ACA question re young adult

[pirsquared]

We currently have three of us (DH, me, 22-year old DD) on an ACA plan together and we are receiving $1400/mo in subsidies. DH will start Medicare this summer, which may or may not be relevant to my question. DD has been hired for a job that starts in August that provides health insurance or cash in lieu of $9500 if she stays on parents' insurance. I know that the availability of employer-based health insurance generally means you cannot receive subsidies for an ACA plan. However, I also know that adult children under 26 can stay on their parents ACA plan, whether or not they are a tax dependent and even if they turn down workplace insurance. My question: would an adult child turning down employer health insurance void ALL of our subsidies, or just a portion that applies to her? Because I would still not have the option of employer health insurance. If all our subsidies would disappear, then this is obviously not a good deal and we would just have DD go off and have her own separate employer plan.

 

[SecondCor521]

TL/DR: Collectively you'll lose PTC for your DH when he goes on Medicare, and you'll lose PTC for your DD when she becomes eligible for her employer coverage. Your DH and DD can continue on the ACA plan if you want, but you/they will pay the full premium.

Details:

You probably will have two tax families this year. The first tax family is you and your husband. The second tax family is your DD (assuming she won't qualify as your dependent this year, which seems likely).

Your DH is eligible to be on the ACA plan and receive PTC for those months before he starts Medicare coverage. Once he starts Medicare, he can still count as a member of your tax family size but won't count towards your coverage family. See https://www.healthcare.gov/medicare/changing-from-marketplace-to-medicare.

Your DD is in a similar situation - she is eligible to be on the ACA plan and receive PTC for those months before she is eligible for her employer based health coverage, assuming that she otherwise is an applicable taxpayer. She can stay on the ACA plan but will lose her eligibility for PTC in August (or September) assuming her employer coverage qualifies as MEC (which it almost certainly does). However, assuming she will not be your dependent this year, she will not count as a member of your tax family size.

Your APTC and SLCSP should be based on your coverage family (which is you and your husband until your husband goes on Medicare, then just you) and your and your husband's ACA MAGI (and your coverage area / zip code, of course). Your premium will be based on whomever has coverage, of course - all three of you, then two of you when your DH goes on Medicare, and then just you if your DD decides not to be on ACA.

Since you have two tax families on one ACA plan, you should read the instructions for Part IV of Form 8962 which discusses allocating the ACA plan and the tax benefits across two tax families. See in particular Allocation situation #4 on page 18 column 1 of the instructions at https://www.irs.gov/pub/irs-pdf/i8962.pdf.

Although many families have the same number for premium, ACA subsidy, and SLCSP for an entire calendar year, it is possible in situations such as yours for these three numbers to change over the course of the year. These changes will show up on your 1095-A and your Form 8962 (and your DD's 8962 if you allocate any of the plan to her).

 

[pirsquared]

TL/DR: Collectively you'll lose PTC for your DH when he goes on Medicare, and you'll lose PTC for your DD when she becomes eligible for her employer coverage. Your DH and DD can continue on the ACA plan if you want, but you/they will pay the full premium.

Details:

You probably will have two tax families this year. The first tax family is you and your husband. The second tax family is your DD (assuming she won't qualify as your dependent this year, which seems likely).

Your DH is eligible to be on the ACA plan and receive PTC for those months before he starts Medicare coverage. Once he starts Medicare, he can still count as a member of your tax family size but won't count towards your coverage family. See https://www.healthcare.gov/medicare/changing-from-marketplace-to-medicare.

Your DD is in a similar situation - she is eligible to be on the ACA plan and receive PTC for those months before she is eligible for her employer based health coverage, assuming that she otherwise is an applicable taxpayer. She can stay on the ACA plan but will lose her eligibility for PTC in August (or September) assuming her employer coverage qualifies as MEC (which it almost certainly does). However, assuming she will not be your dependent this year, she will not count as a member of your tax family size.

Your APTC and SLCSP should be based on your coverage family (which is you and your husband until your husband goes on Medicare, then just you) and your and your husband's ACA MAGI (and your coverage area / zip code, of course). Your premium will be based on whomever has coverage, of course - all three of you, then two of you when your DH goes on Medicare, and then just you if your DD decides not to be on ACA.

Since you have two tax families on one ACA plan, you should read the instructions for Part IV of Form 8962 which discusses allocating the ACA plan and the tax benefits across two tax families. See in particular Allocation situation #4 on page 18 column 1 of the instructions at https://www.irs.gov/pub/irs-pdf/i8962.pdf.

Although many families have the same number for premium, ACA subsidy, and SLCSP for an entire calendar year, it is possible in situations such as yours for these three numbers to change over the course of the year. These changes will show up on your 1095-A and your Form 8962 (and your DD's 8962 if you allocate any of the plan to her).

Thanks! I was hoping you would chime in as you know so much about ACA details.

I do think that DD will still be claimed as a dependent for this year (2022) because a) she will have been a full time student for at least part of at least five months of the year, b) she will not have provided half her own support for the year, and c) she does not plan to move out until after July 1 so she will have lived with us for more than half the year. If she moves out sooner, then that will change things. And she will definitely not be a dependent for 2023. Thus we expect she will be part of our tax family for 2022, but not for 2023.

Thanks for confirming that she would lose PTC eligibility once she is eligible for employer-based insurance. So if she were to decline employer-based insurance (instead taking the cash in lieu), would our tax family (which includes her for 2022) lose all of our PTC for those months or just part of it, given that she would be eligible for employer-based insurance but I would not? In other words should we be comparing her $9500 cash-in-lieu offer with our current PTC of about $17,000 or to some lower, partial PTC amount?

 

[SecondCor521]

Thanks! I was hoping you would chime in as you know so much about ACA details.

I do think that DD will still be claimed as a dependent for this year (2022) because a) she will have been a full time student for at least part of at least five months of the year, b) she will not have provided half her own support for the year, and c) she does not plan to move out until after July 1 so she will have lived with us for more than half the year. If she moves out sooner, then that will change things. And she will definitely not be a dependent for 2023. Thus we expect she will be part of our tax family for 2022, but not for 2023.

Thanks for confirming that she would lose PTC eligibility once she is eligible for employer-based insurance. So if she were to decline employer-based insurance (instead taking the cash in lieu), would our tax family (which includes her for 2022) lose all of our PTC for those months or just part of it, given that she would be eligible for employer-based insurance but I would not? In other words should we be comparing her $9500 cash-in-lieu offer with our current PTC of about $17,000 or to some lower, partial PTC amount?

There's a reason we figure out dependency first - it affects all the downstream stuff. I could have saved myself some typing.

It seems like you're familiar with the dependency rules and that she'll be your dependent in 2022. In that case, then she will be part of your tax family for 2022, and you can ignore the parts of my previous reply about allocating policy amounts.

Your DD will be in your *tax* family all year. She'll only be in your *coverage* family until she is eligible for her employer coverage, which will be either August or September, her employer can tell her when she becomes eligible (it's commonly the first day of the month after her start date). She'll stop being in your coverage family whether she signs up for employer coverage or declines it and takes the cash in lieu. It's being eligible for other coverage, not whether one takes advantage of the eligibility.

Your PTC each month is based on the SLCSP and your monthly contribution amount. The SLCSP depends on the price of the applicable Silver plan for your *coverage* family. The monthly contribution amount depends on your AGI relative to the poverty level for your location and your *tax* family size.

You'll essentially only lose the PTC attributable to her, and only for the August/September through December time frame. What you might do is go on your Marketplace website and put in your family AGI and zip code and a family size of three and make sure you get an amount roughly equal to your current PTC. Then do the same exercise but delete your daughter from the input screen and see what your new (lower) PTC will be. The difference between those two is what you're looking for.

...

Additional comments:

1. Note that when your husband goes on Medicare, he'll also leave your *coverage* family and your PTC will drop due to that as well. You can do the same analysis above with just you as the covered individual but with your family AGI.

2. Since your daughter will be your dependent but will probably be required to file a tax return, you'll have to include her AGI in your family AGI for ACA subsidy purposes on line 2b of Form 8962. This will reduce your subsidy. So when running the analyses without your DD and without your DH, you'll want to be sure to include her AGI along with your AGI in the data entry area.

3. You might want to do some combination of updating the Marketplace when your DH goes on Medicare and/or not accepting the entire APTC amount which they think you're eligible for (I'm imagining that the Marketplace may not be able to treat your DD as not part of your coverage family if she's still on your ACA plan). The analyses above probably will give you an idea of how much subsidy you're actually eligible for. Or just true up at tax time.

 

[pirsquared]

There's a reason we figure out dependency first - it affects all the downstream stuff. I could have saved myself some typing.

It seems like you're familiar with the dependency rules and that she'll be your dependent in 2022. In that case, then she will be part of your tax family for 2022, and you can ignore the parts of my previous reply about allocating policy amounts.

Your DD will be in your *tax* family all year. She'll only be in your *coverage* family until she is eligible for her employer coverage, which will be either August or September, her employer can tell her when she becomes eligible (it's commonly the first day of the month after her start date). She'll stop being in your coverage family whether she signs up for employer coverage or declines it and takes the cash in lieu. It's being eligible for other coverage, not whether one takes advantage of the eligibility.

Your PTC each month is based on the SLCSP and your monthly contribution amount. The SLCSP depends on the price of the applicable Silver plan for your *coverage* family. The monthly contribution amount depends on your AGI relative to the poverty level for your location and your *tax* family size.

You'll essentially only lose the PTC attributable to her, and only for the August/September through December time frame. What you might do is go on your Marketplace website and put in your family AGI and zip code and a family size of three and make sure you get an amount roughly equal to your current PTC. Then do the same exercise but delete your daughter from the input screen and see what your new (lower) PTC will be. The difference between those two is what you're looking for.

...

Additional comments:

1. Note that when your husband goes on Medicare, he'll also leave your *coverage* family and your PTC will drop due to that as well. You can do the same analysis above with just you as the covered individual but with your family AGI.

2. Since your daughter will be your dependent but will probably be required to file a tax return, you'll have to include her AGI in your family AGI for ACA subsidy purposes on line 2b of Form 8962. This will reduce your subsidy. So when running the analyses without your DD and without your DH, you'll want to be sure to include her AGI along with your AGI in the data entry area.

3. You might want to do some combination of updating the Marketplace when your DH goes on Medicare and/or not accepting the entire APTC amount which they think you're eligible for (I'm imagining that the Marketplace may not be able to treat your DD as not part of your coverage family if she's still on your ACA plan). The analyses above probably will give you an idea of how much subsidy you're actually eligible for. Or just true up at tax time.

Sorry about the dependency confusion There is still a chance that she could move out before July 1, which would make all the allocating info relevant. But it is looking more definite that she will wait until August, which would be mutually beneficial.

That is helpful to know that we would only lose the PTC attributable to her. You mentioned going into the Marketplace website and putting in info to estimate. Is there a way to do that without logging in? I don't want to accidentally do an update.

Re Comments #1 & #3: From what I have read, both our premium and our PTC will drop when DH starts Medicare. I am guessing/hoping those will offset each other, resulting in premiums similar to what we are paying now. Of course, our total insurance cost will be more because we will be paying for Medicare for DH on top of the Marketplace insurance for DD and me. Thankfully this will happen a couple of months before DD's potential insurance change so we can deal with one change at a time. I will probably not try to price out the premium/PTC change resulting from DH's transition to Medicare ahead of time since it will happen no matter what

Re Comment #2: This is something I have been thinking about a lot. Last year we did not need to include DD's income in our household income for PTC purposes because she only made about $3000 in a summer job and thus had no filing requirement. She did, in fact, file to get back tax withheld, but the dependent income inclusion is based on requirement to file, not actual filing. So I am wondering whether she can keep her income under $12950 for 2022 (by contributing to a 401k with her new job in the fall) so that she will not have a requirement to file and thus we would not have to include her income (she does not have any unearned income or self-employment income). This would only be possible for 2022, but she will definitely not be a dependent for 2023 so this strategy is not possible after 2022 anyway.

We will probably have her take the employer insurance, but she was informed of the cash-in-lieu offer yesterday so we are exploring this option a bit.

Thank you so much for your helpful, detailed comments. Being the tax/insurance/finance detail person in my family, it is a joy to discuss these issues with someone so knowledgeable.

 

[SecondCor521]

^ I had made the assumption about dependency, so that fault lies with me, not you. No worries!

In my family we have a policy of including tax impacts in our decision making. If it doesn't damage the family dynamic, you could articulate to DD the tax impacts of staying at home until July 1st; maybe even economically incentivize her to do so. I personally think for many of our kids that making smart tax moves really can move the needle for them, and teaching them about these things is something we can do as parents to help them.

My state runs it's own marketplace website, so I know with it I can just go put in the AGI and demographic information and get quotes any time I want to. It sounds like you may be on the federal marketplace, which I'm not familiar with. I would hope it has a similar feature; if not, you could try it with a fake / second account just to get the pricing info.

I don't know how it will turn out when your DH goes on Medicare. He'll still be in your tax family and your estimated AGI will stay the same. But your premium will obviously drop, and since your coverage family will drop by one at that point your SLCSP will drop.

Now that I think about it, you might need to/want to talk to your Marketplace folks when that happens (and also when your DD becomes eligible), because they're basing the SLCSP on what they assume is your coverage family, which they probably assume is equal to the number of people on your ACA plan. But that isn't necessarily true and your coverage family will be changing throughout the year. If you don't notify them, your SLCSP will probably be incorrect on your 1095-A. Although I bet a lot of people don't do this right.

It might be financially viable or advantageous for you to subsidize your daughter's income or 401(k) savings in order to keep her AGI under the standard deduction, thus avoiding the "Line 2b problem" and maintaining more of your subsidy.

Also, as a side note, if your DD's work insurance is HSA eligible, and she is on that insurance on 12/1/2022 and remains on it through 12/31/2023, then she and/or her company can probably contribute to an HSA for her up to $3,650. HSA contributions are treated as an adjustment to income and therefore reduce AGI much the same way as retirement account contributions. If made through employer contributions, I think they also avoid FICA taxation. Also like IRA contributions, they can be made up until 4/15 for the previous year. See Form 8889 instructions, particularly the last month rule.

You may also want to check to see if DD is eligible for the retirement contributions savings credit in 2022. See Form 8880 and instructions.

Thanks for the kind words; I'm not sure how warranted they are.

 

[pirsquared]

^ I had made the assumption about dependency, so that fault lies with me, not you. No worries!

In my family we have a policy of including tax impacts in our decision making. If it doesn't damage the family dynamic, you could articulate to DD the tax impacts of staying at home until July 1st; maybe even economically incentivize her to do so. I personally think for many of our kids that making smart tax moves really can move the needle for them, and teaching them about these things is something we can do as parents to help them.

My state runs it's own marketplace website, so I know with it I can just go put in the AGI and demographic information and get quotes any time I want to. It sounds like you may be on the federal marketplace, which I'm not familiar with. I would hope it has a similar feature; if not, you could try it with a fake / second account just to get the pricing info.

I don't know how it will turn out when your DH goes on Medicare. He'll still be in your tax family and your estimated AGI will stay the same. But your premium will obviously drop, and since your coverage family will drop by one at that point your SLCSP will drop.

Now that I think about it, you might need to/want to talk to your Marketplace folks when that happens (and also when your DD becomes eligible), because they're basing the SLCSP on what they assume is your coverage family, which they probably assume is equal to the number of people on your ACA plan. But that isn't necessarily true and your coverage family will be changing throughout the year. If you don't notify them, your SLCSP will probably be incorrect on your 1095-A. Although I bet a lot of people don't do this right.

It might be financially viable or advantageous for you to subsidize your daughter's income or 401(k) savings in order to keep her AGI under the standard deduction, thus avoiding the "Line 2b problem" and maintaining more of your subsidy.

Also, as a side note, if your DD's work insurance is HSA eligible, and she is on that insurance on 12/1/2022 and remains on it through 12/31/2023, then she and/or her company can probably contribute to an HSA for her up to $3,650. HSA contributions are treated as an adjustment to income and therefore reduce AGI much the same way as retirement account contributions. If made through employer contributions, I think they also avoid FICA taxation. Also like IRA contributions, they can be made up until 4/15 for the previous year. See Form 8889 instructions, particularly the last month rule.

You may also want to check to see if DD is eligible for the retirement contributions savings credit in 2022. See Form 8880 and instructions.

Thanks for the kind words; I'm not sure how warranted they are.

Thankfully, we have a great relationship with DD and she is aware that it is mutually beneficial for her to wait until after July 1 to move out. That is almost certainly what will happen, but sometimes plans change (we are getting used to being flexible after all the changes in plans over the past two years of covid). And she doesn't really want to start paying rent somewhere until she has to She has been living away from home for college but that counts as living at home for dependency purposes. It is what happens after graduation that matters.

DD has been doing her own taxes (with my help) since she was 17 with Free Fillable Forms (which is what I use to file for DH and me), so she has some awareness of how taxes work. She also went through the whole online process with me when I signed us up for Marketplace coverage for 2021. She made a spreadsheet for our top 6 plan choices comparing premiums, deductibles, copays, and out-of-pocket maxes. So she has a decent understanding of how this all works. She is not the tax geek that I am, but she will listen to my explanations with mild interest unlike DH who is wonderful but has no interest in anything tax-related.

We are definitely open to subsidizing her income in the fall if needed so she can contribute enough to her 401K to get her under the filing requirement. Thanks for the HSA tip! I had forgotten about that. However, I think Traditional IRA contributions will not work as a strategy. I think you have to deduct them on your actual tax return, which would create a filing requirement, which would necessitate inclusion of her 2022 income for ACA purposes. Is my understanding correct? If so, we really have to get the math right because we can't fix it after the end of the year.

Unfortunately, she will not be eligible for a Retirement Savings Contribution Credit for 2022 because she will have been a fulltime student for the first 5 months of 2022 and students are not eligible for the credit. But we are glad she is a student because that allows her to still be a dependent

I will definitely call the Marketplace when DH starts Medicare and again when DD starts her own insurance so that premiums can be adjusted accordingly. Last year I did some income updates online, but I read (on this forum and elsewhere) that updating online when someone gets new insurance can cause them to be canceled early so I will contact them by phone for that.

2022 is going to be a very interesting tax year for us...

 

[SecondCor521]

We are definitely open to subsidizing her income in the fall if needed so she can contribute enough to her 401K to get her under the filing requirement. Thanks for the HSA tip! I had forgotten about that. However, I think Traditional IRA contributions will not work as a strategy. I think you have to deduct them on your actual tax return, which would create a filing requirement, which would necessitate inclusion of her 2022 income for ACA purposes. Is my understanding correct? If so, we really have to get the math right because we can't fix it after the end of the year.

Emphasis added.

I disagree technically with what you wrote but agree in practice with what I think you mean.

My understanding of line 2b on Form 8962 is that inclusion of your DD's income is if she is required to file a tax return. As your dependent, she is required to file a tax return if she meets any of the conditions in Chart B or Chart C in the 1040 instructions under "Who Must File?" The most common reason is if their income exceeds the filing thresholds.

A person may elect to file a tax return for any number of reasons. The most common reason for taxpayers like your DD would be to claim a refund of taxes withheld from a paycheck.

If one has, for example, $3K of income and $100 federal tax withheld, one is not required to file a return but one may elect to do so.

Once one has elected to file a tax return even if one is not required to, then claiming any allowed deductions, expenses or credits does not create a filing requirement. So in that sense a tIRA or HSA contribution is just something one may be entitled to claim.

But what I realized you probably mean in this context is that if your DD is already over the income threshold before making the tIRA or HSA contribution, then she has a filing requirement at that point, and the tIRA or HSA contribution would reduce her AGI but not her gross income. I think you're essentially correct here.

401(k) contributions, though, are different, because they reduce box 1 wages, which seems to be what the IRS uses to determine earned income, which is what is used for the filing requirement. So that idea of yours is good.

I will point out that I'm fairly confident that *employer* contributions to an HSA would also reduce box 1 wages and thus would help avoid a filing requirement and a "Line 2b problem". You'd have to be tracking this throughout the fall, though, because I doubt an employer would be able or willing to make a 2022 HSA employer contribution for your DD in spring 2023. Again, though, she'd have to be an eligible individual, which usually means that her employer plan is HSA-eligible.

As for all the other stuff I clipped out above, I generally agree with you and I think you're doing pretty well with all this tax stuff. Even though I mostly know it as well, I don't always succeed on the execution/implementation side. And I regularly have new realizations of how I've been doing things suboptimally and could improve. It has taken me six years of fine-tuning my FIRE tax situation and I'm probably not done yet. My point is that while it's good to try, it is also good to give yourself some grace if you don't get it exactly right in years of large flux like your 2022 and 2023.

 

[pirsquared]

Emphasis added.

I disagree technically with what you wrote but agree in practice with what I think you mean.

My understanding of line 2b on Form 8962 is that inclusion of your DD's income is if she is required to file a tax return. As your dependent, she is required to file a tax return if she meets any of the conditions in Chart B or Chart C in the 1040 instructions under "Who Must File?" The most common reason is if their income exceeds the filing thresholds.

A person may elect to file a tax return for any number of reasons. The most common reason for taxpayers like your DD would be to claim a refund of taxes withheld from a paycheck.

If one has, for example, $3K of income and $100 federal tax withheld, one is not required to file a return but one may elect to do so.

Once one has elected to file a tax return even if one is not required to, then claiming any allowed deductions, expenses or credits does not create a filing requirement. So in that sense a tIRA or HSA contribution is just something one may be entitled to claim.

But what I realized you probably mean in this context is that if your DD is already over the income threshold before making the tIRA or HSA contribution, then she has a filing requirement at that point, and the tIRA or HSA contribution would reduce her AGI but not her gross income. I think you're essentially correct here.

401(k) contributions, though, are different, because they reduce box 1 wages, which seems to be what the IRS uses to determine earned income, which is what is used for the filing requirement. So that idea of yours is good.

I will point out that I'm fairly confident that *employer* contributions to an HSA would also reduce box 1 wages and thus would help avoid a filing requirement and a "Line 2b problem". You'd have to be tracking this throughout the fall, though, because I doubt an employer would be able or willing to make a 2022 HSA employer contribution for your DD in spring 2023. Again, though, she'd have to be an eligible individual, which usually means that her employer plan is HSA-eligible.

As for all the other stuff I clipped out above, I generally agree with you and I think you're doing pretty well with all this tax stuff. Even though I mostly know it as well, I don't always succeed on the execution/implementation side. And I regularly have new realizations of how I've been doing things suboptimally and could improve. It has taken me six years of fine-tuning my FIRE tax situation and I'm probably not done yet. My point is that while it's good to try, it is also good to give yourself some grace if you don't get it exactly right in years of large flux like your 2022 and 2023.

Yes, the bolded was what I was thinking. So we will do the math ahead of time and then check a couple of months before the end of the year to make sure she's on track.

I have learned a lot over the last couple of years while reading on forums like this. I have not always done things optimally taxwise, but the research has helped a lot. I knew almost nothing about the ACA Marketplace until DH was laid off in 2020 due to COVID. Forums like this one have helped us navigate that challenge with much less difficulty.

Thanks for the interesting and helpful discussion! I will try to remember to update when I know more near the end of the year.

 

[jj]

I'm loving this little interchange between you. It's what makes the ER board great!