Subsidy Scenario Question

[yankee466]

Curious as to any random thoughts on the following scenario, as the MarketPlace said to "call the IRS" when I asked.


Last year I put a 22 year old female on a nice silver plan....and with low income subsidies, she winds up paying about $19/month. She now wishes to have me renew her, and she expects to be making the same amount of money next year....so far so good....BUT, she then says she plans to get married next November to someone who actually earns a decent living, and then, when all 2015 income is combined, they would not be subsidy eligible if they filed a joint return for 2016. Filing a joint return is a requirement for subsidies if married.

So...does she continue to get her huge subsidy for 10 months....and then at tax time, find out they may owe all the over payments back since they were not subsidy eligible? Do they just file separately for 2015 and keep their mouth shut about getting married? Does she know that because she is marrying a rich man, she needs to start out and pay full ticket for her insurance....and then hope he does not back out of the wedding? Not sure if there is some pro-rating of chargeback, etc in this type of scenario. All the market place can do when she gets married is to shut off the subsidies from that point on.


There are lots of other scenarios where someone's income could dramatically increase in the course of the year...like if they got a job.......and I wonder what really happens to all the over payments they recv'd with subsidies that they would not be entitled to when you add up the final annual income.

I have no real desire to "call the IRS" at this time......as it is hard enough to get good answers from anyone these days....hence coming to the forum where all the truly knowledgeable people are!!!

Thanks

 

[cadylou]

She should go ahead & get a subsidy based on what she thinks she would make for 2015 based on her current status --single, and then when she marries (if they don't break up before then), she reports the change to the marketplace and will most likely lose future subsidy payments. Clawbacks are not dollar for dollar, so as long as she reports the life change when it occurs, she should be ok. My opinion based on my understanding of the rules . . . .others may have a different opinion. My assumption (and you know how that goes) is that they would account for each situation for the amount of the year where she was single vs. married.

 

[Ann H]

It is pro-rated. They account for the amount of the year that the person was single vs married. So, when she marries she might lose a subsidy based on household income, but she wouldn't have to pay back the subsidy she had been eligible for while she was single. If you want technical details for your question, you will find the answer in the Treasury Department reg TD9590.

 

[RayNY]

Ann's on point with the references! I don't often question you, but are you sure that the subsidy rec'd as a single won't be subject to a clawback at year end after marriage (presuming an income increase)? It appears that they average income of the two spouses when calculating single subsidies-a spouse that earns more, would raise the average, and lower the APTC resulting in a pro-rated clawback for the single months based on the difference between single income and averaged income, won't it?

Here's the vital text:

The final regulations adopt the alternative credit computation suggested by the commentators as an option for taxpayers who marry during the taxable year.Under this alternative method, the credit for the single months is computed separately for each spouse as if each taxpayer’s annual income was one-half of the actual household income for the year, the credit for the married months is computed using actual household income for the year, and the premium tax credit is the sum of the credits computed for the single months and the married months. However, to avoid allowing taxpayers an increased amount of additional premium tax credit resulting from marriage, the final regulations cap any additional premium tax credit allowed to a taxpayer under this alternative computation method at the amount of additional credit that results from computing the credit under the general rule.

I skimmed the rest of the doc, didn't see anything saying the individual wouldn't be subject to a clawback, except for a "proposed-not adopted" clause.

 

[Ann H]

You are correct, Ray. Thank you for that. Note to self - remember this!

 

[RayNY]

Thanks for the confirmation. What a tricky scenario!

 

[Ann H]

Thanks for the confirmation. What a tricky scenario!

Naw, not really tricky. Straight up - You caught me in an error. I just trusted my memory for the rules, and didn't remember the averaging thing.

It does bug me though. I remember a reg that went into detail about people who marry/divorce mid-year, and they were giving pro-rata subsidies. Now I can't find that.

 

[RayNY]

Ann,

Regardless of your memory (which is usually right), it's a tricky situation. I honestly would never have guessed that's how it's handled.

I'd wager you're remembering the pro-rata guidance for new eligibility from a change in marital status.

X and Y make $30k and $40k respectively. As a household of 2, no subsidy eligibility ($70k is over the $62,920 cutoff). Divorced, they both qualify ($46,680 cutoff). If they obtain coverage 7/1, the APTC would be pro-rated by the 6 months of coverage.

 

[Ann H]

Ann,

Regardless of your memory (which is usually right), it's a tricky situation. I honestly would never have guessed that's how it's handled.

I'd wager you're remembering the pro-rata guidance for new eligibility from a change in marital status.

X and Y make $30k and $40k respectively. As a household of 2, no subsidy eligibility ($70k is over the $62,920 cutoff). Divorced, they both qualify ($46,680 cutoff). If they obtain coverage 7/1, the APTC would be pro-rated by the 6 months of coverage.

That is exactly what I remember. Thank-you. You have a stellar memory.