Medicaid coverage gap

Sub-100% FPL income handling — US citizen Medicaid gap, lawfully present immigrant ACA eligibility, and what changed in 2026.

Status: Draft 1 — May 11, 2026 Owner: Asad Khalid

TL;DR — three findings that change calculator behavior

The lawfully-present-immigrant carve-out has been eliminated as of January 1, 2026. The "One Big Beautiful Bill" (P.L. 119-21, signed July 2025) removed the special rule under IRC §36B(c)(1)(B) that previously let lawfully present immigrants below 100% FPL receive PTC if Medicaid-ineligible due to immigration status. The gap is now wider for this population, not narrower.
The Form 8962 safe harbor for sub-100% FPL income still exists and is the legitimate broker workaround. When a US citizen reasonably expects income at or above 100% FPL at enrollment and actual income ends up lower, APTC is generally not clawed back. Codified at 26 CFR §1.36B-2(b)(6) — not a loophole.
APTC repayment caps were eliminated starting tax year 2026 (felt at filing in 2027). If AskFlorence helps someone estimate income too high and they exceed expectations, they could face unlimited clawback. The safe harbor only protects the downward direction.

What changed in 2026

The OBBBA (P.L. 119-21, §71305, signed July 2025) made three relevant changes:

Eliminated the lawfully-present-immigrant sub-100% FPL PTC eligibility (effective Jan 1, 2026)
Eliminated APTC repayment caps for tax year 2026 onward (felt at reconciliation in early 2027)
Further restriction taking effect Jan 1, 2027: even at incomes above 100% FPL, only LPRs, Cuban/Haitian entrants, and COFA migrants will qualify for PTC. Refugees, asylees, work-visa holders, TPS recipients, and DACA recipients lose PTC eligibility entirely.

A separate regulatory shift — the Marketplace Integrity and Affordability Final Rule (HHS, June 25, 2025) — would have required income verification (via Data Matching Issue / DMI) when projected income exceeds 100% FPL but federal databases show lower. This provision is currently stayed by court order in City of Columbus v. Kennedy (US District Court for the District of Maryland, August 22, 2025). As of May 2026, not enforced.

Question 1: How brokers handle this in practice today

The standard practice: when a US citizen estimates income near or below 100% FPL but reasonably expects income to reach 100% FPL by year-end, brokers enter the estimated annual income at 100% FPL (the minimum subsidy-eligibility threshold) on the marketplace application. The marketplace's own application supports this — there's a checkbox for "income is difficult to predict" specifically intended for gig, tips, seasonal, and self-employed workers.

The line between legitimate and reckless: If the applicant has any reasonable basis for the higher estimate (job search, expected raise, starting freelance work, returning to part-time, etc.), this is good-faith and protected. If a broker advises a client to enter $15,650 with no plausible basis, that's the IRS's "reckless disregard" standard and can void the safe harbor.

Question 2: Reconciliation risk if actual income falls short

Under current law, US citizens whose actual MAGI ends up below 100% FPL generally do not have to repay APTC received in good faith, provided four conditions are met. The OBBBA does NOT change this safe harbor.

The four conditions (26 CFR §1.36B-2(b)(6) and Form 8962 Instructions, page 9):

The taxpayer or a family member enrolled in a qualified health plan through the marketplace
The marketplace estimated at enrollment that household income would be 100–400% of FPL
Advance credit payments were authorized and paid for one or more months
The taxpayer would be an applicable taxpayer IF actual income were 100–400% FPL

If all four are met, the taxpayer keeps the APTC. Form-level mechanism: on Form 8962, check "Yes" on Line 6 (the under-100% FPL exception).

The asymmetry that 2026 creates:

Estimate at 100% FPL → actual income lower → safe harbor protects → no clawback
Estimate at 100% FPL → actual income much higher (e.g., 250% FPL) → still subsidy-eligible, smaller subsidy → some clawback, no cap
Estimate at 100% FPL → actual income above 400% FPL → entire APTC clawback, no cap

The safe harbor is one-way. Calculator and agent flow need to model both tails.

Question 3: IRS language about "reasonable expectation"

The IRS does not use "reasonable expectation" as a specific term of art. The operative standard is defined by what disqualifies good-faith treatment.

The "reckless disregard" standard (26 CFR §1.36B-2(b)(6)(ii) and Form 8962 instructions):

A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe.

As long as the income estimate is supported by some reasonable basis the taxpayer documented or could articulate, the safe harbor stands. The IRS does not require the estimate to be accurate — only that it not be made with intentional or reckless disregard for the facts.

For AskFlorence's agent flow: the agent script should document the basis for any income estimate above the applicant's current run-rate. Example: "Currently $12,000 from part-time work; client expects to return to full-time in March based on offer letter received last week; estimated 2026 income $24,000." That basis sentence is what differentiates good-faith from reckless disregard if ever audited.

Question 4: Medicaid rejection in expansion states

Account transfer mechanism: When someone applies via HealthCare.gov, the system first determines Medicaid/CHIP eligibility. If income suggests Medicaid eligibility, the account is transferred to the state Medicaid agency (45 CFR §155.345).

Where rejections happen anyway:

Asset tests (for non-MAGI categories: disability, aged, long-term care)
Mixed-immigration-status household issues (sponsor deeming for legal immigrants)
Five-year waiting period for some lawfully present immigrants
Recent state moves (residency proof gaps, account-transfer lag)
Verification failures (paperwork timing, missed deadlines)
Household composition disputes (whose income counts toward whose MAGI)

What happens after rejection: Medicaid agency sends denial. If income is below 100% FPL and rejection is for non-income reasons, the applicant is sent back to the marketplace. Per Form 8962 instructions, the taxpayer can rely on the marketplace's determination that they were Medicaid-ineligible — provided they gave accurate information at enrollment. This routes them into PTC eligibility under 26 CFR §1.36B-2(b)(5).

Practical issue: the marketplace doesn't currently surface Medicaid-rejection status as an explicit input. Many applicants drop out at the Medicaid denial step and never return. AskFlorence's calculator and agent workflow should specifically:

Identify expansion-state applicants below 100% FPL
Flag the "you may be Medicaid-rejected for non-income reasons" path
Make sure they know to return to the marketplace with the rejection notice
Walk them through PTC qualification under 26 CFR §1.36B-2(b)(5)

Question 5: State-by-state map

Citizens under 100% FPL without Medicaid expansion (the classic gap)

Status	States	Marketplace type	Notes
Non-expansion with coverage gap	Alabama, Florida, Kansas, Mississippi, South Carolina, Tennessee, Texas, Wyoming	All FFM	~1.4M people in gap
Non-expansion, partial coverage	Georgia (Pathways to Coverage, work requirement)	SBM as of 2026	Much lower enrollment than full expansion would yield
Non-expansion, no gap	Wisconsin (BadgerCare covers up to 100% FPL)	FFM	Unique among non-expansion states

Three states alone account for most of the gap population:

Texas: ~42% of all coverage-gap population
Florida + Georgia: most of the remainder
97% of the gap population lives in the South

Critical for AskFlorence's footprint: all 8 of the "true gap" states are FFM states (per the marketplace research). Every gap state we serve will encounter sub-100% FPL US citizens. The product cannot tell these users "you don't qualify" without offering a path forward.

Expansion-state Medicaid-rejection edge case

Affects the 41 expansion states + DC. No clean public dataset on rejection rates by category. Best assumption: relatively small percentage of expansion-state sub-100% FPL applicants, concentrated in mixed-immigration-status families and recent movers between states.

Lawfully present immigrants below 100% FPL (post-OBBBA)

Before 2026: Eligible for PTC nationwide (per old §36B(c)(1)(B))
As of January 1, 2026: No longer eligible for subsidized marketplace coverage in any state. Can still enroll in unsubsidized coverage.
As of January 1, 2027: Even at incomes above 100% FPL, only LPRs, Cuban/Haitian entrants, and COFA migrants will qualify. Refugees, asylees, work-visa holders, TPS recipients, and DACA recipients lose PTC eligibility.

Recommended calculator behavior

If (US citizen) AND (income < 100% FPL):
  If (state in non-expansion gap AND state ≠ WI):
    → Show "Coverage gap" path
    → Ask: "Is there any realistic chance your income will reach 100% FPL by year-end?"
    → If yes: Walk through 100% FPL estimation, document the basis
    → If no: Explain options (community health centers, sliding-scale clinics, county programs)

  If (state = WI):
    → Eligible for BadgerCare Medicaid, route to state application

  If (state in expansion states):
    → Show "Medicaid likely path, but possible rejection scenarios"
    → Walk through household composition, mixed-immigration, recent move flags
    → If any flag triggers: Pre-prepare PTC fallback path

If (lawfully present non-citizen) AND (income < 100% FPL) AND (date ≥ 2026-01-01):
  → Show "no PTC available" path
  → Surface state-specific safety nets (NY Essential Plan, MN MinnesotaCare,
    Healthier Oregon, Covered California immigrant programs, etc.)

For all sub-100% FPL inputs, always disclose:
  → The Form 8962 safe harbor (no clawback if good-faith estimate)
  → The 2026 reality that overestimating income now has no repayment cap
  → The agent script for documenting basis of any estimate above current run-rate

Recommended agent script (high-level)

"Based on what you've told me, your current income looks like it's around X% of FPL, which is below the 100% threshold that opens up tax credits. There are a few things to check before we move forward:
Is your income likely to grow between now and the end of the year? Job change, raise, extra hours, freelance work — anything we can document?
Do you live in a state that has expanded Medicaid? [If yes: walk through Medicaid first, with awareness some categories can be rejected even at low income.] [If no: explain the gap and the 100% FPL estimation path.]
If we estimate your income at the level needed to qualify and your actual income ends up lower, the IRS has a safe-harbor rule — you generally won't owe back the tax credits as long as the estimate was made in good faith. We document what you've told me so it's in your file.
Important note for 2026: if your income ends up higher than expected, the safety net for repayment caps has gone away. Please update us if your situation changes during the year."

Open questions / things to track

Exact procedural Medicaid-rejection rates by state — no clean public dataset. Worth partnering with KFF or Urban Institute, or building telemetry from agent-handled cases.
Comprehensive "Healthier [State]" coverage map for lawfully present immigrants now ineligible for PTC. CA, NY, IL, OR, WA, MN, MA, CO have state-funded programs of varying scope. Separate research task.
DACA recipient status — CMS rescinded marketplace eligibility for DACA recipients via the Marketplace Final Rule (August 2025). Meaningful population without good alternatives — worth tracking.
The DMI (Data Matching Issue) rule — currently stayed in City of Columbus v. Kennedy. If stay lifts, income estimation becomes documentation-intensive. Watch the docket.

Sources

Statute: IRC §36B; P.L. 119-21 §71305 (One Big Beautiful Bill Act)
Regulation: 26 CFR §1.36B-2(b)(5), (b)(6)
IRS: Form 8962 Instructions (2025); Publication 974
HHS: Marketplace Integrity and Affordability Final Rule (June 25, 2025)
CMS: PY2026 Marketplace Type List (May 4, 2026)
KFF: How Many Uninsured Are in the Coverage Gap (Feb 2025)
AMA: 4 OBBBA Changes That Will Reshape Care in 2026 (Dec 2025)
ACOG: H.R.1 Policy Brief
Health Affairs / NHeLP / Beyond the Basics: 2026 Marketplace policy changes
State Health & Value Strategies: H.R.1 Changes to Non-Citizen Coverage
Healthinsurance.org: Coverage gap, immigrant ACA options, ACA income brackets
Case: City of Columbus et al. v. Kennedy et al., US District Court for the District of Maryland (Aug 22, 2025)