Trying to understand the ACA income reporting procedure

[BlueStreak]

In order to qualify for a subsidy, you have apply through the exchange. That requires you to state expected income for 2014. You have the option to have the government send the insurance company the subsidies to reduce your premiums each month, or you can pay the full premiums and then claim the subsidy as a credit when you file your 2014 return. Or if you are uncertain about your income, you can take PART of the subsidy monthly and then reconcile the rest at tax return time. That is all explained here:

http://www.irs.gov/uac/The-Premium-Tax-Credit

What I don't understand is this. Some people would find it very difficult to estimate their income. Highly commissioned sales people might make $30,000 one year and $120,000 the next. A person who retired before age 65 might have tax-deferred investments that will eventually be taxable, but may not know exactly when these taxable events will be needed. Individual contractors have income that varies a lot based on the economy, weather and other factors.

So if I am prepared to wait until I file the 2014 tax return to claim whatever subsidy I am entitled to, do I actually have to claim any income level when applying on the exchange? Do I have to send in any income documentation if I am not actually requesting any subsidies until I do my tax return?

And here is another area of confusion. Some of the pricing and benefits make no sense at all. I see cases where the exchange says a Silver policy is vastly superior to the equivalent Gold policy from the same insurance company. For example, the silver shows up as a $0 deductible where the gold is $6000 deductible. When I asked the company about this, the rep said that the actual benefits displayed on the exchange can change depending on what income level I typed in. I just arbitrarily put in $20,000. If this rep is true, then how will the insurance company know what my actual deductible should be. I mean, if I don't know my actual income until I do my 2014 tax return, and they are basing the policy benefits on income, how can that work? I understand that it is easy to reconcile the subsidy at tax return time. But it is way too late then to adjust the benefits of the policy (such as the deductible or co-pay amounts).

What am I missing?

[Travis_0004]

1. I would estimate your income on the low end.

Then if you are making more than you thought you can make quartly tax payments since your subsidy is too high. Then half way through the year you can reestimate your income.

[Yo_Mama]

2. The premium subsidy and cost-saving subsidy (if any), are figured from the income amount you put in

I seem to recollect that they were supposed to let it go through as long as the estimated income was no more than 10% less than the prior year's.

If your income is highly variable and you really don't have a good estimate, I would suggest talking to the call center about your options.

If you do do that, would you mind reporting back about what their suggestions were?

[PoliticAverse]

3. The difference between silver and gold is because 'cost-sharing' subsidies are only for silver plans

The ACA has two subsidies. A premium subsidy (reduces monthly premium payments) and a
'cost-sharing' subsidy (effectively reduces the deductible by increasing the actuarial value of
the plan based on income).

The cost-sharing subsidy is only available on silver plans.

You can read about the cost-sharing subsidy here:
http://www.healthinsurance.org/learn/the-acas-cost-sharing-subsidies/

and here (page 13):
http://www.fas.org/sgp/crs/misc/R41137.pdf

[BlueStreak]

4. OK. That makes sense, but how can you recapture deductible?

Let's say you thought your income would be $25,000, and that yielded a silver plan with $1000 deductible. And let's say by July you had $10,000 of charges, of which the insurance paid $9,000.

But in August 2014, your ship came in and your actual income for the year ended up being $50,000, which only entitles you to a $5000 deductible Silver plan. I understand you have to reconcile the subsidies with the IRS. But does this mean you have to repay the insurance company the extra $4000 of expenses that are no longer covered under the deductible?

This seems like an accounting nightmare.

[PoliticAverse]

5. As I understand it the IRS cannot recapture the cost-sharing subsidy

(unlike the premium subsidy which they can recapture).

So if you got a cost-sharing subsidy based on an estimated income that was less than your
final actual income turned out to be any excess subsidy is yours to keep.

I remember reading this somewhere in one of the official documents but I don't
recall exactly where at the moment. When I find it again I'll post a link.

[BlueStreak]

8. That makes some sense, but illustrates just how poorly this law was conceived.

As they say, a camel is a horse designed by committee. This aspect of the law really makes one wonder what the staffers were thinking. It would be a nightmare trying to figure out if insurance companies were supposed to be reimbursed because the deductible was too generous. But it is clearly a loophole that is open to abuse.

[PoliticAverse]

9. There is a provision in the ACA to partially reimburse an insurance company if their payouts exceed

projections.

The ACA is very complicated, was drafted quickly and does contain several errors (the 'family glitch' for one
and another being the omission of specifically allowing premium subsidies for policies purchased on the federal
exchange - an omission that the IRS is ignoring but is being challenged presently in the courts).

[B Calm]

6. I retired at age 62, does SS count as income?

[PoliticAverse]

7. Yes, the subsidy is based on "Modified Adjusted Gross Income" which includes Social Security...

http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/1601/~/calculation-of-modified-adjusted-gross-income-%28magi%29

[kitp]

10. Q about "income"

My wife and I are considering retiring next year - ages 61 and 62 - and living off of money we have set aside in an annuity.
The annuity is post-tax and we have paid taxes on its earned interest over the years.

Will this money be considered "income" for the purpose of receiving help in paying for our insurance. I called the 800 number but they were unable to give me an answer.

On edit:
The link above to MAGI does mention annuities, but I know that some annuities are pre-tax and therefore are income when you draw from them. Ours is not. We paid income tax on the money in the annuity and on the interest earned and so its basically a savings account.

[BlueStreak]

11. You aren't taxed twice

I know it is a cop-out, but this really is a question for an accountant. An annuity is not a savings account. It is more like life insurance except that it pays while you are alive. My guess is that a portion of the benefit is taxable even if the original source of the funds is post-tax. Basically if you have to report that as income on your tax return, it will count as income for your subsidy calculation.

People in early retirement often have the exact opposite income problem from most others. You may not have ENOUGH income (according to your tax return) to get up to the level where you can get a subsidy. That's about $16,500 for two people in my situation. If that is an issue and you have some pre-tax funds, you can plan to realize the tax on some of those funds during 2014 to dial in the "right" amount of income. One way to do that is to convert standard 401K money to a Roth plan, if that applies to you.

Of course, if you are already taking Social Security payments, then you should have enough income to get into the subsidy range, and then the issue is not having too much income to get a subsidy (> $62,000 in my case).

[kitp]

12. Thanks

I will have to find out exactly which of my retirement funds will be considered income.
I knew about the 16K break point. If I can reach that, my insurance is very reasonable, if I'm below it it goes WAY up from what I'm getting now on the open market.

Thanks for the info...

Some of it is confusing though. Every penny that went in to the annuity came from earned income that was taxed as income. All of the interest it has earned has been taxed as well. When I draw money out, its not a "benefit", its a withdrawal. I'm not sure I understand the comparison to a life insurance policy.

Some of my retirement money is tax-deferred and so will definitely be treated as taxable income when I liquidate it.

[BlueStreak]

13. I'm not an expert, so don't rely on anything I say

But depending on the nature of the annuity, there could be a capital gain component that would be taxable, even if the corpus was past-tax. And in the event that the annuitant receives more than originally deposited, that's where the life insurance comparison comes in. I don't know exactly how the tax law treats that excess, but it might be taxable.

If you are looking to get up to the low threshold (around $16K for 2 people) in order to qualify for subsidies, you can take any pre-tax money in IRAs or 401Ks and realize that. You would have to pay the tax on that amount, but the numbers are strongly favorable. Let's say you took $20K of pretax money as income for 2014, you might have to pay $2000 in Federal and state taxes on that. But you might receive as much as $17K in subsidies as a result, so you are way ahead of the game.

[kitp]

14. Thanks

Yes, this is probably what I'm going to do, liquidate those assets I know will be income, declare and pay taxes on it, and qualify for the subsidies.
Thanks for the feedback.