meaning that taxpayers for whom affordable employer-based health insurance is available are excluded from eligibility for a PTC. ARPA did not fix the “family glitch,” referenced above.
Reconciling of the Advance Premium Tax Credit
As explained above, the PTC may be paid, in advance, directly to the Marketplace insurer, to reduce the out-of-pocket cost the insured must pay for healthcare. The amount of the APTC is based upon the taxpayer’s household income estimate at the time they sign up for coverage. At the end of the tax year, the taxpayer for whom the APTC was paid must reconcile the APTC with the PTC calculated using actual household income.
If the APTC exceeds the PTC, the taxpayer must generally repay the difference, as an additional tax. While the repayment is generally limited for those with income below 400% of the FPL, taxpayers with income at or above 400% of the FPL must repay the entire APTC. This “subsidy cliff” has caused many taxpayers with small amounts of additional income to face large unexpected tax bills. Courts have ruled that the IRS has no discretion to waive this repayment, regardless of circumstance.
Note: Taxpayers reconcile their APTC on Form 8962, using information reported to them by the Marketplace on Form 1095-A. Special allocation rules apply for households where family members file multiple returns or for those getting married during the year.
Assume that Ben and Barb from the last example expected to earn $67,000/year in 2020 when they purchased insurance on the Marketplace. Based upon estimated household income, they received an APTC in the amount of $33,313 in 2020. They were required to pay 9.83% of their household income or $6,586 in premiums out of their own pocket.
In 2020, Ben and Barb maintained their usual income, but sold depreciated equipment to help one of their grown children with an unexpected medical bill. They recognized income of $20,000 on the sale, pushing their 2020 income to $87,000. Because Ben and Barb's actual 2020 income exceeded 400% of the FPL, they were ineligible for the APTC they received.
Before ARPA, Ben and Barb would have been responsible to repay $33,313 as an additional tax.
No Repayment of Excess APTC for Tax Year 2020 Only
ARPA suspended the requirement to repay excess APTC for tax year 2020. If a taxpayer’s APTC exceeded the actual PTC, no additional tax was imposed, regardless of household income. Taxpayers who received too much APTC were not required to report the excess APTC or even file the Form 8962. For taxpayers who had already filed and paid the tax, IRS automatically reduced the excess APTC and issued a refund. IRS instructed taxpayers not to amend their returns.
Taxpayers who were eligible for an additional PTC not paid through the APTC continued to file the Form 8962 in 2020 to claim the credit.
Reconciliation Required in 2021, But “Subsidy Cliff” if Gone
ARPA’s suspension of the repayment of the excess APTC applied to tax year 2020 only. This means that taxpayers must again repay excess APTC in 2021 after reconciling the payment using Form 8962. By allowing all persons, regardless of income, to qualify for a PTC for premium amounts in excess of 8.5%, however, ARPA removed the “subsidy cliff” for 2021 and 2022. This means repayment amounts triggered by reconciliation will generally be less.
Let’s apply the ARPA rules to the facts from the last example, changing the year to 2022. Ben and Barb purchase insurance on the Marketplace. Their income and SLCSP remain the same.
- MAGI - $70,000/year
- $3,324.96 – monthly cost of SLCSP on the Marketplace
Ben and Barb are eligible for an APTC of $2,829/month ($33,950/year) based upon their projected income. In 2022, they sell depreciated equipment to help one of their grown children with an unexpected medical bill, recognizing $20,000 of income on the sale and pushing their 2022 income to $90,000. As a result of the additional income, Ben and Barb must repay the excess APTC on their 2022 return. The amount of the repayment is the difference between the PTC to which they are entitled and the APTC they received.
With $90,000 of income, Ben and Barb were required to contribute $7,650 toward their premium, instead of the $5,950 they contributed, based upon 8.5% of their projected income. In 2022, reconciliation requires repayment of $1,700 in excess APTC, as opposed to the whole subsidy (as required under pre-ARPA law).
Unless Congress extends these provisions, the special PTC rules implemented by ARPA will expire in 2023. At the time of this writing, the President was encouraging Congress to extend this temporary benefit beyond 2023 through a reconciliation bill.
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