Getting MAGI Right: Changes to Income Counting Rules in Medicaid and CHIP

Last week, we released a primer on the basics of MAGI – how rules for counting household size and income to determine eligibility for Medicaid and CHIP have been aligned with Marketplace subsidies. The move to MAGI has brought about a number of changes in Medicaid and CHIP, but to further complicate things, there are some differences that apply only to Medicaid and CHIP. Today, we’re going to look at how counting income in Medicaid and CHIP has changed under MAGI. It’s important to note that these rules apply only to the MAGI-based groups: children, pregnant women, parents, and the new adult expansion population. They do not apply to the elderly (often called dual eligibles) or people with disabilities.

The Getting MAGI Right series:A Primer on Differences that Apply to Medicaid and CHIP
Differences in Medicaid and CHIP Add Complexity
Exceptions for Who Counts in the Household for Medicaid and CHIP
An Assisters Worksheet for Determining Household Size in Medicaid and CHIP
When Does Social Security Income Count?
Current Monthly Income vs. Projected Annual Income

The move to MAGI aligns eligibility rules in order to avoid gaps in eligibility and facilitate coordination of coverage across all the insurance affordability programs, including Medicaid, CHIP and financial assistance to purchase Marketplace plans. Premium tax credits to lower the cost of Marketplace plans are rooted in tax law, thus, what income counts in Medicaid and CHIP is now largely based on whether income is taxable. Only three sources of non-taxable income are added to taxable income for eligibility purposes.

How does “taxable” income change how income is counted in Medicaid and CHIP? Prior to MAGI, certain types of income, such as TANF and SSI, were counted in determining an individual’s income in Medicaid and CHIP. Now, with the exception of 1) non-taxable Social Security benefits, 2) exempt interest, and 3) excluded foreign income, only taxable income counts. So let’s talk about specific changes:

Non-taxable income. Certain sources of income that previously counted, including Veteran’s benefits, worker’s compensation, TANF, and SSI, are not taxable and, therefore, are not counted when determining eligibility for MAGI-based Medicaid and CHIP. Except for Social Security retirement income, which does count for tax filers, other sources of retirement or insurance disability insurance payments are counted only if they are taxable. (As noted in yesterday’s blog, Social Security income counts only for tax dependents if they are required to file taxes.)

Net business or farm income. Previously, some states did not allow the self-employed or business owners to deduct all of the expenses that are allowed as tax deductions for federal income tax purposes. Specifically, states often excluded a portion of depreciation or capital expenditures, or discounted what business owners could write off as expenses. With MAGI, only net profit (or loss) from business or farm operations counts toward income. This bottom-line net income is reflected on line 31 of Schedule C (Profit or Loss from Business) and line 34 of Schedule F (Profit or Loss from Farming). And any net loss should offset other sources of income.

Child support and alimony. Pre-MAGI, child support received was often treated as income while a portion of child support paid out could be deducted from income. Neither child support received nor child support paid out is included in MAGI-based income. On the other hand, alimony received is treated as income and alimony paid out, which previously was not a common deduction, is deducted from income.

Stepparent income. Before MAGI, states had the option of whether to count a stepparent’s income toward a child of his spouse. Under MAGI rules, stepparents who live with a child are counted in their household size, and the stepparent’s income counts toward the child’s eligibility.

Gifts, inheritances, and other lump sum payments. Gifts and inheritances previously were counted as lump sum income in the month they were received. These sources of income are no longer counted. However, other lump sum payments may count, depending on whether they are taxable or not. For example, lottery winnings are taxable and counted toward MAGI.

Pretax contributions. Employers may offer a number of benefit options that are paid through pre-tax contributions, including certain retirement plans and flexible spending accounts for childcare, medical expenses, and commuter expenses. These contributions are deducted from gross income to determine gross taxable income, and therefore, lower the income that counts under MAGI rules. We’ll talk more about the significance of pretax contributions in tomorrow’s blog on helping people report or project their income.

Cash support. Previously, states may have counted cash support that was received by individual as income. Now, states may only count cash support as income for individuals who are claimed as tax dependents by someone who is not a parent or spouse.

Additional guidance from CMS would be helpful. We continue to hear about states that are missing some of the finer points of what income counts, particularly when it involves changes as the result of MAGI. For example, we’ve heard that the state may be counting child support that is paid outside of the state’s child welfare system as income, or that an eligibility worker is not offsetting a business loss against other income. Deciphering federal regulations can be tricky, and it would be helpful for CMS to issue additional guidance or FAQs that would address these and other issues. We also know that CMS will focus their eligibility audits on ensuring that state systems are making accurate MAGI-based eligibility determinations by having states process “sample” cases. We hope the mix of cases to be audited include scenarios that cover the more confusing aspects of MAGI.

Examples of some of the topics covered in this blog are included in the longer brief, and may be helpful in understanding what income counts. Stay tuned for tomorrow’s blog, which discusses how Medicaid eligibility is based on current monthly income while Marketplace eligibility is based on projected annual income. A special thanks to the Robert Wood Johnson Foundation for its support of “Getting MAGI Right: A Primer on the Differences that Apply to Medicaid and CHIP” and this blog series.

Tricia Brooks
Tricia Brooks is a Senior Fellow at the Center for Children and Families