T-minus 12 days until open enrollment closes for Obamacare. It is crunch time for thousands as they decide if they want to enroll, and ultimately how much of a tax credit to accept in order to determine their first premium payment amount. Much attention has been lavished on the “positives” of the ACA’s tax credits (also called premium subsidies). White House press releases often highlight the impact of the credits while chiding others for not including them when discussing the new higher premiums under the law.
Yet the new reality of Obamacare’s tax credits has left finance reporters to pen articles warning readers to “take care” when considering a tax credit and providing strategies for how best to “protect yourself.” So what do finance reporters know that the White House doesn’t?
By accepting a tax credit, low-income or lower-middle class families face significant tax ramifications and potential financial risk. Congress has changed the rules twice on consumers for the credits, making the income cliffs steeper, and fully equipping the IRS to claw back overpaid subsidies (unlike the individual mandate penalty).
The flip side of the tax credits is almost unknown to the general public.
Who Exactly Gets the Tax Credits?
The ACA’s tax credits are given directly to the insurance companies, and are calculated on a sliding scale, based on family size, and in theory, to those making between 138% and 400% of the federal poverty level (FPL) in states that have expanded Medicaid eligibility. In states that have not expanded Medicaid, the tax credits are available to those making between 100% and 138% FPL.
However, individuals can claim them by estimating that they will make over 100% FPL even if they end up making 90% FPL in these states, effectively closing the coverage gap we have heard Medicaid expansion supporters and the media complain so loudly about. However, the tax credits are unavailable to those with an “affordable” offer of employer-based insurance, or for those on other forms of government-approved coverage like standard Old Medicaid or Medicare.
Yet, soon to be published research by my colleague Jonathan Ingram will show that the tax credits phase out quickly for those in the exchange, and are therefore unavailable for many young people (18-34) in numerous states making far less than 400% FPL, based on the complex formula used to calculate the subsidies, and the price of the plans available on the exchange. This fact is only making the Administration’s job of convincing young people to sign up even harder.
The credits can only be used in a government-sanctioned Obamacare exchange. In other words, individuals purchasing private insurance on their own must decide if they want to keep their current insurance plan without a subsidy or drop their coverage to take the tax credit. Since so many states rejected the President’s call to renew policies for those facing cancellations, and the recent extension of that policy, millions of Americans are facing this exact decision of joining an exchange or buying elsewhere by March 31.
All citizens that take the credit must file a tax return to receive the credits regardless of their income. Failure to do so will result in them being prohibited from seeking a credit in the future. Married couples must file a joint return.
How You Take The Credit Could Determine Exposure
The initial tax credit calculation will be based on an applicant’s income tax return from the previous year, or a best estimate of what it will be next year. The credit can be taken in advance at the beginning of the year. However, individuals who enroll in the Obamacare exchange will run the risk of having to pay back a significant portion of the tax credit if their life circumstances change (more on this below).
The credit can also be taken on the following year’s return in the form of a refund. However, individuals who make this decision will be responsible for coming up with the full cost of the Obamacare exchange insurance at the beginning of the year. Individuals and families do have the option of taking a partial credit.
Congress Has Changed Obamacare’s Tax Credit Rules Twice
Republicans have by and large ignored the tax credit issue unless talking about the budget implications. Perhaps the silence is due to the fact that Congress has voted to change Obamacare twice to increase the financial risk that families could face when they take the credit.
Since the enactment of ACA, these limits have been amended twice: first under the Medicare and Medicaid Extenders Act of 2010 (P.L. 111-309), and then under the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayment Act of 2011 (P.L. 112-9). Congress changed the payback protection to vanish at the 400% poverty level and increased the payback amounts at 200% and 300% FPL from what they had been before.
The result will be surprise bills from the IRS in the mail come tax time 2015, in the order of a couple hundred dollars all the way up to full value of any subsidy received if a family crosses the 400% FPL threshold. (This could be $10,000-$12,000 for a family of four, as an example.) Just a few dollars of extra income could result in thousands of back taxes to be paid.
Life Change Should Be Reported to the Exchange, Requiring a New Application
Our lives are constantly in flux. Lower and middle-class families rarely find themselves in static work and life environments, but that is exactly what Obamacare assumes. Even the most common and mundane life changes could significantly impact an individual’s financial situation if he or she decides to take the tax credit. So Obamacare recommends that individuals report these changes immediately.
In a recently released presentation by CMS, it was outlined that individuals will have to submit a new application to re-determine eligibility, triggering a special enrollment period and subsequently termination of the old policy.
As reported by Sara Hansard at Bloomberg:
“Life events resulting in a special enrollment period eligibility are:
- adding a member, such as a birth or by marriage;
- relocating;
- losing access to other coverage, such as employer coverage;
- being released from incarceration; and
- changing citizenship or immigration status.
…
“The presentation also listed life events that don’t result in special enrollment period eligibility: removing a member as a result of death or divorce; gaining access to other coverage, such as employer coverage; becoming pregnant; a change in tax filing status; a change in status as American Indians, Alaska Natives or tribal status; changes in disability status; corrections to date or birth or Social Security number; or some changes in income.”
However many of these rules will cause significant confusion as a death or divorce could change the income of a family significantly, making some households appear more wealthy as they jump down a family size level on the FPL scale. Or gaining employer coverage should make an individual ineligible for a subsidy.
36-40% of California Exchange Eligible Enrollees Will Owe the IRS Money Next Year
To put a finer point on how many people are likely to be subject to a life chance significant enough to trigger a payment to the IRS, UC Berkley’s Ken Jacobs and Dave Graham-Squire, Elise Gould from the Economic Policy Institute, and Dylan Roby at UCLA wrote an illustrative piece for Health Affairs. Largely overlooked by the media the article “Large Repayments of Premium Subsidies May Be Owed to the IRS if Family Income Changes are Not Promptly Reported,” made some important observations about the exchange eligible population in California that can be extrapolated to most of the rest of the country.
Income Fluctuation Is Very Common in This Population.
“Nearly three-quarters (73.3%) of the predicted subsidy recipients were in families with income changes of more than 10% between the two years. Of those recipients, 37.8% had large income increases, while 35.5% had large decreases. Thirty percent of recipients were in families whose income increased more than 20%, and 18.9% had income increases of more than 40%.”
To be fair, some will receive even more subsidy as a result of a life change, the Health Affairs piece estimated that 41% would receive an additional credit. But given the level of income fluctuation in this population, one bad economic year (but a good subsidy year) is likely to be followed by a good economic year (but a bad subsidy year).
A Sizable Portion Will Owe the IRS the Entire Value of the Credit.
“We estimate that 9% of those who are eligible for a subsidy at the beginning of 2018 would end the year with an annual income of more than 400% of poverty, requiring them to pay back any subsidy that they had received. Nineteen percent of those who started with an annual income of 251-400% of poverty would end the year with an annual income of more than 400% of poverty.”
Many Will Owe Money Even If They Report All Life Changes.
“…if no income changes were reported…38.4% of individuals receiving subsidies would be in families that were predicted to owe repayments…”
If income changes of 10% or more were reported and the new income was used to adjust subsidy levels”… 35.8% would…” still owe repayments.
Percent of CA Exchange Subsidy Recipients Owing Repayment, 2019, By Scenario
(Source: Health Affairs, September 2013 vol. 32 no. 9 1538-1545)
Median Payments Are Substantial.
Median repayment amounts with no income changes reported or subsidy adjustments will be close to $900.
Nationally repayment will be a very big deal if we buy the estimates by the Kaiser Family Foundation that 48% of those that purchase individual policies will now qualify for a premium subsidy.
Small Raises Could Mean Tens of Thousands in Back Taxes to the IRS
In a recently released report I co-authored with CPA Jonathan Small, “Too Risky Too Exchange?” we looked at five very common life events that could dramatically impact citizens’ life, perhaps most dramatically near the income cliff found at the 400% FPL of eligibility. But there are income cliffs baked into Obamacare around 133% FPL and 250% FPL as well.
If you are interested, even more technical information on this issue can be located in this CRS report, “Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA).”
More Education About Exchange Subsidies Could Depress Enrollment
A pull quote from the Health Affairs piece might have hit the nail on the head for why the report was largely ignored by the media.
“If there is much media attention to the need for repayments, some people could be dissuaded from participating in the exchanges.”
Sadly the media has once again failed, and left millions of American with only half the information that is needed to make an intelligent decision about Obamacare’s tax credits. We can anticipate a flurry of sad stories of families receiving multi-thousand dollar bills from the IRS next April, and quotes from the families wondering why no one told them the truth about the Obamacare tax credits.
– Josh Archambault
This article originally appeared here on Forbes.com.
