How COVID Relief Legislation Will Aid Market Plan Consumers

Edited April 9, 2021 – The IRS has clarified how taxpayers should proceed in this situation. People who had to repay all or part of their premium tax credit from 2020, can simply skip Form 8962 and do not have to reconcile their premium tax credit. If you owe extra premium tax credits (i.e. the amount that was paid for your benefit in 2020 turned out to be too low), then you can still claim it using Form 8962. Individuals who already filed their 2020 tax return, and have repaid the extra advance premium credit, do not need to file an amended tax return. The IRS will refund them the money on a regular basis.

Are you confused about the fact that you may have to pay back some or all of the premium subsidy paid on your behalf last year? The American Rescue Plan Act, H.R. 

It’s a one-time grant that is part of the COVID measure of the federal government, which will also increase premium subsidies in 2021 and 2022. This will be a great reduction for many of those who signed up to individual and family health plans through the medical insurance marketplace/change last year.

The premium subsidies (premium tax credits) of the Reasonably priced Care Act make medical insurance affordable for thousands of people, but they can be quite complex. Unlike other tax credits, these are available upfront and paid to your insurance company all year. This is called APTC – advance premium tax credits – because it’s paid in advance.

It is possible to choose to pay the full value for a policy purchased through the exchange and then claim the whole premium tax credit in your tax return. However, this is something that very few people do. Most people will instead give the market a projected income for the year, and the estimated premium tax credit is sent to their insurer throughout the entire year, reducing the amount they have to pay in insurance premiums.

All of this must be reconciled when policyholders submit their tax returns. The IRS could give you extra money at this time if your subsidy is too low, or make you pay back some or all of the subsidy paid on your behalf during the year.

How legislation can prevent a subsidy compensation catastrophe at tax time

This issue was proving to be a significant problem for the 2020 tax year. It was harder for people to accurately project their income for 2020 because of the combination of increased federal unemployment benefits and irregular employment. As is always the case, those of us who earned more than 400% of federal poverty level were faced with the prospect of having to pay back their entire premium subsidy. This could be in the thousands or even tens thousand dollars, depending on the situation.

A family’s earnings may have increased because they got more unemployment benefits than they expected, or they obtained a new job that raised their total earnings over the subsidy eligibility level. This can mean that in normal years all subsidy must be paid back, regardless of how low the policyholder’s income was during the months when they received a subsidy through the market.

Even if their income was below 400 percent of poverty, they could be required to pay up to $2,700 extra in premium subsidies depending on their actual earnings and tax filing status.

The 2020 tax year is the only one that will be covered by this provision

Due to the American Rescue Plan Act however, market plan buyers will not have to worry about paying back extra premium subsidies in 2020. If your subsidy amount was too low, you can still claim the additional amount that you owe when you file your tax return. If your subsidy was too large, you won’t have to pay it back.

This is a one time provision that applies solely to the 2020 tax year. It’s still essential to project your earnings for in this tax year with as much precision as you can, and to maintain your change updated if your earnings changes later this year.

What if you have already filed your tax return?

In April 2021 the IRS clarified that people in this situation do not need to file amended returns. The IRS will instead refund them the money on a regular basis.

The IRS has not yet clarified how it will handle the extra premium tax credits for those who have already filed their 2020 tax return earlier this year and repaid a portion or all of the premium tax credit scores for 2020. Tax filers can always amend their tax returns to make changes, but the IRS suggests that they wait until further instructions are given by the IRS before doing so.

The tax software is also not yet clear when it will reflect the fact that additional premium subsidies for 2020 don’t need to be paid back. Karen Pollitz, Senior Fellow at Kaiser Household Basis notes that “the forms and tax software already present compensation, so this can take some time.” It’s likely to be very complex for those who file their taxes in the next 4 to 5 weeks.

If you need help, speak to your tax preparer. You can also contact your tax software company. Tax return deadlines have been extended until May 17, 2021. However, you can also request an extension if you need it. This will give you up to October 15, 2018 to submit your return.