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Saturday, September 2, 2017

Another large payment owed for incorrect PTC

Another case* addresses a couple receiving an advance Premium Tax Credit (PTC) of a large amount and having to pay it all back. They also note that if they had known they would have to pay it back, they would not have taken the insurance. The cost of the insurance for this California couple was 20%  of pre-tax household income. That's a lot!

For context, if this couple lives in San Jose, rent for a one-bedroom apartment starts at $2,000/month or 33% of the couple's pre-tax income!

The case is a reminder of flaws with the Premium Tax Credit, such as:
  • Individuals only get it if they buy insurance on the exchange AND their household income does not exceed 400% of the federal poverty line. For 2016, this is $47,080 for a single person and $63,720 for a family of two.
  • The PTC is based on the cost of the second lowest cost silver plan. So, one's age and location are factored in. Insurance costs more as you age. But, despite this fact, the eligibility for the credit is still tied to 400% of the federal poverty line. Since people don't automatically make more money as they age, it makes it less likely that older individuals will be able to obtain affordable insurance (until they are old enough for Medicare).
Despite flaws, the PTC has at least one good point - it offers a tax savings. It's not as good as what about 60% of employees get who work for an employer who subsidizes their health coverage. If your employer pays part or all of your health insurance, it is tax-free income. AND there is no limit on this tax benefit regardless of how much your income exceeds 400% of the federal poverty line. So while the PTC is not as good of a benefit, it is at least of some help for individuals without the employer provided tax-free subsidy.

One proposal for some relief is S. 1529 (115th Cong.), Addressing Affordability for More Americans Act of 2017. This bill would increase eligibility for the PTC to individuals with household income of 800% or less of the federal poverty line (rather than 400%). The change is proposed starting for 2018. It still isn't as good as the tax-free employer provided subsidy though.

What do you think?

*Here is a summary of the recent case: (see my 7/20/17 post for another case on this topic)

McGuire, 149 TC No. 9 (8/28/17) – The McGuires received an advance Premium Tax Credit (APTC) in 2014 of $591 per month ($7,092 for the year). The monthly premium on their Silver plan was $1,182. This was arranged through Covered California in 2013. Still in 2013, Mrs. M started working and “promptly notified Covered California.” This was a significant change because it caused the couple’s household income to exceed 400% of the federal poverty line (FPL) for 2014 making them ineligible for the PTC. It was not until mid-June 2014 that Covered California (CC) acknowledged their reported change in household income. This letter also stated:

The Covered California website shows how much your premium assistance lowers your premium. Your premium assistance is based on our records and the income you put on your application that you expect this year. If you take the full premium assistance to pay the premium, and your income is higher, you may have to pay some back at tax time.”

The court noted that it was not clear whether the couple could have changed to a plan with a lower premium. The court also notes that it would not have mattered what was in the letter because the couple never received the letter. Per the court, the couple made several attempts to alert CC about the change in their income, but to no avail. CC also did not react to the couple’s request to change their address. The McGuires also never received Form 1095-A from CC.

On their 2014 Form 1040, the couple checked the box on line 61 to indicate they had coverage for every month of the year. They did not include Form 8962 on the PTC or indicate receiving an APTC of $7,092. The IRS received the Form 1095-A and issued a notice of deficiency.

The court agreed with the IRS. Because the McGuire’s household income exceeded 400% of the FPL, they are not entitled to a PTC and must pay back the APTC. The couple noted that they would not have taken the coverage if they had known they had to cover the entire cost. While the court was sympathetic, it noted that there was nothing it could do. We “are not a court of equity, and we cannot ignore the law to achieve an equitable end.”

The court did waive the negligence penalty and found reasonable cause to waive the substantial understatement of tax penalty. The McGuires did not receive the Form 1095-A and did not receive the APTC directly so were not completely aware of the additional benefit or amount. Also, they attempted a few times to get CC to correct the APTC. In addition, the couple relied on a CPA to prepare their return.


James Kronenberg said...


Great timely "heads up" regarding how Advance Premium Credit (APC) is both a "blessing" and a "curse" depending upon how taxpayer circumstances change during a calendar year.

I'm a bit confused about how there would be an IRS penalties imposed as I thought original ACA legislation "prohibited" IRS from assessing penalties with regards to any amounts due on IRS form 1040 due to ACA provisions.

I realize this "interest only" assessment is normally considered by tax professionals when advising their clients in context of the Shared Responsibility Payment (SRP) where IRS may not assess penalties.

Unless I am "misguided" or "delusional" (both or one are entirely possible in this age of taxpayer compliance complexity), IRS penalties are limited to income tax assessments that are sourced under Title 26 Internal Revenue Code (IRC) since ACA provisions enacted by US Congressional legislation are merely "appended" to IRC for purposes of reporting and enforcement of the Individual Mandate.

Am I "bonkers" or is this a "stretch" by IRS Collections Division to assess those negligence penalty and substantial underpayment penalty ?

Professor Nellen said...

James, Thanks for the comment. The ACA tax provisions are in Title 26 of the US Code so are part of the Internal Revenue Code. The PTC is at Section 36B. It is unusual in that generally, a taxpayer isn't given a credit in advance that might have to be paid back. Also, if it has to be paid back, it can be treated as the individual paying health insurance rather than a tax. When a taxpayer claims the PTC in advance, the government is advancing funds to the health insurance provider. If any needs to be paid back, it gets paid back to the IRS. It also counts as payment of health insurance if one has to pay back any of the advance PTC.

Also see Q28 from the IRS -

If an individual owes the mandate for not having health coverage or meeting an exemption, that is also owed to the IRS. But for the mandate, the IRS is only allowed to collect the amount from a refund or voluntary payment. The IRS may not collect the mandate via lien or levy. But any advance PTC that needs to be paid back has no such restriction on it.

It does seem odd to assess a penalty for receiving too much advance PTC and having to pay all or a portion back, since it really seems like late payment of health insurance, but I don't know of any exception Congress provided. I expect though that the IRS and courts will find that the reasonable cause penalty waiver will apply where the taxpayer did not intentionally take action to get an amount in advance that they are not entitled to.