By Jake Harmsen, Wipfli Financial Advisors, LLC
The American Rescue Plan Act (ARPA) included some changes to programs aimed at helping those most in need, such as lower-income individuals and families. When it comes to health insurance premium subsidies (i.e., premium tax credits) under the Affordable Care Act (ACA), the changes it made actually benefit individuals and families in a wide range of income levels.
Here are the two big changes the ARPA made to the ACA and how they may impact you if your health insurance was acquired on the ACA exchange:
1. ACA income limits
The premium you pay for ACA healthcare is based on your household size and the percentage that your income is over or under the federal poverty level. 
Before the ARPA, if your household income was 400% or more of the poverty level, you received no premium assistance tax credits and paid 100% of your premium. But if your household income was between 300-400%, you paid a maximum of 9.5% of your income towards the premium. This led to individuals and families who were just barely over the 400% limit being hit with a tax impact in the thousands and even tens of thousands of dollars as compared to similarly situated taxpayers with income just under that threshold.
However, for the years 2021 and 2022, the ARPA has made a significant change to the premium percentages across all income levels. Whereas those with incomes up to 200% of the poverty level had to pay between 2-4% of income, they now pay 0%. And whereas those 400% or higher received no assistance, they now pay a maximum of 8.5% of their income towards the premium.
An additional subsidy is provided to anyone receiving unemployment compensation for at least one week during 2021. Regardless of your actual household income, the amount in excess of 133% of the federal poverty level will be ignored for determining your eligible premium tax credit (PTC). This will allow certain taxpayers to obtain a PTC even if taxable income is 1,000% or more of the federal poverty level.
2. ACA premium subsidies
When you enroll in healthcare through the federal exchange, it requires you to estimate your household income for the coming year and then calculates your share of the monthly premium based on that amount. However, many people don’t understand everything they should be including in that income amount and therefore have inadvertently underestimated their income and received a larger subsidy, or overstated their income and received a smaller subsidy, than they were entitled to. The difference is trued-up on your personal income tax return and can result in an increase or a decrease in the premium tax credit amount.
Additionally, the rise in unemployment and expansion of unemployment benefits made many taxpayer’s income estimates inaccurate. In fact, unemployment benefits may even have pushed some taxpayers over the 400% level, while for others their household income may have been far below their original estimate even when you include the enhanced unemployment benefit.
Why is this a big deal? Because the IRS requires you to pay back the excess subsidy. This not only hurts low-income people who may not have the money to make up the difference but also those who surprisingly found themselves over the 400% level and faced with the prospect of paying back their entire subsidy.
The ARPA provides immediate relief for affected individuals. For the tax year 2020, the government will generally not require taxpayers to repay the excess subsidy to the IRS regardless of how far off their estimated household income was.
If you have already filed your 2020 tax return, you do not need to file an amended return. The IRS has said it will refund the money to you automatically.
How financial planning comes into play
Will ACA income limits revert in 2023? Yes, if Congress doesn’t take further action.
However, there are five things you can start doing today to prepare.
1. Fund your HSA
If you have an HSA, we recommend funding it as much as possible — even maxing out the annual amount. The benefits are valuable. HSAs let you make tax-deductible contributions and tax-free distributions, as well as provide tax-deferred growth. While you can’t use it to pay ACA premiums, you will be able to use it to pay for Medicare Parts A, B and D once you turn 65. Plus, you can use your HSA to pay for unreimbursed qualified medical expenses no matter what age you are.
You can also use a technique called bunching, where you accumulate your medical expense receipts for several years and then, when you have a serious cash crunch or after you retire, submit them for income tax free reimbursement from your HSA.
2. Convert your IRA into a Roth IRA
Has your income decreased but you expect it to go back up in 2023 and beyond? If so, consider a Roth IRA conversion. There are no income restrictions on Roth IRA conversions, the funds grow tax-free and withdrawing funds from the account is also tax free if you meet certain requirements. Although it may cost you some additional premium today, it could be a valuable technique if the law reverts and you need tax free income sources after 2023.
3. Recognize capital gains now and perform tax loss harvesting
Again, if income is expected to be lower over next two years, consider recognizing capital gains in 2021 or 2022. This resets basis in case the ACA income limits revert in 2023 and could lead to less of a tax impact down the road. We also recommend considering tax loss harvesting, which is the process of selling a security in a taxable account for a capital loss to offset capital gains.
Similar to doing Roth Conversions, realizing gains may cost you some additional tax and premiums in the current year, but it can provide you greater flexibility and liquidity in future years.
4. Don’t immediately take Social Security
Immediately taking Social Security when you turn 62 can handcuff you when it comes to planning opportunities. Your full amount of Social Security counts toward your income, so if you retire at age 62 but have to take on ACA healthcare coverage because you can’t go on Medicare until age 65, one smart planning strategy may be to delay taking Social Security. Relying on other income sources or savings in the meantime can ensure you pay a lower ACA premium, especially if the income restrictions do revert in 2023.
5. Plan your cash flow needs
Cash flow planning can also help. Consider whether it makes sense for you to take money out of your IRA this year, pay the taxes on that money and make the cash available for next year’s expenses. By “bunching” your distributions in some tax years, you may be eligible for larger PTC in the other years. Be sure to weigh the additional income tax burden against the likely increased credit amount.
Wipfli and Wipfli Financial can help
As you can see, there are quite a few planning strategies you can leverage now and in the future to mitigate the impact of ACA healthcare premiums and, in general, assist you in meeting your financial goals.
ACA enrollment is open through August 15. Because your premium is based on your modified adjusted gross income, but what counts as income can get complicated, talk to us about what’s included. We can help you make the correct calculation, as well as assist you in using any of the above planning strategies.
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