ACA - Affordability of health insurance and age

In filing our 2014 tax returns, we will all have to answer a new question (line 61 on the 2014 Form 1040) - did you and everyone in your family (spouses and dependents on the return) have health coverage for every month of 2014.  If anyone was lacking coverage for any month, they must next determine if they meet an exemption. If they do not, they owe the Individual Shared Responsibility Payment (penalty). One of the exemptions that many people might qualify for is that the health insurance available to them was unaffordable. If the employer offered coverage, you look at the cost of that coverage (cost less what employer contributes to that cost). If the employer did not offer coverage, you look at what the cost of coverage would have been in the Marketplace (Exchange). If you would have been eligible for a Premium Tax Credit (Section 36B), you must reduce that cost of Marketplace coverage by the credit you could have obtained.

That is a very quick summary of some fairly complex rules.  I want to point out that the measure of affordability to avoid the penalty is the same for everyone regardless of age, even though insurance costs more as we age.

For example, I pulled this information from the Covered California website (the state exchange for California).  I used a San Jose zip code and bronze level coverage (Bronze 60 PPO) for a single individual who does not have coverage through her employer.  Here is the annual cost of this coverage at these age levels:

25   $2,932
35   $3,452
45   $3,898
55   $5,692
64   $7,679

At an income level of $50,000, the individual is not eligible for a Premium Tax Credit because her income exceeds 400% of the federal poverty line, or $45,960.  For the unaffordable exemption, multiply household income (here, $50,000) by 8%.  If the cost is greater, the coverage is not affordable and this uninsured individual will avoid having to pay the Individual Shared Responsibility Payment.  Well, 8% of $50,000 is $4,000.  So, at age 55 and 64, this individual avoids the penalty and they attach Form 8965 to their return showing they meet the unaffordable exemption (the Form 8965 instructions explain the exemptions, as does Section 5000A and the regulations).

At ages 25, 35, and 45, this individual could have afforded coverage on the Marketplace (based on the 8% factor relevant in determining if the penalty applies). So, unless they meet some other exemption, they will owe the penalty (reported on line 61 of Form 1040; this is the Individual Shared Responsibility Payment).

Given that health insurance costs more as we age, why is 8% of household income the affordability measure for all individuals regardless of age? 

This example also illustrates that the Affordable Care Act does not help everyone get insurance. In this simple example, the individual at age 55 or 64 (or in between) and $50,000 of income, is not eligible for a Premium Tax Credit to subsidize the cost of coverage (because that income amount exceeds 400% of the federal poverty line). If no employer coverage is available and they truly cannot afford the cost of coverage through the Exchange (which likely is as low as they would get outside of the Exchange), they go uninsured.  The rules assume that when insurance costs more than 8% of income, it is unaffordable, yet that same unaffordable income level is too high to qualify for a subsidy (the credit). Something seems out of whack here.  Why doesn't the affordability factor consider age and eligibility for the credit (subsidy)? Or, why don't the credit (subsidy) rules factor in increasing cost of coverage as we age? While these rules may enable an older person to avoid the penalty, they don't result in health insurance coverage.

And one more point - how one spends their monthly income will vary from city to city due to cost of living differences. Here is a report from Zumper for August 2014 showing monthly rent for a one bedroom apartment as $3,100 in San Francisco, but only $590 in Indianapolis. Should availability of a premium tax credit factor in where you live rather than assuming anyone with household income over 400% of the federal poverty line (which is only higher for Hawaii and Alaska; but the same for the 48 contiguous states), can afford the lowest cost bronze level insurance without a subsidy?

What do you think?

For a brief overview to the credit and penalty, see IRS Publication 5187.