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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.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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