'I see people who have a lot of money but little or no taxable income who still qualify for ACA Marketplace subsidies'
"My son does not work, is a full-time student and does not have any income." (Photo subject is a model.)
Dear Quentin,
Tell me how this is fair: I see people who have a lot of money but little or no taxable income who still qualify for ACA Marketplace subsidies for their health insurance. I'm curious how this works. My son does not work, is a full-time student and does not have any income. He did receive a small settlement from an accident years ago. Yet he (we) still have to pay about $500 a month for him to have medical insurance.
The Mother
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You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.
Some people will get paid under the table. Others will see every last dime go through Uncle Sam.
Dear Mother,
Don't worry about other people who may or may not game the system.
Compare and despair. That is a thankless task. Some people will get paid under the table. Others will see every last dime go through Uncle Sam. There's no accounting for others. Let them do their thing. Your son has, perhaps, been given a rougher deal: Even though he is a full-time student with little or no income, he still pays about $500 for health insurance. However, the settlement itself is probably not the real reason for his high premium. Is it fair? Probably not. Is it usually the rule? Yes. Is it the rule in his case? I really don't have enough information to say.
What I can tell you: Under the Affordable Care Act, subsidies are based on household income, not on assets or wealth. If your son is claimed as your dependent, he would be part of your ACA Marketplace "household." So if he earns nothing, but you claim him as a dependent on your tax return, and your household income is relatively high, then the ACA Marketplace takes that tax household into account when determining his eligibility, not his individual income. As a result, he may qualify for little or no financial assistance even though he personally has no earnings.
There is another wrinkle. Compensation for physical injury is excluded from gross income, but punitive damages and any interest earned are taxable. If that money generates investment income, or if portions of the settlement were taxable, it can affect his MAGI and any subsidy calculation. Your modified adjusted gross income (MAGI) is what counts here, and that's not necessarily the same thing as "taxable income." Medicaid eligibility works on similar household MAGI rules, so if your son is claimed as your dependent, your income will likely count too.
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High wealth, low ACA subsidies
ACA Marketplace subsidies are based on household MAGI, not on assets or net worth. As you suggest, a person with substantial wealth - cash savings, no mortgage or a big investment portfolio - can still qualify for significant subsidies if their ACA-reportable income for a given year is relatively low. This usually happens when people structure their assets in ways that generate little or no taxable income, as retirees often do. The arrangement is completely legal, but may seem less fair to someone in your son's position.
Early retirees can be particularly good at this. The people you say qualify for medical subsidies and yet live comfortably may be these happy or early retirees who are living off their assets - drawing down savings in a strategic manner, per advice like this from their financial adviser, living on post-tax Roth distributions or simply spending their cash until their required minimum distributions (RMDs) kick in - while lolling about in a low tax bracket for as long as possible. Nice work, if you can get it.
Premiums of $500 a month for an individual in your son's position are possible. The amount depends on where your son lives, his age, the plan he selected, whether he is eligible for a subsidy, whether you claim him as a tax dependent, your household MAGI, among other factors. Most likely, if you claim your son as a dependent, the ACA Marketplace is taking the tax household into account rather than simply looking at his individual income. Your income may, therefore, reduce or eliminate any subsidy he would otherwise receive.
If your son filed independently and was not claimed as your dependent, his own MAGI - which would likely be close to zero - could qualify him for substantial subsidies. (He cannot simply choose not to be your dependent for ACA Marketplace purposes.) Whether that trade-off makes sense, however, depends on what that is worth to you at tax time. Bottom line: An individual with significant assets can still qualify for financial assistance, whereas someone with low personal income might receive little to no subsidy if their household falls into a higher income bracket.
Every case lives or dies on its own set of circumstances.
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The Moneyist regrets he cannot respond to letters individually. Check out The Moneyist's private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.
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-Quentin Fottrell
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