2020 Refund for ACA Premium Tax Credit when income too high?

[Loren Ver]

Background, DH and I are FIREd and have a marketplace plan. I try to balance our MAGI income so that we can have a decent subsidy.  In 2020, our MAGI overshot by a lot due to investment gains paying out.  I then decided to go ahead and pull out additional income enjoying the zero percent tax rate as much as possible since we were going to have to pay back the subsidy for the year. 

We filed our taxes by the usual April 15th deadline, and paid back our subsidy but owed no additional federal taxes. 

Yesterday I got a letter from the IRS that reads I will be getting a refund for my "...2020 Form 1040 because of recent tax laws, rulings, or regulations required us to correct for Excess advance premium tax credit repayment."  It is in the amount I repaid for my 2020 premium tax credits.

So a few questions and thoughts.

 First, what's up with this?  I am assuming it has to do with Biden's recent changes to how the ACA is being run, but I didn't know it was going retroactively change the rules.  Or was it something else?

Second, retroactive changes make me nervous.  Sure it is in my favor, but it still makes me nervous. My 2020 books were closed, the game played, and now the rules are changing.  I'd really like to understand how this happened, and if the same changes can be used to cause negative effects on my family in the future retroactively.  Yah, the money is nice, but stability of rules (especially once the moment has passed) is can be worth more.

Thank you for your thoughts,
Loren

[secondcor521]

There were two provisions in the American Rescue Plan Act, which was the name for the COVID relief bill passed by Congress and signed into law by President Biden back in March, that retroactively affected 2020 tax returns.

One of these provisions retroactively eliminated for 2020 the need to pay back any excessive APTC.  Since you paid it back, the IRS is refunding that excess APTC repayment back to you.

(The other provision had to do with making the first $10,200 of unemployment insurance tax free at the federal level.)

Regarding your second question, you can lobby your elected officials to not change the rules retroactively.  Generally, though, in my experience, they don't make adverse changes retroactively; only ones that they view as beneficial / beneficent.

[MissNancyPryor]

This happened to me, too and I did a little bunny trail off the longer thread on the ACA.  Here is where I started that part of the conversation:

https://forum.mrmoneymustache.com/welcome-to-the-forum/what-comes-after-the-aca/msg2850988/#msg2850988

There is discussion about the subsidy cliff being removed and its effect on taxes in there.  Right now the cliff is suspended for the next 2 years but there is hope it remains permanent which makes trying to stay under that magic MAGI less troublesome.

[seattlecyclone]

I think this repayment forgiveness thing is a silly law. It's not supposed to matter whether you're off by a bit in your income estimates when you sign up for ACA insurance, or in what direction; in 2020 it did. For 2020 only, two people with identical incomes will pay different amounts for health care. The one who underestimated their income will pay less than the one who overestimated. This sure seems to suggest that people will be better off underestimating in the future. If they pass this retroactive forgiveness again you'll save money, and if they don't the estimate doesn't matter.

[Loren Ver]

Thank you all for your replies, very helpful.

I knew someone (multiple someones in this case) would know more about what was going on than me :).

I'll check out the ACA discussion link- thanks!


LV