CRS Examines Definition of Income in Patient Protection and Affordable Care Act

Under the Patient Protection and Affordable Care Act (PPACA; 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 program and to provide consistency between Medicaid and the health insurance exchange. The use of MAGI, however, has raised some concerns among Congress and the Obama Administration as it excludes some types of income either partially or altogether. Of particular interest has been the potential impact of eligibility for Medicaid and premium credits for early retirees (aged 62 through 64) receiving Social Security benefits, as some or all of their Social Security income may be excluded from the MAGI definition of income. 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. A recent cost estimate by the Congressional Budget Office finds that changing the MAGI income calculation to include all Social Security benefits would reduce the deficit by $13 billion over the 2012-2021 period.

Legislative proposals have been introduced in both chambers of Congress to change the definition of income to be more inclusive and consistent with other low-income programs. In evaluating these proposals, a number of issues might be considered. First, an alternative definition may add complexity compared with the use of MAGI. Specifically, 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. Second, the definition was developed to ensure coordination between Medicaid and premium credits in the health insurance exchange. A change in the definition of income for Medicaid should then also apply to premium credits to ensure consistency between Medicaid and the premium credit offered to selected individuals who purchase private health insurance through the exchanges. 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.

                               Contents

Under the Patient Protection and Affordable Care Act (PPACA; 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.¹ The use of MAGI, however, has raised concerns among Congress and the Obama Administration as it excludes some income categories either partially or altogether. Of particular interest has been the definition of income's impact eligibility for premium credits for early retirees (aged 62 through 64) receiving Social Security benefits, as some or all of their Social Security income may be excluded from the MAGI definition of income.

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. The Department of Health and Human Services (DHHS) also has recognized that this may be an issue that needs to be addressed.² In addition, the Centers for Medicare and Medicaid Services Chief Actuary has indicated in recent public comments at a Society of Actuaries conference that this could potentially affect 3 million early retirees.³ A recent cost estimate by the Congressional Budget Office (CBO) shows changing the income calculation to include all Social Security benefits would reduce the deficit by $3 billion over the 2012-2016 period and by about $13 billion over the 2012-2021 period.⁴

The use of MAGI for determining income eligibility is different from the income definition used for most 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.

This report first describes the relevant Medicaid and health insurance exchange provisions in PPACA 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 provides some illustrative examples of what composition of Social Security and non-Social Security income would qualify early retirees for Medicaid and premium credits under the MAGI definition of income. 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 PPACA

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.⁵ PPACA created a new mandatory Medicaid eligibility group for all nonelderly, non-pregnant individuals (e.g., childless adults, certain parents, certain people with disabilities) who are not otherwise eligible for Medicaid and are also not entitled to or enrolled in Medicare Part A or enrolled in Medicare Part B. For such individuals, PPACA establishes an income threshold of 133% of the federal poverty level (FPL) as the new mandatory minimum Medicaid income eligibility level. The income that is compared with this threshold is based on MAGI. (Greater detail about what is and is not included in MAGI will be discussed later in this report). The law also specifies that an income disregard in the amount of 5% FPL will be used to determine Medicaid eligibility based on MAGI; thus, the effective minimum income-eligibility threshold for such individuals in this new eligibility group will be 138% FPL.⁶ These provisions are effective in 2014. In addition to individuals eligible under the new mandatory eligibility group up to 133% FPL, PPACA 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 PPACA, 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).⁷ 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 care services.⁸

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.⁹

Premium Credits Under PPACA

PPACA requires "American Health Benefit Exchanges" to be established in every state by January 1, 2014, either by the state itself or by the DHHS Secretary.¹⁰ Exchanges will not be insurers, but will provide qualified individuals and small businesses¹¹ with access to private health insurance plans. The exchange plans will provide comprehensive coverage (with the exception of stand-alone dental plans and catastrophic health plans) and meet all applicable market reforms specified in PPACA.

To make exchange coverage more affordable, eligible individuals may receive premium assistance in the form of tax credits.¹² Eligibility for the premium credit is based, in part, on income and relies on the MAGI definition.¹³

Income Eligibility for Premium Credits

Beginning in 2014, qualifying individuals will be able to receive "premium assistance 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 insurer¹⁴) and may claim the full credit amount even if they have little or no federal income tax liability.

PPACA specifies that premium credits will be available to "applicable taxpayers" in a "coverage month."¹⁵

An applicable taxpayer is defined as an individual who

• is part of a tax-filing unit;

• is enrolled in an exchange plan;

• is not eligible for "minimum essential coverage"¹⁶ (other than through the individual health insurance market), such as Medicaid, Medicare Part A, or employer-sponsored insurance (with exception¹⁷); and

• has household income (defined as MAGI) between 100% and 400% of the federal poverty level (with exception¹⁸).

The amount of the tax credit will vary from person to person: it depends on the MAGI of the taxpayer (and dependents), the premium for the exchange plan in which the taxpayer (and dependents) is (are) enrolled, and other factors. In certain instances, the credit amount may cover the entire premium and the taxpayer 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. PPACA 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.¹⁹ The premium credit amount would be the arithmetic difference (if any) after subtracting the maximum premium contribution amount from the premium for the second lowest cost silver plan²⁰ in the enrollee's local area.

 

Figure 1. Maximum Premium Contribution as a Share of MAGI for

 

Premium Credit Eligible Individuals, by Federal Poverty Level

 

 

 

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 2011. 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 2011, 6.3% of MAGI at 200% FPL is equal to approximately $114 per month²¹ (see Table 1). If the premium for the second lowest cost silver plan is greater than $114 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.

       Table 1. Maximum Premium Contributions for Premium Credit Eligible

In § 2002(a) and § 1401(a) of PPACA, household income is defined to be MAGI in compliance with the Internal Revenue Code (IRC). Specifically, gross income is total income minus certain exclusions (e.g., public assistance payments, employer contributions to health insurance payments). 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.²²

Because AGI (and consequently MAGI) includes only sources of income that are taxable, some sources (or types) of income that may be considered resources for determining whether a person (or couple) is low-income are only partially included, whereas others are not included at all. Two of the sources of income partially included in MAGI, that may be considered resources for determining low-income are non-taxable Social Security benefits and non-taxable pension and annuity income. Examples of sources of income that are not included in MAGI are fringe benefits, cafeteria plan benefits, gifts (cash, property, or in-kind), and inheritances (see Table 2). 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.

           Table 2. Composition of Income Under Different Definitions

Generally, Social Security beneficiaries aged 65 and older are eligible for Medicare coverage for health care services. Under PPACA, individuals and households who choose to receive their Social Security benefits early at the ages of 62 through 64 may qualify for Medicaid if their MAGI is up to 133% of the FPL (or 138% of FPL because of the 5% disregard). In 2011, the federal poverty guidelines published by DHHS for a two-person family is $14,710 and $10,890 for a one-person family.²³ Under this criteria, MAGI would have to be $20,300 or lower for a two-person family and $15,028 or lower for a one-person family to qualify for Medicaid coverage.²⁴ A two-person household with MAGI up to $58,540 or 400% of income could be eligible for premium credits. Because the IRC definition of MAGI would be used, not all Social Security income is included in the MAGI definition and, for the majority of Social Security beneficiaries, no Social Security income is included in MAGI.²⁵

As shown in Table 3, up to 50% of Social Security and Tier I Railroad Retirement Board (RRB) benefits are taxable (i.e., included in MAGI) for individuals whose provisional income exceeds $25,000 ($32,000 for married couples). Provisional income is defined as the total income from all sources recognized for tax purposes plus certain otherwise tax-exempt income, including half of Social Security and Tier I RRB benefits. There is also a second income threshold for the calculation of taxable Social Security and Tier I RRB benefits, up to 85% of benefits may be taxed (included in MAGI) for individuals whose provisional income exceeds $34,000 and for married couples whose provisional income exceeds $44,000.

              Table 3. Calculation of Taxable Social Security and

The extent to which Social Security benefits would be included in MAGI would depend on the amount of other non-Social Security income. Beneficiaries with high Social Security benefits but lower non-Social Security income would be more likely to qualify for the new 133% eligibility group.²⁶ One example of such a case would be those earning at or above the taxable maximum amount of earnings for their entire careers and with little other income from pensions, earnings, and dividends.²⁷Table 4 shows what Social Security benefits would be for early retirees who had career earnings at the taxable maximum amount ("maximum earner") and scaled low and medium career earners.²⁸

 Table 4. Annual Social Security Benefits for New Beneficiaries Aged 62 in 2011

For example, early retirees aged 62 to 64 who are married and a two-earner household and have income of $58,840 (which is equivalent to 400% of the FPL) could qualify for Medicaid if they receive the maximum Social Security benefit (about $42,000) and have a very low level of non-Social Security income. For this couple, their MAGI is equal to their non-Social Security income ($16,840) plus the taxable portion of their Social Security benefits ($2,920), which is equal to $19,760 and is below the 138% of the FPL ($20,300), thus making them eligible for Medicaid under the PPACA provisions.

Another example shown in Table 5 is a two-earner couple with $36,775 in total income, which is about 250% of the FPL. In this case, the couple could also collect $17,000 in Social Security benefits, which is equivalent to a scaled lower earner couple (assuming both have similar earnings history) and they would still be eligible for Medicaid with their MAGI of $19,775 at 134% of the FPL.

        Table 5. Illustrative Examples of Social Security and Non-Social

A similar illustration can be shown with a couple with total income of 400% of FPL. As shown in Table 6, this couple had about $36,000 in Social Security benefits (which is in between a medium and maximum earner), their MAGI would be about 200% of FPL. Under PPACA, their maximum premium contribution would be about 6.3% of MAGI compared with 9.5% if total income were used instead of MAGI. Using the estimates in Table 1 for 2011, this would result in their maximum monthly premium contributions declining from $466 to $154 per month.

        Table 6. Illustrative Examples of Social Security and Non-Social

In July 2011, CBO estimated the effect of including non-taxable Social Security income in the definition of MAGI. For Medicaid, CBO estimates that adding nontaxable Social Security income to the MAGI definition would reduce Medicaid enrollment, beginning in 2014, by between 500,000 and 1 million people depending on the year. According to CBO, those losing Medicaid coverage include some retirees aged 62 through 64 as well as some people receiving survivor benefits, disability benefits, and other Social Security benefits. Those losing Medicaid coverage are expected to enroll in the health insurance exchanges and receive premium credits, or obtain employment-based insurance, or become uninsured.²⁹

CBO estimates two different effects on the number of people who purchase insurance through the health insurance exchanges. First, CBO and the Joint Committee on Taxation (JCT) estimate that many of the individuals who lose Medicaid coverage would become eligible for premium assistance and cost sharing subsidies in the exchanges. Thus, the number of people purchasing health insurance through the exchanges would increase. Second, CBO estimates that some people previously eligible for premium credits would lose eligibility if the definition used for eligibility included all Social Security benefits (e.g., MAGI plus nontaxable Social Security benefits). This would, according to CBO, reduce the number of people purchasing insurance through the exchanges. CBO and JCT estimate the net effect would increase enrollment in the health exchanges by roughly 1 million people in any given year between 2014 and 2021.³⁰

Issues for Congress

There has been increased interest in Congress to change the PPACA 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 PPACA 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.³¹ For example, children eligible for Medicaid who are receiving child welfare services follow the income eligibility rules of the title IV-E assistance programs. Low-income families with children follow the income counting rules of the former Aid to Families with Dependent Children (AFDC) program,³² 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 mandatory³³ and optional³⁴ 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.³⁵ 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.³⁶

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,³⁷ 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.³⁸

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.³⁹ 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.⁴⁰ 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.⁴¹

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.⁴² In general, that individual may choose the pathway that is in the best interest of the recipients.⁴³ 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.⁴⁴

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. Because many of these income sources are nontaxable, they are not reported on individuals' tax return. For example, as shown in Table 7, 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 the expected volume of potential applicants. CBO estimates that approximately 19 million individuals would receive premium credits in 2019.⁴⁵ 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,⁴⁶ as well as wage income and other information from the Social Security Administration and the Internal Revenue Service.⁴⁷ Employers are also required to make quarterly wage reports to a state agency.⁴⁸ 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 PPACA 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. PPACA 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 ("PPACA screen and enroll requirements") were intended to ensure that there is coordination between the exchanges and Medicaid.⁴⁹

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 it has 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 7 shows some of the definitions of income used by various social programs.

Both the Administration and Congress have recognized potential shortcomings of using MAGI to determine eligibility for Medicaid provisions and premium credits in PPACA. 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 both nontaxable Social Security income and 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.

Author Contact Information

Gene Falk provided valuable comments on the report. Randy Aussenberg provided the information on income eligibility for SNAP. Umar Moulta-Ali provided comments on the Supplemental Security Income information.

Key Policy Staff

 Area of Expertise    Name                   Phone     E-mail

² Statement by Richard Sorian, Assistant Secretary for Public Affairs, June 22, 2011, http://www.healthcare.gov/news/blog/medicaid06212011a.html.

³ Estimates by the Office of the Actuary based on analysis of the March Supplement to the Current Population Survey and Medicare Expenditure Panel Survey data. The estimate was included in comments made during presentation before the Society of Actuaries Conference on June 22, 2011.

⁴ Congressional Budget Office Cost Estimate, "S. 1376, A bill to conform income calculations for purposes of eligibility for the refundable credit for coverage under a qualified health plan and for Medicaid to existing federal low-income assistance programs," July 22, 2011.

⁵ For the Medicaid program, income includes anything a person receives that can be used to purchase food, clothing or shelter, including earned income (such as wages, salary and compensation for work) and unearned income (such as Social Security disability or retirement benefits, interest and dividends, and gifts). Resources encompass anything a person owns that can be converted to cash, including checking or savings accounts, real estate, cars, boats and other vehicles, stocks and bonds, and where applicable, insurance policies. See Medicaid Manual, Pub. 45, "General Financial Eligibility Requirements and Options," p. 3812, "Treatment of Contributions from Relatives to Medicaid Applicants or Recipients."

⁶ As a conforming measure, PPACA also changes the mandatory Medicaid income eligibility level for poverty-related children aged 6 to 19 from 100% FPL to 133% FPL (as applied under prior law to children under the age of 6). MAGI income counting rules and the 5% income disregard will apply to all poverty-related children (except those determined eligible through an Express Lane eligibility determination as permitted under the State Children's Health Insurance Reauthorization Act, CHIPRA, P.L. 111-3).

⁷ For background information on the Medicaid program, see CRS Report RL33202, Medicaid: A Primer, by Elicia J. Herz.

⁸ Long-term care services include institutional services, such as nursing facility care, and home- or community-based services, such as home care, personal care, transportation, and care management, furnished under the state plan or a waiver.

⁹ Center for Medicare and Medicaid services, Center for Medicaid and State Operations, letter to state health officials and state Medicaid Directors (SMDL# 10-005, PPACA #1), New Option for Coverage of Individuals Under Medicaid, April 9, 2010.

¹⁰ § 1311(b).

¹¹ Beginning in 2017, states will also have the option to allow large employers to offer health benefits through the exchanges. Under PPACA, small firms will be defined as employers with 100 or fewer workers beginning in 2016. By extension, large firms will be defined as employers with 101 or more workers.

¹² For additional information about the premium credits under PPACA, see CRS Report R41137, Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (PPACA), by Bernadette Fernandez and Thomas Gabe.

¹³ In addition to premium credits, cost-sharing (e.g., deductibles and copayments) subsidies may also be available to certain individuals who receive premium credits. §§ 1401-15 and 10105 of P.L. 111-148 as amended by §§ 1001 and 1004 of P.L. 111-152.

¹⁴ § 1412(a)(3).

¹⁵ A coverage month refers to a month in which the applicable taxpayer paid for coverage under an exchange established under PPACA.

¹⁶ The definition of minimum essential coverage is broad. It includes Medicare part A, Medicaid, CHIP, TRICARE, the TRICARE for Life program, the veteran's health care program, the Peace Corps program, a government plan (local, state, federal) including the Federal Employees Health Benefits Program (FEHBP) and any plan established by an Indian tribal government, any plan offered in the individual, small group or large group market, a grandfathered health plan, and any other health benefits coverage, such as a state health benefits risk pool, as recognized by the HHS Secretary in coordination with the Treasury Secretary.

¹⁷ An individual eligible for, but not enrolled in, an employer-sponsored plan may still be eligible for premium credits if the employer's coverage is either (1) not "affordable;" that is, the employee's premium contribution toward the employer's self-only plan would exceed 9.5% of household income; or (2) of low value; that is, the plan's payments cover less than 60% of total allowed costs on average.

¹⁸ An exception is made for lawfully present aliens with income below 100% of the FPL, who are ineligible for Medicaid for the first five years that they are lawfully present. These taxpayers will be treated as though their income is exactly 100% of FPL for purposes of the premium credit.

¹⁹ In years after 2014, the percentages would be adjusted to reflect any percentage by which premium growth exceeded income growth.

²⁰ One of the requirements that nearly all exchange plans must meet is to provide a certain level of coverage generosity, based on actuarial value. Actuarial value is a summary measure of a plan's generosity, expressed as the percentage of medical expenses estimated to be paid by the issuer for a standard population and set of allowed charges. Most exchange plans must meet one of four levels of actuarial value specified in PPACA. Each actuarial value level has a corresponding precious metal designation: bronze (60%), silver (70%), gold (80%), and platinum (90%).

²¹ For 2011, 200% of the federal poverty level for one person, residing in one of the 48 contiguous states or the District of Columbia, is $21,780 for the year or $1,815 per month. CRS computation based on "Annual Update of the HHS Poverty Guidelines," 76 Federal Register 3637-3638, January 20, 2011, http://aspe.hhs.gov/poverty/11fedreg.pdf.

²² See IRC Section 36(B)(d)(2).

²³ These are for the 48 contiguous states. There are different thresholds for Alaska and Hawaii. See Department of Health and Human Services, http://aspe.hhs.gov/poverty/11poverty.shtml. These are different than the U.S. Census Bureau's poverty threshold measures.

²⁴ $20,300 = ($14,710 x 1.38) and $15,028= (10,890 x 1.38).

²⁵ According to the Congressional Budget Office, 39% of all Social Security beneficiaries were affected by the income taxation of Social Security benefits in 2005. This is the most recent data available. Because the income thresholds to determine the taxation of Social Security benefits are not indexed for inflation or wage growth, the share of beneficiaries affected by these thresholds is expected to increase over time.

²⁶ There is a 5% set aside when calculating eligibility thresholds, so technically the threshold is 138% of FPL.

²⁷ The taxable maximum limit is $106,800 in 2011. According to SSA, 6% of workers had earnings above the taxable maximum amount in 2008 and this level has remained relatively steady over the past decade.

²⁸ The three scaled-earnings cases have earnings patterns that reflect differences by age in the probability of work and in average earnings levels experienced by insured workers during the period 1991-2007. The general level of earnings is set relative to the average wage index (AWI). For the scaled medium earner, the general career-average earnings level is set to about equal the AWI. For the scaled low earner, the general career-average earnings level is set at about 45% of the AWI. The maximum earner is assumed to have earnings at (or above) the contribution and benefit base for each year starting at the age of 22 and prior to retirement.

²⁹ Congressional Budget Office Cost Estimate, "S. 1376, A bill to conform income calculations for purposes of eligibility for the refundable credit for coverage under a qualified health plan and for Medicaid to existing federal low-income assistance programs," July 22, 2011.

³⁰ Congressional Budget Office Cost Estimate, "S. 1376, A bill to conform income calculations for purposes of eligibility for the refundable credit for coverage under a qualified health plan and for Medicaid to existing federal low-income assistance programs," July 22, 2011.

³¹ Section 1902(a)(10) of the Social Security Act.

³² The AFDC program was replaced by Temporary Assistance for Needy Families (TANF) block grant program under the Personal Responsibility and Work Opportunity Act of 1996 (P.L. 104-193). However, there is no Medicaid link to TANF under current law.

³³ Examples of mandatory income exclusions and disregards included income tax refunds (which instead counted as a resource), the first $50 of child support received monthly, the income of individuals receiving SSI payments or on behalf of whom foster care or adoption assistance payments are made, grants and loans to undergraduate students for educational purposes, federal low-income home energy assistance program benefits, and certain monthly earned income disregards -- including the earned income of recipient children who are students and not full-time employees, the first $90 of earnings per worker, a time-limited $30, a time-limited one-third of remaining earnings for recipients, and up to $175 of the actual cost of care for each dependent child or incapacitated adult (up to $200 for those under the age of 2).

³⁴ Examples of optional income exclusions and disregards used by most or all states included gifts up to $30 per recipient in any quarter, food stamps, government rent or housing subsidies, the earned income of applicant children who are fulltime students, and assistance from other agencies and organizations that complements and does not duplicate cash payments under AFDC. See 45 CFR 233.20 and U.S. Department of Health and Human Services, Characteristics of State Plans for Aid to Families with Dependent Children, 1990-91 Edition.

³⁵ For more information, see Congressional Distribution Memo, Overview of Medicaid and Medicaid-Expansion SCHIP Eligibility for Children and Rules for Counting Income, November 29, 2007, by April Grady.

³⁶ In general, when determining income eligibility, states may consider only income and resources actually available to the individual. The agency may not consider income or assets of relatives or other members of the household to be available to a Medicaid applicant except for parents of a child who is under the age of 21, blind or disabled, or the spouse of an adult. Special rules apply when one spouse is in a medical institution and the other remains in the community. See (See Sections 1109 and 1902(a)(17) of the Social Security Act.

³⁷According to SSI's income counting rules, Social Security retirement benefits -- along with other types of annuities or pensions related to past work -- are treated as unearned income. See (20 C.F.R. § 416.1121(a)).

³⁸ See CRS Report RS20294, Supplemental Security Income (SSI): Beneficiary Income/Resource Limits and Accounts Exempt from Benefit Determinations, by Umar Moulta-Ali. A more extensive list of income exclusions is contained in SSI program regulations and guidance.

³⁹ See Federal Register, vol. 76, no. 159, August 17, 2011, Proposed Rule, p. 51152.

⁴⁰State Medicaid Manual, Pub. 45, 3812.

⁴¹ A recent proposed rule, "Medicaid Program; Eligibility Changes Under the Affordable Care Act" acknowledges the differences in the treatment of income under the Internal Revenue Code as compared with pre-PPACA Medicaid program rules as well as circumstances under which the change to MAGI income may have varying impacts on the Medicaid eligibility of potential beneficiaries. "The Administration is concerned about this unintended consequence and is exploring options to address it, including a modification of the section 36B treatment of Social Security benefits through regulation." The proposed rule identifies three types of income (e.g., lump sum payments, including inheritance, educational scholarships, grants) in which the Administration proposes to codify current Medicaid rules and seeks comments on these proposed policies. See Federal Register, vol. 76, no. 159, August 17, 2011, Proposed Rule, p. 51157.

⁴² See Federal Register, vol. 76, no. 159, August 17, 2011, Proposed Rule, p. 51151.

⁴³ Medicaid statute provides that eligibility determination will be made in a manner consistent with simplicity of administration and the best interest of the recipient. Section 1902(a)(19) of the Social Security Act.

⁴⁴ See 42 CFR § 435.404. For individuals who would be eligible under more than one category, the state may assign eligibility based on a pre-determined eligibility hierarchy. With regard to state reporting systems, if no eligibility category is selected the system may be programmed to default to a specified eligibility category.

⁴⁵ The premium credit estimate is from CBO's and JCT's final estimate of PPACA, dated March 20, 2010, which includes the provisions in both, P.L. 111-148 and the amendments in P.L. 111-152. It is available at http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf.

⁴⁶ IRC Section 3304(a)(16).

⁴⁷ IRC Section 6103(1)(7).

⁴⁸ Agencies will exchange information that may be of use in establishing or verifying eligibility or benefit amounts under any other program (such as child support programs under Part D of Title IV of the Social Security Act, any state program under a plan approved under Title I, X, XIV, or XVI of the Social Security Act).

⁴⁹ See CRS Report R41210, Medicaid and the State Children's Health Insurance Program (CHIP) Provisions in PPACA: Summary and Timeline, by Evelyne P. Baumrucker et al.