Premium Tax Credit Interaction with Medicaid

Posted by Lee Reams Sr. on

Note: Medicaid goes by the name of Medi-Cal in California and is enhanced and thus uses 138% of the poverty level for qualification)

We have had several questions posted related to PTC and its interaction with Medicaid.  In virtually all of the cases, a spouse, child or dependent applied for and received free Medicaid coverage for 2015.  In order to do that they would have had to indicate they were not in another family or did not have another family member with household income that they neglected to include in the application. Was it a mistake, misunderstanding, or fraud?  At any rate they received Medicaid coverage for FREE.

Medicaid Penalty - When tax time rolled around the Medicaid beneficiary ended up as a spouse or dependent on another taxpayer’s tax return and therefore was included in that individual’s tax family for purposes of the ACA.  If  it turns out that this tax family’s household income exceeded 100% of the poverty level (138% in states that have enhanced Medicaid) then the ones that managed to receive FREE Medicaid insurance didn’t actually qualify for Medicaid. 

A number of students have been asking isn’t there some kind of penalty for that?  If not there is a big loophole is the system.

Well, turns out Medicaid can come back to those who improperly obtained Medicaid coverage for the cost of the insurance.  Will they do so is another question.

However, the repayment is not built into the tax system, so it has no effect on the preparation of tax returns.

Penalty For Not Being Insured – Section 5000A imposes a “shared responsibility payment” for anyone who is not “covered under minimum essential coverage” (Section 5000A(a) & (f)).  Medicaid is a “qualified health plan” so if all the family members are covered by Medicaid and other qualified health insurance then there is no uninsured penalty.

Premium Tax Credit (PTC)– The question related to this issue has to do with the PTC.  In order qualify for the Section 36B PTC insurance must be obtained through a government Marketplace.  Thus Medicaid does not qualify for a PTC.  

However, assume another member of the tax family obtained coverage through the Marketplace.  Then that family member would qualify for the PTC.

The amount of the Section 36B PTC is dependent on family size and household income.  Here again, students are questioning the fact the premium tax credit for the family is not affected by the fact that some members of the tax family were on Medicaid.  The answer to that question is it makes no difference. If only one member of the tax family qualifies for the PTC it will be same as if all members of the family qualified.  There is no adjustment needed or allowed.  

Example: Mother and daughter manage to get coverage through Medicaid.  Mother files jointly with father and they claim daughter as a dependent.  Father uses his correct household income (too high for Medicaid) and obtains his insurance through the Marketplace. With a family size of three, the family’s percent of the federal poverty level is lower, and thus the PTC is higher even though the mother and daughter had insurance through Medicaid.  FREE insurance and higher PTC…but that's the way it works out!

 The following example is from Reg 1.36b-3(c)(3), Example #2 which confirms the conclusion taken above.  

Example 2. (i) Taxpayer N has one dependent; S. S is eligible for government sponsored minimum essential coverage. N is not eligible for minimum essential coverage. N enrolls in a qualified health plan for 2014 and the Exchange approves advance credit payments. On August 1, 2014, S loses eligibility for minimum essential coverage. N terminates enrollment in the qualified health plan that covers only N and enrolls in a qualified health plan that covers N and S for August through December 2014. N pays all premiums not covered by advance credit payments.

(ii) Under paragraph (c)(1) of this section, January through December of 2014 are coverage months for N and August through December are coverage months for N and S. N's premium assistance credit amount for 2014 is the sum of the premium assistance amounts for these coverage months.