Definition of Income for Certain Medicaid Provisions and Premium Credits in ACA
Released: 2013-02-05T00:00:00

Introduction

Under the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended), the definition of income for eligibility for certain Medicaid populations and premium credits in the exchanges is based on modified adjusted gross income (MAGI). The initial intent of using MAGI was to standardize the definition of income for Medicaid eligibility purposes to reduce some of the variability and complexity that exists under the current Medicaid program and to provide consistency between Medicaid and the health insurance exchange.

MAGI is equal to adjusted gross income (AGI) plus certain foreign earned income and tax-exempt interest. AGI is equal to gross income minus certain exclusions (e.g., public assistance payments, contributions to retirement plans) minus some above-the-line deductions (e.g., trade and business deductions, losses from sale of property, and alimony payments).

The use of MAGI, however, has raised concerns among Congress and the Obama Administration, as it excludes some income categories either partially or altogether and is, thus, different than the income definition used in most other federal low-income programs, like Supplemental Security Income (SSI) and Department of Veterans Affairs (VA) benefits, which include most sources of income, taxable and nontaxable, when determining eligibility. By excluding some types of income, individuals and families with a higher percentage of total income relative to the federal poverty level may qualify for Medicaid and premium credits.

This report first describes the relevant Medicaid and health insurance exchange provisions in ACA that rely on MAGI. It then discusses what is and is not included in this definition of income. Since Social Security income has been noted by others as a concern when defining income, the report discusses the enactment of legislation to include all Social Security benefits in the MAGI definition (and not just taxable benefits). Finally, the report raises some issues for Congress in considering changes to the definition of income for Medicaid eligibility and premium credits in the health insurance exchanges.

Medicaid Eligibility and ACA

Medicaid is a means-tested program providing health insurance to certain low-income individuals. Today, people qualify for Medicaid if they meet the program's categorical requirements and have income and assets equal to or below state-specified thresholds. Section 2001 of ACA added a new mandatory coverage group to the Medicaid statute to include certain individuals (under the age of 65) with income at or below 133% of the federal poverty level (FPL) (effectively 138% FPL as a result of the 5% income disregard) by January 1, 2014, or sooner at state option. This mandatory expansion of Medicaid was included in a legal challenge of the law: National Federation of Independent Business v. Sebelius (NFIB). On June 28, 2012, the United States Supreme Court issued its decision in NFIB. The Supreme Court held that the federal government cannot terminate current Medicaid federal matching funds if a state refuses to expand its Medicaid program to include nonelderly, nonpregnant adults under 133% of the federal poverty level. If a state accepts the new ACA Medicaid expansion funds, it must abide by the new expansion coverage rules. However, based on the Court's opinion, a state can refuse to participate in the expansion without losing any of its current federal Medicaid matching funds. The Court's decision leaves enforcement of all other provisions of ACA intact, including the exchange provisions and the use of MAGI.

States that choose to participate in this ACA expansion will cover most nonelderly citizens (including childless adults, parents, and individuals with disabilities) up to 133% FPL, and the income that is compared with this threshold for individuals in this group will be based on MAGI. (Greater detail about what is and is not included in MAGI will be discussed later in this report.) In addition to individuals eligible under the ACA expansion group, ACA also requires the new MAGI counting rule to be used to assess the financial eligibility for most of Medicaid's other nonelderly populations eligible under prior law.

Under ACA, certain groups are exempt from income eligibility determinations for Medicaid based on MAGI. Prior law's income determination rules under Medicaid will continue to be used for determining eligibility for the following groups: (1) individuals who are eligible for Medicaid through another federal or state assistance program (e.g., foster care children and individuals receiving SSI), (2) the elderly, (3) certain disabled individuals who qualify for Medicaid on the basis of being blind or disabled without regard to whether the individual is eligible for SSI, (4) the medically needy, and (5) enrollees in a Medicare Savings Program (e.g., Qualified Medicare Beneficiaries for whom Medicaid pays the Medicare premiums or coinsurance and deductibles). In addition, MAGI does not affect eligibility determinations through Express Lane enrollment (to determine whether a child has met Medicaid or CHIP eligibility requirements), for Medicare prescription drug low-income subsidies, or for determinations of eligibility for Medicaid long-term services and supports.

During a transitional period between April 1, 2010, and January 1, 2014, states have the option to extend Medicaid to individuals eligible under the new eligibility group up to 133% FPL as long as the state does not extend coverage to (1) individuals with higher income before those with lower income or (2) parents unless their children are enrolled under the state plan, a waiver, or in other health coverage. Prior to 2014, states are not required to use the MAGI counting rules when determining income eligibility for the new eligibility group up to 133% FPL. States that pick up this option may apply a different income counting methodology, such as that used by SSI, as long as it is approved by the Secretary. During this transitional period, states may apply less restrictive income counting methodologies as long as such methodologies are available to all members in a given group.

Premium Credits Under ACA

ACA requires health insurance exchanges to be established in every state by January 1, 2014, either by the state itself or by the Secretary of Health and Human Services (HHS). The ACA exchanges are not insurance companies; rather, they will coordinate the offer of private health plans to qualified individuals and small businesses. Generally, the plans offered through the exchanges will provide comprehensive coverage and meet all ACA market reforms, as applicable.

To make exchange coverage more affordable, eligible individuals may receive premium assistance in the form of tax credits. Eligibility for the premium credit is based, in part, on income and relies on the MAGI definition.

Income Eligibility for Premium Credits

Beginning in 2014, qualifying individuals will be able to receive premium tax credits toward the purchase of exchange coverage. The credit is an advanceable, refundable tax credit, meaning taxpayers need not wait until the end of the tax year to benefit from the credit (advance payments will actually go directly to the insurer ) and may claim the full credit amount even if they have little or no federal income tax liability.

ACA specifies that premium credits will be available to "applicable taxpayers" in a "coverage month" beginning in 2014.

An applicable taxpayer is an individual who

is part of a tax-filing unit; is enrolled in an exchange plan; and has household income (defined as MAGI) between 100% and 400% of the federal poverty level (with exception ).

A coverage month refers to a month in which the applicable taxpayer paid for coverage offered through an exchange, not including any month in which the taxpayer was eligible for "minimum essential coverage," other than through the individual health insurance market, with exceptions.

Amount of Premium Credits

The amount of the tax credit will vary from person to person: it depends on the MAGI of the tax-filer (and dependents), the premium for the exchange plan in which the tax-filer (and dependents) is (are) enrolled, and other factors. In certain instances, the credit amount may cover the entire premium and the tax-filer will pay nothing toward the premium. In other instances, the taxpayer may be required to pay part (or all) of the premium.

For this latter scenario, the amount that a taxpayer who receives a premium credit would be required to contribute toward the premium is capped as a percentage of MAGI. That percentage will be less for those with lower MAGI compared with those with higher MAGI, where income is measured based on MAGI relative to the FPL. For taxpayers with MAGI between 100% FPL and 133% FPL, the amount they would be required to contribute toward the premium will be capped at 2% of MAGI. For taxpayers with income 300%-400% FPL, their premium contribution will be capped at 9.5% of MAGI. ACA further specifies the "applicable percentages" that premium credit recipients, whose incomes are between those two MAGI bands, would be required to pay toward the cost of exchange coverage. The premium credit amount would be the arithmetical difference (if any) after subtracting the maximum premium contribution amount from the premium for the second-lowest-cost silver plan in the enrollee's local area.

While premium credits will not be available until 2014, for illustrative purposes, consider what the maximum premium contributions would be for exchange enrollees if premium credits were available in 2012. For example, an exchange enrollee who is eligible for the credit with MAGI at 200% FPL may be required to pay up to 6.3% of MAGI toward the cost of exchange coverage. In 2012, 6.3% of MAGI at 200% FPL for one person is equal to approximately $117 per month (see Table 1 ). In other words, the required monthly contribution for self-only coverage is $117, if premium credits were available in 2012. If the premium for the second-lowest-cost silver plan is greater than $117 per month, that excess would be the amount of that enrollee's premium credit (provided that the premium for the plan in which the person actually enrolled was more than the excess amount). With respect to this premium credit calculation, an individual who enrolls in an exchange plan that is more expensive than the second-lowest-cost silver plan will have to pay the additional premium amount.

The Definition of Income Under ACA as Amended

ACA created Sec. 36(B) of IRC to define household income based on MAGI for purposes of Medicaid eligibility for certain populations and premium credits for coverage through the health insurance exchanges. Specifically, gross income is total income minus certain exclusions (e.g., public assistance payments, contributions to retirement plans).

From gross income, adjusted gross income (AGI) is calculated to reflect a number of deductions, including trade and business deductions, losses from sale of property, and alimony payments. MAGI is defined as AGI plus certain foreign earned income and tax-exempt interest.

As originally enacted under ACA, AGI (and consequently MAGI) includes only sources of income that are taxable. Thus, some sources (or types) of income that may be considered resources for determining whether a person (or couple) is low-income were only partially included, whereas others were not included at all. Two sources of income that were partially included in the initial ACA MAGI definition were non-taxable Social Security benefits and non-taxable pension and annuity income. Examples of other sources of income that are not included in MAGI are fringe benefits, cafeteria plan benefits, gifts (cash, property, or in-kind), and inheritances (see ). These may be considered resources for determining low-income. In addition, as discussed later, many other low-income programs include some measure of liquid assets as resources when determining eligibility.

This definition of MAGI raised concerns, especially with respect to exclusion of non-taxable Social Security benefits. Generally, Social Security beneficiaries aged 65 and older are eligible for Medicare coverage for health care services. However, under the initially enacted ACA definition of MAGI, individuals and households who choose to receive their Social Security benefits early at the ages of 62 through 64 could potentially qualify for Medicaid if their MAGI was no higher than 133% of the FPL (or 138% of FPL because of the 5% disregard), or for premium credits in the newly established health care exchanges if their MAGI was between 100% to 400% of the FPL, even if their total income was much higher. Specifically, if the ACA definition of MAGI was used, not all Social Security income would be included in the MAGI definition and, for the majority of Social Security beneficiaries, no Social Security income would be included in MAGI.

To address this concern, the original ACA definition of MAGI was later amended under P.L. 112-56 , which among other things, included non-taxable Social Security in the definition of MAGI. This change did not affect the treatment of non-taxable pension and annuity income, which continues to be partially excluded under the amended definition of MAGI.

Issues for Congress

There has been increased interest in Congress to change the ACA definition of income for determining Medicaid eligibility for new enrollees and premium credit eligibility to be more inclusive and more consistent with other low-income programs. A number of issues might be considered in exploring the consequences of the change. First, the initial intent of ACA was to standardize current rules governing Medicaid eligibility for a majority of Medicaid-eligible groups (e.g., non-disabled children, parents, pregnant women, and caretaker relatives) in order to reduce the variability and complexity of these definitions under the current Medicaid program. An alternative definition may add complexity compared with MAGI. In addition, because adjusted gross income (on which MAGI is based) can be computed largely from information on an individual's federal tax return, verification of income is streamlined. If an alternative definition is used that is not based on tax return information, the administrative complexity of verifying nontaxable income from different sources comes into play. Third, the definition was developed to be consistent so that qualifying for Medicaid and qualifying for premium credits in the exchange would be mutually exclusive. So changing the definition for Medicaid should also apply to premium credits. Finally, many of the current legislative proposals have focused largely on the inclusion of Social Security benefits in income definitions for eligibility purposes. However, most other low-income programs include other types of income (e.g., nontaxable pensions) and asset holdings that are also excluded from MAGI.

This section discusses these issues in greater detail and identifies how other federal low-income programs define and verify income for eligibility purposes.

Variability and Complexity of Current Medicaid Income Definitions

Under today's general rules for determining income eligibility for Medicaid, states are required to follow the same rules and processes used by the most closely related cash assistance program in their state to determine eligibility. For example, children eligible for Medicaid who are receiving child welfare services follow the income eligibility rules of the Title IV-E foster care and adoption assistance programs. Low-income families with children follow the income counting rules of the former Aid to Families with Dependent Children (AFDC) program, and aged, blind, or disabled individuals follow the eligibility rules of the Supplemental Security Income (SSI) program, except in states that have elected the option of not providing Medicaid for all SSI recipients (209(b) states). Differences in income eligibility determination rules across different Medicaid eligibility categories increase the complexity of determining eligibility for the Medicaid program.

For Medicaid eligibility groups that rely on the former AFDC income eligibility rules, not only were the rules complex but there was large variability across the states. For example, the state AFDC methodologies had both mandatory and optional income exclusions and disregards. Some of these disregards applied to recipients but not applicants, meaning that it was harder to become eligible for AFDC than to continue receiving benefits. To further complicate matters, a gross income test equal to 185% of a state's standard of need applied after certain exclusions and disregards were taken into account (e.g., the first $50 of child support) but before others (e.g., earned income disregards). In addition, many states obtained waivers to operate their AFDC programs outside of the standard rules—including those that applied to disregards. Program rules also defined the group of individuals whose income, resources, and needs were considered as a family or a unit for purposes of determining eligibility and payment amounts.

As with the former AFDC program, not all income and resources are counted in the SSI income methodologies. In general, the SSI program assesses unearned income as well as earned income for the purpose of determining eligibility. Examples of monthly unearned income exclusions permitted under the SSI program's income counting rules include food stamps, housing assistance, energy assistance, student grants and scholarships for educational expenses, and a general income exclusion of $20 that applies to income that is not needs-based. Examples of monthly earned income exclusions permitted under the SSI income counting rules include the first $65 of earnings, one-half of earnings over $65, and impairment-related expenses for blind and disabled workers. In some cases, the income and resources of non-recipients (e.g., a parent or spouse) are counted in determining eligibility and payment amounts.

In addition, while the Medicaid statute requires states to start by using the same rules and processes (or methodology) as the cash assistance programs, the statute also gives states the authority to cover higher-income individuals under many eligibility pathways by using additional disregards (i.e., less restrictive methodologies) that reduce their countable income to the threshold that is normally allowed. These statutory authorities permit states to cover higher-income individuals under many eligibility pathways. Although some information is available, with the flexibility that states are provided for determining countable income under Medicaid, it is difficult to identify the full range of exclusions and disregards that states may use in practice today.

The transition to MAGI income counting rules for most Medicaid-eligible populations (e.g., non-disabled children, parents, pregnant women, and other caretaker relatives) beginning in 2014 (or sooner at state option) was intended, in part, to reduce the variability and complexity of the definition of income under the current Medicaid program. However, because the MAGI definition of income is less inclusive than the definitions of income used in many social programs, it may result in permitting individuals and families with a higher percentage of total income relative to the federal poverty level to qualify for Medicaid.

For example, under today's Medicaid income counting rules, any voluntary contributions made by relatives or friends are to be taken into account by the state in determining Medicaid eligibility. Under the MAGI income counting rules, gifts (cash and in-kind) and inheritances are not taken into account when determining income eligibility for populations where MAGI income counting rules will apply. It is possible that an individual eligible under the new mandatory eligibility pathway with annual income less than 133% of FPL could be determined eligible for Medicaid, and while receiving gifts (cash and in-kind) to cover, for example, the cost of food, rent, and other living expenses that are not counted as income. The same also may be true for groups exempted from the MAGI income counting rules.

It is also possible that an individual eligible for Medicaid under one of the optional eligibility groups that are explicitly exempt from MAGI income counting rules (beginning in 2014) may also meet the income eligibility test for the new mandatory eligibility group that will rely on MAGI income counting rules. In general, that individual may choose the pathway that is in the best interest of the recipients. For example, the individual might choose the pathway that would entitle him or her to more benefits, or one that uses the MAGI income eligibility definition in lieu of the SSI income definition rules to protect funds (e.g., gifts) not taken into account when determining the individual's eligibility for Medicaid. For individuals who would be eligible under more than one category, Medicaid regulations specify that the individual will be determined eligible for the category he or she selects.

Administrative Costs of Using a More Inclusive Income Measure

The problem with not using MAGI (or any income measure tied to the tax return) is that validation of income would no longer be done primarily through tax returns. While non-taxable Social Security income is reported for informational purposes on a tax return, not all non-taxable income is reported on an individuals' tax return. For example, as shown in Table 3 , individuals applying for SSI must provide documentation directly to an entity that must ensure that those documents are complete and valid. This could be administratively cumbersome to collect and validate. These administrative costs would be highest for premium credits largely because it is an entirely new program and because of the expected volume of potential applicants. CBO estimates that approximately 19 million individuals would receive premium credits in 2019. For Medicaid eligibility this would be less of an issue because many states already use SSI definition for other categories of Medicaid eligibility and have set up processes for income verification. Under current law, the Medicaid program requires states to collect applicants' Social Security numbers and wage information from agencies administering state unemployment compensation laws, as well as wage income and other information from the Social Security Administration and the Internal Revenue Service. Employers are also required to make quarterly wage reports to a state agency. The health insurance exchanges, on the other hand, would have to develop and support an administrative process to verify nontaxable income not currently included in MAGI.

Consistency Between Medicaid and Premium Credit Definition of Income

The definition of income in ACA (as amended by P.L. 112-56 ) was developed to be consistent between the Medicaid and premium credit provisions. As long as a person is eligible for Medicaid and can access those benefits through a state Medicaid program, that person may not receive a premium credit. ACA further requires state exchanges to identify individuals eligible for Medicaid and premium credits. Likewise, Medicaid programs must be able to determine applicants' eligibility for subsidized exchange coverage. These eligibility determination and enrollment provisions ("ACA screen and enroll requirements") were intended to ensure that there is coordination between the exchanges and Medicaid.

Definitions of Income Used in Selected Low-Income Programs

If the MAGI definition of income is changed, the key question becomes what definition of income should be used. In determining this, it is instructive to understand key differences between using the current definition of income derived from a tax return versus income definitions used by other low-income programs for eligibility purposes.

Definitions of income and household (or family unit) are different between the tax system and low-income programs, reflecting the different purposes of the systems. In general, the purpose of the income tax system is to collect income taxes, and the definitions of income and tax unit were developed to meet this purpose. A tax unit (or tax filing unit) is the taxpayer and, if married, the taxpayer's spouse. The tax unit may have qualified children or qualified relatives associated with the tax unit as dependents for certain tax provisions. For tax purposes this is the "household." A household, using the Census definition, may consist of a number of tax units. For example, a single household may have three tax units: (1) a married couple with minor children; (2) an adult child of the married couple; and (3) an elderly parent of the married couple. All three of these tax units would be evaluated separately for Medicaid eligibility. Beginning in 2014, tax unit 2 would have a Medicaid eligibility pathway not currently available. Use of MAGI may permit entitlement to Medicaid that would not exist under current income rules for tax units 1 and 2.

Income for tax purposes is the income that is taxed at that level; in this case, the personal income tax level. Generally, income is only the income of the taxpayer, and if married the taxpayer's spouse. However, under certain circumstances, the income of minor children may be included. Some types of income may be excluded partially or fully from income for tax purposes because they have been, or will be, taxable to other personal income tax units, or at other levels (such as business, gift, or estate taxes). Also, some types of income are excluded to encourage (or reward) certain behavior by tax units, such as saving for retirement.

In contrast, the purpose of social programs is to provide support (financial, medical, or other) to persons and families that may not be able to provide the needed support themselves. The programs generally rely on a concept of need that uses definitions of household and income to determine the level of financial resources available from the household to support the needs of the family or individual. A social program may consider everyone related in the household (or residence) as a household regardless of the tax unit status of the members of the household.

Also, many social programs use a definition of income that is more inclusive than the definition for income taxes. This is because for social programs, the relevant factor for income is not who is responsible for paying the taxes associated with the income, but who is the final recipient of the income. For this reason many social programs require applicants and individuals receiving benefits to report gifts (cash and in-kind) and inheritances, as these gifts and inheritances can be used to support the applicant or recipient, even though they are not taxable to the applicant or recipient. Across social programs, the definition of income (what income is counted) and the specific rules for counting income are not consistent and will vary. Table 3 shows some of the definitions of income used by various social programs.

Conclusion

Both the Administration and Congress have recognized potential shortcomings of using MAGI to determine eligibility for Medicaid provisions and premium credits in ACA. The initial intent of using MAGI was to standardize the definition of income for Medicaid eligibility purposes in order to reduce some of the variability and complexity that exists under the current Medicaid program and to provide consistency between Medicaid and the health insurance exchange. Although changing the definition of income to include a more comprehensive measure that includes other nontaxable income sources would be more consistent with other low-income programs, such as SSI, this change may increase the administrative complexity, especially for the premium credits in the health insurance exchanges.