Updated April 15, 2014.

Did you get government help paying your monthly health insurance premiums? If you got the premium tax credit health insurance subsidy to decrease the cost of your monthly health insurance premiums, you’re at risk for having to pay back the subsidy.

Why Would I Have To Pay Back the Subsidy?

The subsidy is based on your income. The lower your income, the more help you get. If your income is above 400% of federal poverty level, you don’t get any help.

However, when you apply for the subsidy, you don’t always know exactly what your income will be, so you use your estimated income. Even if you have a relatively stable income, a year-end bonus or a raise could cause you to make more than you expected that year.

Most people choose to have the subsidy money paid directly to their health insurance company each month to decrease the cost of their monthly premiums. This is known as receiving the subsidy in advance. Since the subsidy is a tax credit, it’s technically not credited until you file your taxes. However, it’s hard to pay your health insurance premiums this month using money you won’t receive until next April 15^th, so the Affordable Care Act included provisions for the subsidy to be paid in advance.

However, accepting advance payment of the subsidy means you’re receiving money based on your estimated income rather than your actual income. If you end up earning more than you estimated, you will have received more subsidy money than you should have.

  The government will want this extra subsidy money back. If your income increased enough that it turns out to be more than 400% above federal poverty level, even one dollar more, you’ll have to pay back the entire subsidy when you file your taxes.

Learn more about this in “How a Health Insurance Subsidy Could Cost You Big-Time.”

How Do I Avoid Having to Pay Back the Health Insurance Subsidy?

If having to come up with thousands of dollars without much warning sounds like your idea of a nightmare, there are a couple of ways to prevent this scenario from happening to you.

1. Don’t choose advance payment of the subsidy. Rather than having the subsidy sent to your health plan every month, you can choose to have the subsidy credited to you all at once when you file your taxes for the year. This way you know you’ll receive the correct subsidy amount because you’re not working with an estimated income. You’ll know exactly what your income for the year was.
   
   However, if you were having trouble paying for health insurance and needed the subsidy, you may need the money at the time your health insurance premiums are due. You may not have a stash of cash available to pay your premiums while you wait for your tax refund to come after the year is over. Here’s an option that may work better for you.
2. Update your health insurance exchange each time your income changes. If you get a bonus, a raise, or a larger-than-expected commission, don’t just pocket the money. Call your health insurance exchange and tell them you need to update your income estimate to make sure you’re getting the correct subsidy amount.
   
   The exchange will recalculate the premium tax credit subsidy based on your new estimated income and will tweak the subsidy amount for the rest of the year. This adjustment of the subsidy amount will help you come out with the correct subsidy amount at the year’s end. It may also mean the amount you pay each month for health insurance goes up a little. However, that’s probably easier to deal with than having to pay it all back in one lump sum on April 15^th.