Every tax season hundreds of thousands of Californians are hit with an unexpected bill: They owe hundreds of dollars or more to the IRS because they accepted more money in subsidies for health insurance than they were allowed.
The chargeback can sting. Collectively, owed the IRS close to $690 million in 2021 in charges related to the health care subsidies, according to agency data from the most recent year available. That is roughly $1,662 per person or family. Many people who end up owing money live in lower-income households.
This repayment rule is connected to the federal and the state-based health insurance plans it encouraged. , the state鈥檚 insurance marketplace, offers generous premium subsidies to those who qualify based on their income, but people can unknowingly receive too much aid if they underestimate how much they鈥檒l earn the following year or if they lose a dependent and do not report that change.
The federal government collects any 鈥渆xcess鈥� aid when people file their taxes. The government calls this process 鈥渞econciliation.鈥�
Ten years after the rollout of the insurance marketplace, many Californians continue to be caught off guard come tax filing time. Often the charges come as a shock.
鈥淭hey feel like they鈥檙e following the rules, they鈥檙e getting their coverage. And, they just kind of feel like they鈥檙e getting in trouble for doing everything right,鈥� said , assistant director of community economic development services at Her nonprofit helps local low-income residents prepare their taxes at no cost as part of a .
The people who receive excess aid are not wealthy. About half of the households who owed the IRS for excess premium subsidies in tax year 2021 earned less than $50,000, according to data from the agency.
, an insurance broker in Merced, said most people can avoid this clawback by reporting any changes in income and dependents to Covered California as soon as possible. This way the agency will adjust the amount of premium subsidies a person or family is receiving, and they鈥檒l avoid an unpleasant surprise come tax filing time.
Hernandez tells clients to report all taxable income to the agency鈥� that includes any extras, such as a bonus or significant winnings from a lucky night at the casino.
鈥淪ome members who are doing the enrollment themselves think that they need to go by last year鈥檚 income, and that鈥檚 not always the case,鈥� Hernandez said. People should instead estimate income based on their current situation, he explained.
Don鈥檛 wait for open enrollment
Covered California in an emailed response to questions from CalMatters said it sends a notice reminding enrollees to report any changes, such as income and household size, before they sign up for or renew coverage.
鈥淐onsumers are reminded throughout the notice to ensure their information is accurate, and states what the tax implications are if information is incorrect,鈥� Jagdip Dhillon, a Covered California spokesperson, said in an email.
Of course, people shouldn鈥檛 wait until open enrollment to declare changes. Enrollees can report changes at any point, either with the help of an enrollment counselor or by calling Covered California directly.
鈥淧eople may need mid-year reminders, if you鈥檙e only getting this (notice) once a year it can be kind of late,鈥� said , director of the program on the Affordable Care Act at KFF, a health policy organization that conducts polling and research. 鈥淥pen enrollment is in November and tax season is April. It might be a good idea to think about it in July.鈥�
The reconciliation rule also works the other way around. People who overestimate their income and receive less subsidies than they鈥檙e eligible for could get money back. And for those who make less than 400% of the federal poverty level, there are the IRS if they were to owe.
At the time of learning they鈥檒l owe the IRS, some people question whether they should keep their health insurance, Casillas said. But people may also owe if they go without insurance. That鈥檚 because California is one of five states that requires residents to have health insurance. Those .
Many save money with Covered California
Some people who have encountered this issue in the past see it as a tradeoff, Casillas said. They pay very little for their health insurance every month, but pay hundreds or a couple thousand dollars when they file their taxes. For many people, what they end up owing the IRS is still less than what they鈥檇 pay for a health plan at full price or what they鈥檇 pay for a hospital visit, Casillas said.
鈥淲e just tell them, 鈥楬ey, you know what, these things can be unpredictable. You want to have some savings,鈥欌�� she said.
Correctly estimating next year鈥檚 earnings can be especially difficult for people who freelance or job hop, causing their estimates to be less precise, experts say.
鈥淎 lot of people on the ACA marketplace do have incomes that can be very volatile. They might be piecing together part-time jobs or are self-employed or small business owners,鈥� Cox said.
Hernandez said he advises people enrolled in a Covered California plan to find an agent of their own and check in with them every so often. Because agents get commissions from insurance companies, this service is often free to the public. This is the best way to be informed and avoid unexpected charges, he said.
Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.
is a nonprofit, nonpartisan media venture explaining California policies and politics.