ACA Confusion on 1095-C and Affordability

There is much to be confused about regarding the Affordable Care Act. While the goals of broadening access to affordable care and reducing costs are laudable, the complexity of many of the tax provisions is disconcerting to say the least.

In a recent "tax tip," the IRS pushed out on the 1095 forms, an item for Form 1095-C issued by "applicable large employers" to their full-time employees, caught my attention (again). One of the ways the IRS tells a recipient of Form 1095-C to use it follows:

"If you enrolled in a health plan through the Marketplace, the information in Part II of Form 1095-C could help determine if you’re eligible for the premium tax credit. If you did not enroll in a health plan through the Marketplace, this information is not relevant to you."

Part 2 of the 1095-C states what the cost is of the lowest cost insurance plan an employer offered. When an employer offers a plan that is "affordable" (for 2015, the cost was no greater than 9.56% of the employee's household income), the employee is not eligible for a Premium Tax Credit, assuming they even buy health insurance through the Marketplace. 

A problem is that many people don't know what their household income will be until the end of the year (or soon thereafter). Why?  Consider these things that might happen during the year:

• You get a higher paying job or extra hours.
• You get a year-end bonus.
• You win the lottery or do well in Vegas at the slots.

So, you might not know until year end that your employer-offered coverage was affordable and you're not eligible for the Premium Tax Credit you got from the Exchange that lowered the premiums you paid each month. You'll have to pay that amount back (it could be thousands of dollars)!

But wait! As long as you provided current information to the Marketplace/Exchange about the cost of the coverage offered by your employer and about your income, you'll be okay.  See page 11 of Pub 974 for more on this. What is not clear is what verification you'll have that you gave proper information to the Exchange.  Will it be enough that the Exchange gave you the Premium Tax Credit each month?  What will the IRS do with the Part 2 information and the PTC Form 8962 attached to the employee's return?  We'll have to wait and see.

All of this just illustrates a few flaws in the system of how health coverage is subsidized through the tax system. If you have employer-subsidized coverage, no worries as you're not getting a PTC, but you're getting an exclusion from your income. And, unlike the PTC that ends once your household income exceeds 400% of the federal poverty line (about $42,000 for a single person), your income exclusion for your employer-subsidized coverage doesn't end.

What do you think?