Do You Have to Pay Back Covered California Subsidies?

Health insurance can be expensive, but Covered California helps lower costs for eligible individuals through premium subsidies. These subsidies reduce monthly payments, making coverage more affordable. However, they are based on estimated income, meaning you might have to pay some back if your actual earnings differ from what you reported.

Premium Subsidy Basics

Covered California’s premium subsidies come from the federal government’s Advance Premium Tax Credit (APTC), which directly reduces monthly premiums for qualifying individuals. The amount depends on household income, family size, and the cost of the benchmark Silver plan in their region.

Eligibility is based on the federal poverty level (FPL), with subsidies generally available to those earning between 138% and 400% of the FPL. The American Rescue Plan Act (ARPA), later extended by the Inflation Reduction Act, expanded subsidies through 2025, allowing some individuals above 400% of the FPL to qualify if their premiums exceed 8.5% of household income.

Since subsidies are based on projected annual income, enrollees must estimate their earnings when applying. Reporting income changes to Covered California throughout the year helps prevent unexpected repayment obligations.

Adjusted Gross Income and Subsidy Limits

Covered California determines financial assistance using Modified Adjusted Gross Income (MAGI), which starts with Adjusted Gross Income (AGI) from a federal tax return and adds back certain deductions, such as non-taxable Social Security benefits, tax-exempt interest, and excluded foreign income.

If a household’s income exceeds subsidy limits, repayment may be required. For example, a household that initially projected an income within the subsidy-eligible range but later earned more may have to return part or all of the financial assistance received. Repayment caps vary by income level. In 2024, individuals earning between 200% and 300% of the FPL face a repayment limit of $1,800 if they received excess subsidies, while those exceeding 400% of the FPL may have to repay the full amount.

Income fluctuations can complicate subsidy calculations, particularly for self-employed individuals or those with irregular earnings. A freelancer estimating $35,000 in annual income but ultimately earning $50,000 could face a significant repayment. Updating income estimates with Covered California as earnings change can help prevent large tax bills.

Filing and Reconciliation Requirements

At tax time, anyone who received premium subsidies must reconcile them with their actual income using IRS Form 8962. This form compares the total Advance Premium Tax Credit (APTC) received with the final Premium Tax Credit (PTC) based on actual income. If the APTC was lower than the final PTC, the taxpayer receives a credit. If it was higher, repayment is required, subject to income-based caps.

Failing to file Form 8962 can delay future subsidy eligibility. The IRS may withhold premium assistance in subsequent years if reconciliation isn’t completed, leading to higher monthly insurance costs. Taxpayers who don’t file or reconcile properly may also receive IRS notices requesting additional documentation or adjustments.

Paying Back Excess Subsidies

If a taxpayer receives more in subsidies than they qualify for based on final income, they must repay the excess when filing taxes. Several factors can contribute to this, including income changes, household size adjustments, or errors in reported information.

Income Changes

Since the Affordable Care Act (ACA) ties premium tax credits to household income as a percentage of the FPL, even a modest earnings increase can reduce or eliminate subsidy eligibility. For example, if an individual estimated an income of $30,000 (about 225% of the FPL for a single filer in 2024) but later earned $45,000 (around 340% of the FPL), their subsidy entitlement would decrease. The IRS requires taxpayers to reconcile this difference using Form 8962, and any excess subsidies must be repaid, subject to repayment caps.

For those with variable income—such as freelancers, gig workers, or commission-based employees—accurately estimating annual earnings can be difficult. Updating income estimates with Covered California as financial situations change can help prevent large repayments. Setting aside funds throughout the year can also help cover potential tax liabilities.

Family Size Changes

Household composition affects subsidy eligibility, as premium tax credits are based on the number of dependents claimed on a tax return. Changes such as marriage, divorce, the birth of a child, or a dependent aging out of eligibility can impact subsidy amounts.

For example, a single filer earning $40,000 in 2024 may qualify for subsidies, but if they marry and their combined household income rises to $80,000, their eligibility could be reduced or eliminated. Failing to report these changes promptly can result in receiving excess subsidies that must be repaid. The IRS uses final tax filing status and dependent count to determine the correct subsidy amount, so discrepancies between initial estimates and final tax returns are reconciled.

Incorrect Data Submission

Errors in reported information can also lead to excess subsidies. Common mistakes include misreporting income sources, failing to account for all household members, or incorrectly estimating deductions that impact MAGI.

For example, if an applicant excludes taxable interest income or underestimates self-employment earnings, their reported MAGI may be lower than their actual income. This can lead to an overestimation of subsidy eligibility, requiring repayment when filing taxes. Reviewing financial records before submitting an application and updating information as needed throughout the year can help prevent these issues. Keeping documentation of income sources, deductions, and household changes ensures compliance with IRS reconciliation requirements.

Exemptions From Repayment

Some individuals may qualify for exemptions from repaying excess subsidies. These exemptions are designed to protect lower-income taxpayers and those experiencing financial hardship.

The most common exemption applies to individuals whose final income remains below 400% of the FPL. The IRS imposes repayment caps based on income brackets, meaning those with lower earnings may only need to return a portion of the excess subsidies rather than the full amount. In 2024, a household earning between 200% and 300% of the FPL faces a maximum repayment limit of $1,800, while those below 200% have even lower caps. If a taxpayer’s income drops below 100% of the FPL due to job loss or reduced work hours, they may be exempt from repayment entirely.

Another exemption applies in cases of financial hardship. If an individual experiences a major life event, such as a natural disaster, severe illness, or unexpected medical expenses, they may qualify for relief from repayment obligations. The IRS allows taxpayers to request a waiver or reduction if they can demonstrate that repaying excess subsidies would cause undue hardship. This requires submitting documentation, such as medical bills or proof of income loss. Those facing financial difficulties should consult a tax professional to explore their options.

Seek Guidance If Uncertain

Navigating subsidy repayment rules can be complicated, especially for individuals with fluctuating income or changing household circumstances. Since failing to reconcile subsidies properly can lead to unexpected tax liabilities, seeking guidance from a tax professional or financial advisor can help clarify obligations and prevent costly errors.

Covered California enrollees who anticipate income changes should update their information to minimize repayment risks. Consulting with a certified enrollment counselor or tax preparer can provide insight into how different financial scenarios impact subsidy eligibility. Reviewing IRS guidelines and using online tax calculators can also help estimate potential repayment amounts before filing a tax return.