ACA: A Day Of Reckoning, One Year Hence

Practically no one looks forward to a tax deadline, but Democrats may have special reason to worry about the one they will face a year from now.

The Affordable Care Act has many hidden nooks and crannies, some created by poor planning and design, some purposely built in. One such pocket will come fully to light for some consumers after they file their 2014 tax returns, whose final due date including extensions is exactly one year from today. What voters see will almost certainly not please them.

Many Americans – hundreds of thousands, according to The Wall Street Journal – face the risk of losing or needing to repay their federal insurance subsidies next year. For many, if not most, the fact that they owe the government will come as a surprise, and so will the amount.

The mechanism as designed works like this. People who signed up through the federal or state exchanges generally saw the price of the plan they selected as a single, net figure. For those who the system identified as eligible, this figure was the price after tax subsidies (also called advanced premium tax credits) were deducted from the gross price. These are the subsidies at question in the current situation, not to be confused with Silver Plan Cost-Sharing subsidies, which operate slightly differently.

Consumers can choose to take tax subsidies immediately or to wait and receive a credit when filing their tax return. For those who chose to take it at the time of enrollment, the government paid the credit to the taxpayer’s insurance company, reducing the price of premiums. Incidentally, this option created a lower “sticker price” for many of the people comparing insurance plans on the exchanges.

Eligibility for this subsidy was largely based on self-reported income estimates for 2014 income. But people don’t always know exactly what they will make in the coming year. When people file their 2014 returns – potentially as late as October 15, 2015 – it will be the first opportunity for the government to verify people’s real 2014 income figures.

In some cases, the government will then say, “Oops.” People who received larger subsidies than they should have on the basis of their actual income will have to repay he difference. Repayment liability is limited for certain lower-income taxpayers, but those who don’t fall within the income boundaries will be on the hook for the entire amount. If you file in October, you almost certainly won’t even hear about this debt until 2016.

Affordable Care Act supporters say this isn’t a problem, because the IRS will just withhold the reclaimed subsidy from the individual’s tax refund. This assumes everyone is due a significant refund in the first place. What happens, for example, if you lose your job? If you have no withholdings and not enough cash on hand to pay, then the law says the government will send you a bill for the balance due.

For those who know about the mechanism, there are options. Those whose income rises substantially can attempt to lower their Modified Adjusted Gross Income, or MAGI, which is the pertinent figure for determining the subsidy. Taxpayers can also contact the pertinent marketplace to adjust the estimate if they know that it will be wildly different; this may not prevent having to return part of the subsidy, but it might limit how much. But to take either of these courses of action, people need to be aware of how the subsidy works. Very few people are.

Back in March, Forbes reported on the situation, noting that the law gave IRS clawback powers for overpaid subsidies, in contrast to the toothless individual mandate penalty. And while choosing to take the credit in the form of a delayed refund is a way to avoid the risk of having to repay the government, it also presupposes that individuals can find enough money (and desire) to pay the premiums out of pocket in the first place – something that seems unlikely in many cases, considering that those who could afford to buy their own insurance often won’t qualify for the subsidies. That means that, in order to make Affordable Care Act plans look “affordable,” the government encouraged people to roll the dice on their future income, without making clear the consequences for guessing incorrectly.

The problem is one that is baked into the law, and it won’t resolve itself without action. An article in “Health Affairs” predicted that 73.3 percent of exchange eligible Californians will have income changes of over 10 percent from year to year; the study’s authors also forecast that nearly 40 percent of recipients would have to pay back some of their subsidy, and around 9 percent would have to return the entire value of the credit. The study noted that while updating information may help a few people in this situation, many will still face substantial bills. Though regions will vary in their particular numbers, it is clear that this issue will be significant across the country as a whole.

In all likelihood, as this situation boils up in 2016, there will be great pressure on the Democrat in the White House, and any remaining Democrats in Congress, to defer or forgive these debts. Thus the subsidy gap is primed to become yet another hidden costs of an unworkable Affordable Care Act design. In this case, however, the cost was hidden purposely. The government made a conscious choice not to provide greater clarity about insurance pricing, in order to make the Affordable Care Act look more affordable.

But a day of reckoning is coming. Fittingly enough, it will arrive on Tax Day next year when Americans discover that, just like death and taxes, the truth eventually finds all of us.

About Larry M. Elkin 552 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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