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 but to further complicate things, there are some differences that apply only to Medicaid and CHIP. Today, we’re going to look at a key difference. This final blog in our series is going to drill down on how Medicaid and CHIP eligibility is based on current monthly income, while Marketplace subsidy eligibility is based on projected annual income.
Current monthly income is used to determine eligibility for Medicaid and CHIP. Unlike Marketplace subsidies, which are based on projected annual income for the applicable coverage year, Medicaid and CHIP eligibility are based on current monthly income. As noted in yesterday’s blog, lump sum payments, such as lottery winnings, would only count in the month received. About two-thirds of the states have adopted the option to count predictable changes in income that can be verified (e.g., a signed contract or clear history of fluctuating income) in determining current monthly income.
Projected annual income is used to estimate Marketplace subsidies. Ultimately, Marketplace subsidies are based on a projection of income for the calendar year in which coverage is sought. Applicants are asked to provide details of their various sources of income and deductions while the online system does the math. The projected income can be revised if applicants are expecting a change during the year.
Actual annual income is used to determine the final Marketplace premium tax credits. What many individuals do not know that the income projection only estimates the level of premium tax credits (PTC) that they can take in advance to pay for their share of the insurance premiums. It is not until individuals file their tax return for the year that the actual amount of PTC is determined. Any difference between the final PTC and the amount taken in advance will be reconciled on the individual’s tax return.
Reporting or projecting income accurately. Since PTCs are based on a sliding income scale, it is important to estimate as closely as possible. Estimate too low and consumers may have to pay back excess tax credits. On the other hand, overstate income and consumers may miss out on enrolling in Medicaid or in plan with lower cost sharing. But what and how to report can be confusing. For example, one significant change with MAGI, is that pre-tax contributions reduce taxable income. Consider a single mother who earns $23,000 a year (146% FPL) but contributes $3,000 to a pre-tax dependent care account, which results in a taxable income of $20,000 (127% FPL). Her gross income would qualify for Marketplace subsidies, while her gross taxable income would qualify for Medicaid in an expansion state. This can make a considerable difference in the benefits she receives and the cost-sharing she is required to pay.
In the Marketplace, if someone overstates their income, they will get additional tax credits on their tax return. But they may have missed out on lower cost-sharing. Consider a family of 3 that earns $40,000 (202% FPL) and contributes $5,000 to a pre-tax dependent care account. Their taxable income of $35,000 (177% FPL) means that could enroll in a plan that pays 87% of average costs versus a plan that pays only 73% of average costs. The difference in cost-sharing can be significant.
Reporting changes during a year. Individuals who experience a change in income should report it promptly in order to have their eligibility reviewed and their subsidies adjusted according. Doing so will help reduce the chances for surprises come tax time.
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. 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.