ACA and 8% rule

[Kendoo]

Need some help understanding this. Think I read somewhere that there is no ACA cliff thru 2022 and that healthcare is capped at 8% of your income (MAGI I assume). If I make $100K a year, the max I would pay is $8K? I assume this is just premiums and not total out of pocket? What if I decide to retire 6/30/22, would I still pay $8K for 6 months of HI, or would it be $4K? I assume this all gets squared away when I file 2022 taxes and that the actual monthly rate I pay will be whatever my state (NY) marketplace shows without subsidies? TIA, so confusing to me.

 

[PaunchyPirate]

Need some help understanding this. Think I read somewhere that there is no ACA cliff thru 2022 and that healthcare is capped at 8% of your income (MAGI I assume). If I make $100K a year, the max I would pay is $8K? I assume this is just premiums and not total out of pocket? What if I decide to retire 6/30/22, would I still pay $8K for 6 months of HI, or would it be $4K? I assume this all gets squared away when I file 2022 taxes and that the actual monthly rate I pay will be whatever my state (NY) marketplace shows without subsidies? TIA, so confusing to me.

It is actually 8.5%. And yes, it is based on your MAGI and yes it is for the premium cost only.

So for $100k, the most you would be asked to pay is $8500 per year or $708.33 per month.

In order to determine your monthly subsidy, you need to go into the exchange website and determine what the Second Lowest Cost Silver Plan (SLCSP) would be for you in your location. Let's guess that this is $925 per month. Your subsidy is the difference between your max pay and the SLCSP. So in this example, you would qualify for a subsidy of $216.67 per month ($925-$708.33).

You are then entitled to spend that $216.67 on ANY plan you desire. You can spend it on a lower cost Bronze plan and save more money. Or you can spend it on a higher cost Gold plan and pay more money. But you'll still get the same monthly subsidy.

Unfortunately, I'm not up to speed on how things get prorated for partial year calculations. So I'll leave that for someone else to help with.

Edited to add: If your estimated MAGI turns out to be different for the year, the final numbers are reconciled on your tax return for that year. If you underestimated your MAGI, you may owe some of the subsidy back. If you overestimated, you may be given a credit on your taxes.

 

[zinger1457]

Your subsidy will be based on your full year income and will be prorated for each month of ACA coverage. Just to be clear $8500 is the most you would pay for full year coverage (half that for 6 months) based on selecting the second lowest cost Silver plan. If you selected a higher cost Silver/Gold plan then you would pay more, if you selected a lower cost Bronze plan then you would pay less.

 

[BladeS.]

Great info in this thread - thank you! Still trying to work this new 8.5% of MAGI system out for 2022 now that plan costs are live online to review. What still confuses me is how the Gov subsidies (PTC) play into this equation. Let's use the same MAGI income number of $100K for this exercise so max annual cost is $8500. When I input my $100K income into the healthcare.gov tool it states I'm eligible for $1,224/month tax credit for my family of 3 in TX. The $1,224 is of course reducing the monthly premium costs I'm being shown when viewing all plans on the site. Let's say I select a Bronze plan with a monthly prem. cost of $450.00 (after it was reduced by the $1,224 tax credit)

I then view the second cheapest Silver plan which is strangely $708.26/month (again after being reduced by the same $1,224 tax credit).

So... If my 2022 MAGI comes in at $105K that puts me $5K over what I estimated. How much would I be required to reimburse the Gov when I file my Fed Taxes? How do the $1,224/month tax credits come into play in all this? I hated the old "all or nothing" fall off the cliff rule but at least I understood that one! Any help on this topic would be most appreciated! Even my CPA is still a tad baffled and waiting for their tax software to update on this topic.

 

[RunningBum]

I then view the second cheapest Silver plan which is strangely $708.26/month (again after being reduced by the same $1,224 tax credit).

Why do you say "strangely"? This comes out to $8500, rounded up. Exactly the 8.5% of your $100,000 MAGI that you'd expect from the SLCSP.

So... If my 2022 MAGI comes in at $105K that puts me $5K over what I estimated. How much would I be required to reimburse the Gov when I file my Fed Taxes? How do the $1,224/month tax credits come into play in all this? I hated the old "all or nothing" fall off the cliff rule but at least I understood that one! Any help on this topic would be most appreciated! Even my CPA is still a tad baffled and waiting for their tax software to update on this topic.

$105,000 * 8.5% is $8925. You would be expected to pay $425/yr more towards your health care than you would at $100K, so $425 is what you would owe.

The way it works at tax time is that the take your actual MAGI, and determine the subsidy you were allowed. Then the look at the subsidy you received. If you received more than allowed, you owe the difference. If you received less than allowed, you will receive the difference. For 2020, the IRS did not make people pay the difference. I wouldn't count on that for 2021 or 2022.

There was only an "all or nothing" at 400%FPL. Everyone else getting a subsidy resolved any differences between subsidy received and subsidy allowed at tax time. Do you really hate this so much that you want to go back to getting no subsidy?

Is this a tax CPA? I know this isn't really straightforward, but a tax accountant shouldn't be puzzled by this. I'd fine another one.

 

[BladeS.]

RunningBum - thank you for your reply! And no, I don't really want to go back to the former all or nothing plan but I do want to fully understand this one! If you can indulge me with a follow up question I'd be grateful. I'm sure this thread will help others now that the 2022 plans are viewable.

I understand you keep plugging the 8.5% into the higher MAGI dollar figure and then owe the delta vs. your original estimate (In this case $100K vs. $105K) as a worst case reimbursement scenario.

Here's where I'm still a bit confused - My 2022 MAGI estimate will be $100K which the .Gov site is utilizing to offer me a $1,224/month tax credit which I in turn will use in full to lower my Bronze monthly premium to $450/month which equates to me paying the health provider $5,400/year out of my pocket. If my 2022 MAGI comes in at the stated $100K figure nothing further is needed. If my MAGI is under $100K I will receive credit to be used on my tax return.

But.. If I come in over at $105K do I then take the 8.5% max and create the dollar figure of $8925. - subtract the $5,400 I've already paid out to the carrier for the year and then owe the delta of $3,525 to be reimbursed back to the Gov on my Fed tax return?

Thanks again!

 

[RetiredHappy]

Even though I don't buy my health insurance through ACA, I was curious as to how the 8.5% rule works and played with the system yesterday. I used the ACA site and it asked me for my income. I put in the amount - we are kinda of screwed with huge capital gains this year and next year (No thanks to Merrill Lynch... MAGI of $200K to $300K), and it promptly said that I was not eligible for subsidies but still can buy plans from the ACA site. The second lowest Silver plan for my age costs something like $780.

 

[RunningBum]

Here's where I'm still a bit confused - My 2022 MAGI estimate will be $100K which the .Gov site is utilizing to offer me a $1,224/month tax credit which I in turn will use in full to lower my Bronze monthly premium to $450/month which equates to me paying the health provider $5,400/year out of my pocket. If my 2022 MAGI comes in at the stated $100K figure nothing further is needed. If my MAGI is under $100K I will receive credit to be used on my tax return.

But.. If I come in over at $105K do I then take the 8.5% max and create the dollar figure of $8925. - subtract the $5,400 I've already paid out to the carrier for the year and then owe the delta of $3,525 to be reimbursed back to the Gov on my Fed tax return?

Thanks again!

No, definitely not! Remember, the 8.5% is NOT your subsidy, it is the amount you are responsible to pay if you get the second lowest cost silver plan. Then they take the full cost of the SLCSP and subtract out what you are responsible for (8.5% of your estimated MAGI), and THAT is your subsidy, which you can apply to any plan.

So, at tax time if your actual MAGI is $105K instead of $100K, you do the same math as you did for estimated MAGI. Multiply $105K * 8.5%, and subtract that from the SLCSP and that number becomes your actual subsidy. Compare the actual subsidy vs. your estimated subsidy to determine what you owe or are owed. With the numbers you gave, you will owe $425.

 

[PaunchyPirate]

RunningBum - thank you for your reply! And no, I don't really want to go back to the former all or nothing plan but I do want to fully understand this one! If you can indulge me with a follow up question I'd be grateful. I'm sure this thread will help others now that the 2022 plans are viewable.

I understand you keep plugging the 8.5% into the higher MAGI dollar figure and then owe the delta vs. your original estimate (In this case $100K vs. $105K) as a worst case reimbursement scenario.

Here's where I'm still a bit confused - My 2022 MAGI estimate will be $100K which the .Gov site is utilizing to offer me a $1,224/month tax credit which I in turn will use in full to lower my Bronze monthly premium to $450/month which equates to me paying the health provider $5,400/year out of my pocket. If my 2022 MAGI comes in at the stated $100K figure nothing further is needed. If my MAGI is under $100K I will receive credit to be used on my tax return.

But.. If I come in over at $105K do I then take the 8.5% max and create the dollar figure of $8925. - subtract the $5,400 I've already paid out to the carrier for the year and then owe the delta of $3,525 to be reimbursed back to the Gov on my Fed tax return?

Thanks again!

No. Calculate the monthly SUBSIDY of both MAGIs. Add each of them them up so they represent one year. The difference between the 2 subsidies is what you would owe back at tax time. It is the subsidy that gets credited. So it is the subsidy that could end up being over or under based on the actual MAGI.

 

[RunningBum]

Even though I don't buy my health insurance through ACA, I was curious as to how the 8.5% rule works and played with the system yesterday. I used the ACA site and it asked me for my income. I put in the amount - we are kinda of screwed with huge capital gains this year and next year (No thanks to Merrill Lynch... MAGI of $200K to $300K), and it promptly said that I was not eligible for subsidies but still can buy plans from the ACA site. The second lowest Silver plan for my age costs something like $780.

One reason to go through the ACA is if for some reason you don't have those capital gains and it turns out you do qualify for the subsidy, you can get the entire subsidy at tax time, but only if you got an ACA plan. I've found that the same plans are available at the same price in the ACA marketplace or not. If you have a plan through work, whether retirement or still working, of course you wouldn't go through the ACA.

 

[RunningBum]

We really need a FAQ for this. It really is easy to misunderstand. How does a FAQ happen? PaunchyPirate gave the best explanation I've seen in another recent thread that could at least be the basis for it.

 

[cathy63]

But.. If I come in over at $105K do I then take the 8.5% max and create the dollar figure of $8925. - subtract the $5,400 I've already paid out to the carrier for the year and then owe the delta of $3,525 to be reimbursed back to the Gov on my Fed tax return?

If you underestimate your income, you will owe at most 8.5% of the difference between actual and estimated income. 8.5% * ($105K - $100K) = $425.

Its "at most" because at some point 8.5% of your actual income will exceed the price of the 2nd lowest silver plan, and at that point, you will pay back all of the subsidy you received.

The easiest way to model this is to just put the $105K into the web site and see what your new premiums would be if you estimated your income accurately in the beginning. The amount you'll pay back is just the difference between the two premiums.

 

[PaunchyPirate]

One reason to go through the ACA is if for some reason you don't have those capital gains and it turns out you do qualify for the subsidy, you can get the entire subsidy at tax time, but only if you got an ACA plan. I've found that the same plans are available at the same price in the ACA marketplace or not. If you have a plan through work, whether retirement or still working, of course you wouldn't go through the ACA.

I 100% agree with most of your comment. However, the part about the same plans being offered off and on the exchange for the same price must vary by location. Here in Western PA, the local Blue Cross/Blue Shield offers some plans off the exchange that are not on the exchange. They offer more HSA compliant plans off exchange, for example. For 2021 the offered plan differences were larger than they appear to be for 2022.

And In 2021, I could not purchase the BCBS Blue Access PPO on the exchange but I could have off the exchange. For 2022, I’m happy to see I will be able to buy it on the exchange and use subsidies to offset the cost some.

For someone definitely not getting a subsidy, I advise checking directly with insurers who do business in their area in addition to on the exchange. You may find more plans to choose from.

 

[RetiredHappy]

One reason to go through the ACA is if for some reason you don't have those capital gains and it turns out you do qualify for the subsidy, you can get the entire subsidy at tax time, but only if you got an ACA plan. I've found that the same plans are available at the same price in the ACA marketplace or not. If you have a plan through work, whether retirement or still working, of course you wouldn't go through the ACA.

I see several specialists and my most important specialist only takes my off-exchange private insurance individual plan. I have checked the ACA EPO insurer for our area, and this specialist is not on their provider list. For 2023, which I am pretty sure we will be able to manage our taxable accounts much better than Merrill Lynch in avoiding any significant capital gains, we still have significant income from SS, RMD, annuity, dividends and interests and the 8.5% maximum premium amount is still irrelevant.

 

[BladeS.]

Thanks again to all that responded! I actually understand the current system now! Can't wait to see what's offered up for 2023. Stay healthy out there!

 

[Choosehappy]

One word of caution with non-ACA compliant plans is that they do not necessarily have to cover preexisting conditions. By law ACA plans have to allow for them. We’ll be coming off of COBRA next June and will be switching over to the ACA then. So great to see this discussion.

 

[RetiredHappy]

One word of caution with non-ACA compliant plans is that they do not necessarily have to cover preexisting conditions. By law ACA plans have to allow for them. We’ll be coming off of COBRA next June and will be switching over to the ACA then. So great to see this discussion.

A clarification here. Off exchange non-catastrophic / full plans may decline your application to go on their plan because of pre-existing conditions. If they accept you into their plan, then you are fully covered. But once they accept you, they cannot throw you out later.

 

[Choosehappy]

Very true. Thanks for clarifying.