A Hidden Trap in Obamacare


Beginning this year, there is a “gotcha” which middle income individuals who might be able to qualify for the Affordable Care Act’s (“Obamacare”) “premium assistance credit” (“PAC”).  There are many instances in the Internal Revenue Code in which certain “tax breaks” are phased out rather than disappear entirely with the first dollar over a given threshold amount.  For those close to qualifying for the PAC there is a dramatic surprise waiting in the wings.

The Patient Protection and Affordable Care Act (PPACA, P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152)—collectively, the Affordable Care Act—provide the Code Sec. 36B credit that is designed to make health insurance affordable to individuals with modest incomes (i.e., between 100% and 400% of the federal poverty level, or FPL) who are not eligible for other qualifying coverage, such as Medicare, or “affordable” employer-sponsored health insurance plans that provide “minimum value.” (Code Sec. 36B(b)(3)(A)(i)) The credit applies for tax years that end after Dec. 31, 2013. (Reg. § 1.36B-1(o)) For purposes of the 2014 credit, the FPL to be used is the 2013 FPL. (See IRS’s “Questions and Answers on the Premium Tax Credit” (Feb. 3, 2014). )

For example, for persons whose income is between 300% and 400% of FPL, the credit is equal to the excess of the premium over 9.5% of household income. (Code Sec. 36B(b)(3)(A)(i)).  However, a taxpayer whose income is 401% of FPL gets no credit.

As an example, a single individual has 2014 household income of $45,960. This is exactly 400% of the FPL for 2013, and the credit will equal any insurance premium over 9.5% of their income. Say the yearly insurance premium for a single person age 55 is $6,828 (this is an estimate from the Congressional Budget Office). The person pays a premium amount equal to 9.5% of his household income. This 9.5% is equal to $4,366. The government then pays the rest of the premium via the tax credit. In this case, the subsidy is $2,462 ($6,828 – $4,366 = $2,462). However, if the person’s income is $45,961, or $1 over the 400% point, the government pays $0, the person pays all $6,828. The $1 cost him $2,462.

This “trap” for the unwary only affects those who buy their own health insurance on an exchange and are not eligible for other qualifying insurance.  If you fit that description your next step is to evaluate how close you may be to the 400% of FPL amount.  Consider that 400% of FPL, for purposes of the 2014 credit, is $45,960 for one individual; $62,040 for a family of two, and $94,200 for a family of four.

In order to attempt to avoid the PAC “trap”, individuals who might otherwise qualify for the PAC but may not be able to, should consider accelerating deductions into 2014 and/or deferring income into 2015. 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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