There’s a kind of time bomb built into the Obamacare exchanges. Next year an unknown but probably significant number of low income people are going to discover they owe the IRS money through no fault of their own. Those who fail to file a tax return acknowledging this unexpected liability will lose their access to health care subsidies. Those who do file will be subject to ordinary IRS collection efforts up to and including tax liens and levies.
The problem was pointed out in June by Chris Jacobs and then in more detail this month by Sam Baker at National Journal. The value of ACA subsidies are tied to the cost of the 2nd cheapest Silver plan available on the exchange. This plan is called the benchmark. If you buy the benchmark plan then you only pay a fixed percent of your income in premiums and the government pays the rest. If your plan costs more than the benchmark, you pay the difference out of your own pocket.
Here’s where it gets tricky. The benchmark plan changes every year. As insurers compete to offer a slightly cheaper entry level plan the benchmark cost could go down. That means that what used to be the benchmark plan (i.e. the one you bought last year) may now be an above benchmark plan. And if so, you are responsible for the difference in cost.
The real problem is that most people in this situation won’t know it until they get a bill at the end of the year. That’s because Obamacare has an auto-renew feature. If you auto-renew the plan you bought last year, as many people will undoubtedly do, the government will continue paying the same amount of subsidy it paid last year. From the perspective of the buyer, it appears as if nothing has changed. It’s not until the end of the year, when the IRS performs a “reconciliation,” that the government overpayment is recognized. If the government overpaid by $50 a month, you now owe the IRS $600 in taxes.
There’s actually another wrinkle which limits the amount someone could owe as a result of a subsidy overpayment. People below 200% of the Federal Poverty Line can only owe $300. People between 200% and 300% of FPL can owe $750. Finally, those between 300% and 400% can owe $1250. That’s the max for individuals, the figures double for a family. In any case, the result is that a lot of relatively low income people will suddenly discover they owe the government a chunk of money thanks to Obamacare.
From this point a few things could happen. According to the IRS, if the individual fails to file a tax return reconciling the overpayment, they lose their eligibility for future subsidies. That’s the worst case scenario because now the person owes the IRS money and loses their insurance going forward.
For those that do file a return, they need to come up with some way to pay off the debt. However, the amount owed is not deducted from any ongoing subsidies. In other words, the government will continue to buy a person healthcare even if they currently owe the government money for last year’s insurance.
Assuming the person in this position can write a check to cover the overpayment, the problem is solved. If not, the IRS will treat the outstanding amount as it would any tax liability. Normally the IRS would expect you to apply for a payment agreement allowing the individual to pay the debt off over a period of months. Those who don’t make such arrangements could find themselves on the wrong end of a federal tax lien. And if they still don’t work out a deal to pay the debt the IRS could conceivably proceed to a levy, i.e. taking money directly from the person’s paycheck until the debt is gone.
We’re still more than a year out from all this happening, but Obamacare auto-renewals begin in just a few more months. Once those happen, the design of the exchanges makes some number of overpayment cases (depending on changes in the benchmark plans) inevitable. The time bomb will be set but won’t be noticed by most people until next year when a lot of unhappy campers discover they owe the IRS money.
Of course there is a way the Obama administration could help people avoid all of this. It could loudly and repeatedly recommend that people who want the maximum subsidy pick out a new plan every year, i.e. buy the latest benchmark plan so subsidies remain steady. So far the administration doesn’t seem to be doing anything like that. On the contrary, they rolled out the auto-renew feature this summer making it easier to keep the same plan.
Politically, the Obama administration has already been stung by the President’s broken promise about keeping insurance plans. Telling people they need to buy a new plan every year would undoubtedly restart that criticism. So instead the administration has apparently opted for a smooth renewal process even if that guarantees a big tax mess down the line.
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