ACA penalty?

[Murf2]

Good Morning all. I've had a question posed to me by a friend and I'm unsure of what to tell him.

He is trying to live on a very tight budget and is receiving subsides & substantial cost sharing currently.

He owns a stock of a company that is to be bought out sometime this year. This will leave him with a substantial capital gain when it occurs.

His question to me concerned his fear of the cost sharing changing.

Would you recommend him
1 Changing his estimated income now to adjust for the MAGI change at year end.

2 Wait until the sale actually occurs to change reported income to ACA

3 Just continue as is and settle up at tax time.

I have read that the tax subsides would be settled up but that the cost sharing isn't addressed at all.
If this is correct, it would be much better for him. It just hard to believe that they just let it go. Have I misunderstood this point?

If the amounts would make any difference, he estimated his income from 2017 at about 20k and if his stock has to be sold, he thinks he would end up with maybe a 30-35k MAGI at year end.

Your thoughts would be very helpful!
Murf

 

[MichaelB]

Cost sharing is addressed. There is no retroactive settlement, it's a "what's done is done" approach, so he will not face any cost sharing reconciliation, just a policy change going forward if the income does change.

If this is possible income and the amount is not certain, I would suggest he follow #2, which is to report the change in income when it actually happens. The adjustments to policy, premium assistance and cost sharing are made then.

 

[FIREmenow]

Good Morning all. I've had a question posed to me by a friend and I'm unsure of what to tell him.

He is trying to live on a very tight budget and is receiving subsides & substantial cost sharing currently.

He owns a stock of a company that is to be bought out sometime this year. This will leave him with a substantial capital gain when it occurs.

His question to me concerned his fear of the cost sharing changing.

Would you recommend him
1 Changing his estimated income now to adjust for the MAGI change at year end.

2 Wait until the sale actually occurs to change reported income to ACA

3 Just continue as is and settle up at tax time.

I have read that the tax subsides would be settled up but that the cost sharing isn't addressed at all.
If this is correct, it would be much better for him. It just hard to believe that they just let it go. Have I misunderstood this point?

If the amounts would make any difference, he estimated his income from 2017 at about 20k and if his stock has to be sold, he thinks he would end up with maybe a 30-35k MAGI at year end.

Your thoughts would be very helpful!
Murf

Depending on his share percentage in the company, he may be able to structure the sale proceeds to be paid in smaller, yearly payments so that all of the windfall isn't all at once. This may or may not help the situation.

 

[MBSC]

Would you recommend him
1 Changing his estimated income now to adjust for the MAGI change at year end.

2 Wait until the sale actually occurs to change reported income to ACA

3 Just continue as is and settle up at tax time.

I have read that the tax subsides would be settled up but that the cost sharing isn't addressed at all. If this is correct, it would be much better for him. It just hard to believe that they just let it go. Have I misunderstood this point?

The textbook answer is #2 and what the applicant agreed to do.

Options 1 and 2 will cause two 1095A forms to be generated. There is a recent thread on the problems this can cause.

If you report a mid-year income increase you are technically terminating the current plan and enrolling in another plan. Hence the two 1095A forms with two different "markeplace-assigned policy numbers" in box 2. The problem with those receiving substantial CSR is that they will only be presented the plans they qualify for. When you report the income increase, the low OOP plan may no longer be presented as an option because your income is now too high. You have to select the version of the Silver plan with a higher OOP for the remainder of the year. Any amounts applied to the deductible of the "old plan" do carry over to the "new Silver version."

If #3 is chosen:

Cost Sharing Reductions (CSR) are not reconciled when you settle up at tax time. The person keeps the low OOP plan all year.

While there are limits on the premium subsidy repayment amounts (explained here), the caveat is that you cannot owe too much in premium subsidy repayments at tax filing or you will be subject to an underpayment of tax penalty. So you may need to make quarterly estimated tax payments as an alternative to paying higher premiums for the remainder of the year.

 

[aaronc879]

The correct way to do it is #2. I did that in 2016. I think your friend could probably do #3 and get away with it but it's not the right thing to do.

 

[Ian S]

Forget #1. As others have stated #2 may be the "right thing" to do but these days with the rich and powerful getting most all the breaks while the little guys take it in the shorts, I wouldn't blame any "little guy" if they opted for #3.

 

[meierlde]

The textbook answer is #2 and what the applicant agreed to do.

Options 1 and 2 will cause two 1095A forms to be generated. There is a recent thread on the problems this can cause.

If you report a mid-year income increase you are technically terminating the current plan and enrolling in another plan. Hence the two 1095A forms with two different "markeplace-assigned policy numbers" in box 2. The problem with those receiving substantial CSR is that they will only be presented the plans they qualify for. When you report the income increase, the low OOP plan may no longer be presented as an option because your income is now too high. You have to select the version of the Silver plan with a higher OOP for the remainder of the year. Any amounts applied to the deductible of the "old plan" do carry over to the "new Silver version."

If #3 is chosen:

Cost Sharing Reductions (CSR) are not reconciled when you settle up at tax time. The person keeps the low OOP plan all year.

While there are limits on the premium subsidy repayment amounts (explained here), the caveat is that you cannot owe too much in premium subsidy repayments at tax filing or you will be subject to an underpayment of tax penalty. So you may need to make quarterly estimated tax payments as an alternative to paying higher premiums for the remainder of the year.

Note that the apr on underpayment is only 4%.

 

[Murf2]

Note that the apr on underpayment is only 4%.

I'm sorry, I don't understand this. Could you clarify,please.

Thanks,
Murf

 

[meierlde]

I'm sorry, I don't understand this. Could you clarify,please.

Thanks,
Murf

If you go to form 2210 you find that the annual percentage rate charged on an underpayment of taxes is 4% per year, it actually works out to be .04/365* the number of days involved. (See the form). (This is the rate for 2016 taxes may go up in 2017).