If you’re making more on unemployment than working it may mean less help with health insurance premiums — and a tax bill

If you’re collecting more on unemployment than what you earned while working, it could affect how much you pay for health insurance.

For households that bought coverage through one of the health exchanges and get advance tax credits to reduce thier premiums, those federal subsidies are based on the annual income you estimated when you chose your plan. And if that amount gets pushed higher unexpectedly, you could face a tax bill next spring when you file your 2020 return.

“If their income is a lot more than they estimated, they’ll have to pay back some or all of the subsidies,” said Karen Pollitz, a senior fellow with the Kaiser Family Foundation. “If it’s less, they’d get more back.”

At last count, 10.5 million people were enrolled in health plans through an exchange, according to the foundation. (It’s uncertain how significantly the coronavirus pandemic and unemployment have altered that enrollment number).

Most enrollees — which include the self-employed and workers with no job-based health insurance — receive subsidies, Pollitz said. Typically, the tax credits are advanced throughout the year and reduce what you pay in premiums.

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“For people who don’t qualify for Medicaid, and those who don’t get coverage through their job, the marketplace is where they go,” Pollitz said. 

One of the side effects of the federal government’s expanded unemployment benefits — which added $600 per week to state benefits — is that some unemployed workers have more income now than they did when they were working. Of course, it’s uncertain at this point when (or whether) many of the now-jobless will return to work or if those higher  unemployment benefits will be extended beyond July 31, when they are scheduled to end.

While the recently enacted CARES Act excludes that extra weekly money from counting toward qualifying for Medicaid, Pollitz said, the law doesn’t grant the same reprieve for calculating eligibility for tax credits through a health exchange.

The subsidies are available to families whose income is from 100% to 400% of the federal poverty level, based on household size. For an individual, that means income from $12,490 to $49,960 in 2020, according to the Kaiser Family Foundation. For a family of four, that would translate into income of $25,750 to $103,000.

The tax credit amount, meanwhile, is based on factors that include income, age and the benchmark “silver” plan in your geographic area.

If your income falls below whatever cap applies to your situation but is higher than you estimated, you may have to repay some of the subsidies you received. Over the income ceiling, and look out.

“If it passes four times the poverty level, even by a dollar, you’d have to repay all of it,” Pollitz said. “It’s a steep cliff.”

For some households, those subsidies can be significant. By way of example: Pollitz looked at one zip code in Maryland where the average benchmark premium is roughly $2,200 a month for a family of three — two adults in their 50s and a dependent child. If they made below 400% of the poverty level for their household size — about $87,000 — they could get tax credits worth about $20,000 annually, reducing their monthly premiums to roughly $500. 

So if their income jumps above the qualifying earnings cap, they would have to repay that full $20,000.

If you suspect that unemployment — or any other type of unexpected or unplanned money — will push your income up enough to reduce your premium tax credits, it’s worth seeing if a contribution to a 401(k) plan or other qualifying retirement account could lower your income enough to avoid any repayment, said CPA Oscar Vives Ortiz.

“The way to mitigate it is to lower your income as much as you can,” said Ortiz, a member of the American Institute of CPAs’ personal finance specialist committee.

Contributions to certain retirement accounts are tax-deductible, and can lower your adjusted gross income, or AGI. Just be aware that the premium tax credits are based on your modified adjusted gross income, which is your AGI with certain other deductions or income added back in.

You also could set aside some of the extra income to cover the difference when tax time comes, or you can alter how much you’re accepting in subsidies by going to your account through the exchange, Pollitz said. 

The idea, though, is to plan ahead as much as possible.

“Sometimes the mental impact of something can be far worse than the actual financial impact,” Ortiz said.

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