In summary
Every year, thousands of Californians are shocked to find out they have to pay fees for their subsidized health insurance to the IRS. Here’s how to avoid it.
Every tax season, hundreds of thousands of Californians are faced with an unexpected bill: They received more than they were allowed in health insurance subsidies, and now owe the IRS hundreds of dollars or more.
Chargebacks hurt. 415,000 households in California In 2021, the U.S. government had to pay nearly $690 million to the IRS for Medicaid-related claims, according to IRS data for the most recent year available. That amounts to about $1,662 per person or family. Many of those owed money live in low-income households.
The repayment rules relate to the federal Affordable Care Act and the state-based health insurance programs it encourages. The state’s insurance marketplace, Covered California, offers generous premium subsidies to those who qualify based on income, but if you underestimate your income for the following year or lose a dependent and fail to report the change, you could unknowingly be oversubsidized.
The federal government will collect the “excess” aid payments when you file your taxes, a process the government calls “reconciliation.”
Even though the insurance marketplace has been around for 10 years, many Californians are still caught off guard when it’s time to file their taxes, often by surprise at the amount they are charged.
“They feel like they’re following the rules, they’ve got insurance, and they’re doing everything right and still getting into trouble.” Audrey CasillasDeputy Director of Community Economic Development Services Koreatown Youth Community Center. Her nonprofit helps local low-income residents prepare their taxes free of charge. Los Angeles County Tax Assistance Program.
The people who receive the excess subsidies aren’t the wealthy: About half of the households that had to pay excess premium subsidies to the IRS in the 2021 tax year made less than $50,000, according to IRS data.
Alex HernandezMerced insurance broker David B. Wilson said most people can avoid the reversal by reporting changes in income or dependents to Covered California as soon as possible, allowing the agency to adjust the amount of premium subsidy an individual or family receives and avoid unpleasant surprises come tax-filing time.
Hernandez tells his clients to report all taxable income to the IRS, including any special income, such as bonuses or big winnings from a lucky night at the casino.
“Some people who enroll on their own think they have to base it on what they made last year, but that’s not necessarily the case,” Hernandez said. Instead, people should estimate their income based on their current situation, he explained.
Don’t wait for registration to open
In an emailed response to questions from CalMatters, Covered California said it notifies policyholders to report changes in income, household size and other factors before enrolling in or renewing their insurance.
“Throughout the notice, consumers are reminded to make sure their information is accurate and are told what will happen to their taxes if their information is inaccurate,” Covered California spokesman Jagdip Dhillon said in an email.
Of course, enrollees don’t have to wait until enrollment opens to report changes: they can report changes at any time, with the help of an enrollment counselor or by calling Covered California directly.
“People may need a mid-year reminder, but if they only get this notification once a year, it may be a little too late.” Cynthia Cox“Enrollment opens in November, tax season is in April, so July might be a good time to start thinking about it,” said Jonathan Mather, Affordable Care Act program director at KFF, a health policy group that conducts polling and research.
The adjustment rules also apply in reverse: People who overestimated their income and received less than they were entitled to could get money back, and people who earn less than 400% of the federal poverty level could get more. Limiting the amount you have to repay If they owe money, they will report it to the IRS.
Some people wonder whether they should keep their health insurance when they find out they have to pay taxes to the IRS, Casillas said. But you could still pay taxes if you don’t have insurance, because California is one of five states that require residents to have health insurance. People who don’t have health insurance could be penalized.
Many people are saving money with Covered California
Some people who’ve run into this problem in the past see it as a trade-off, Casillas said. They pay a small amount for health insurance each month, but pay hundreds or thousands of dollars when they file their taxes. For many, the amount they end up paying to the IRS is less than what they would have paid for regular health insurance or doctor’s visits, Casillas said.
“We just tell them, ‘Hey, you want to have some savings because these things can be unpredictable,'” she said.
Experts say it’s particularly difficult for freelancers and people looking for a new job to accurately estimate their income next year, which can lead to inaccurate estimates.
“Many people enrolled in the ACA marketplaces have very unstable incomes. They may have a combination of part-time jobs, or they may be self-employed or small business owners,” Cox said.
Hernandez said he encourages people with Covered California plans to find an agent and communicate with them regularly — a service that is often free to the public, since agents receive commission from insurance companies — and that it’s the best way to stay informed and avoid surprise bills, he said.
Supported by the California Healthcare Foundation (CHCF), we work to ensure people get the care they need, when they need it, and at an affordable price. For more information, visit www.chcf.org.
