Prop regs fix a PTC issue 7 years later

The Affordable Care Act enables individuals to not only purchase insurance on an exchange but to also get a subsidy for it if they qualify. That subsidy is the Premium Tax Credit (PTC). There are eligibility criteria such as purchasing the coverage on an exchange (such as Covered California), if the person is employed the employer does not offer affordable coverage and the household income is below 400% of the federal poverty level.

When regs were issued in 2014 at the start of the PTC, section 36B(c)(2)(C)(i) that includes this clause:

"This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee."

Reg. 1.36B-2(c)(3)(v)(A)(2) interpreted that clause to mean that if the coverage offered to the employee was affordable, no one in that employee's household would qualify for a PTC even if the coverage offered to the family was not affordable.

I always thought that was an odd interpretation of the vague clause and contrary to the purpose of the ACA - to help more people get affordable coverage.  I think a possible reason for the odd interpretation is that the ACA is designed to encourage employers to offer affordable coverage to employees AND family members. So perhaps the thought was that employees would encourage employees to ask the employer to provide affordable coverage. Unfortunately, that is unrealistic, particularly where employees are low paid (such that their household income if below 400% of the federal poverty level (about $43K for a single person)).

Well, this month, the IRS issued proposed regs to fix this (REG-114339-21 (4/7/22)). A 4/5/22 Tweet from the Treasury Dept indicates that this change should enable about 1 million people to save hundreds of dollars per month on their coverage. Why is this finally being fixed? Apparently it is Executive Order 14009 (1/29/21) where Treasury was directed to find ways to strengthen the ACA via administrative actions. This is a good fix.

What about other needed fixes? One major one is that the PTC includes a cliff rather than a phaseout. So once household income exceeds 400% of the FPL, the taxpayer must pay back all of the PTC it received for that year. That can easily be $1,000 to over $10,000. That is harsh.  Also, the measure of household income is based on the entire year. So, if someone is out of work, say for the first 7 months of the year and can't afford health insurance, they can get the PTC, but if the job they get for the last 5 months of the year puts them above 400% of the FPL, they have to pay back the PTC even though they needed it for the first 7 months to buy health insurance.

That will need a legislative fix though.

And, before I leave this topic, in case anyone is thinking that this PTC subsidy of thousands of dollars is too good of a tax break, millions of individuals get tax breaks on health insurance. About 65% of employees have an employer who pays all or some portion of their health insurance. That benefit is tax free to the employees. So, if someone's employer contributes $10,000 to their health insurance and is in the 24% tax bracket, they save $2,400 in taxes. BUT, they also save shelling out $10,000 for the coverage paid by the employer. This is the most expensive tax break in the tax law in terms of reduced tax collections (see page 33 of this JCT tax expenditure report). And not all employees get this subsidy and it is worth more to those in a higher tax bracket.

What do you think?

#letsfixthis

Another large payment owed for incorrect PTC

Another case* addresses a couple receiving an advance Premium Tax Credit (PTC) of a large amount and having to pay it all back. They also note that if they had known they would have to pay it back, they would not have taken the insurance. The cost of the insurance for this California couple was 20%  of pre-tax household income. That's a lot!

For context, if this couple lives in San Jose, rent for a one-bedroom apartment starts at $2,000/month or 33% of the couple's pre-tax income!

The case is a reminder of flaws with the Premium Tax Credit, such as:

• Individuals only get it if they buy insurance on the exchange AND their household income does not exceed 400% of the federal poverty line. For 2016, this is $47,080 for a single person and $63,720 for a family of two.
• The PTC is based on the cost of the second lowest cost silver plan. So, one's age and location are factored in. Insurance costs more as you age. But, despite this fact, the eligibility for the credit is still tied to 400% of the federal poverty line. Since people don't automatically make more money as they age, it makes it less likely that older individuals will be able to obtain affordable insurance (until they are old enough for Medicare).

Despite flaws, the PTC has at least one good point - it offers a tax savings. It's not as good as what about 60% of employees get who work for an employer who subsidizes their health coverage. If your employer pays part or all of your health insurance, it is tax-free income. AND there is no limit on this tax benefit regardless of how much your income exceeds 400% of the federal poverty line. So while the PTC is not as good of a benefit, it is at least of some help for individuals without the employer provided tax-free subsidy.

One proposal for some relief is S. 1529 (115^th Cong.), Addressing Affordability for More Americans Act of 2017. This bill would increase eligibility for the PTC to individuals with household income of 800% or less of the federal poverty line (rather than 400%). The change is proposed starting for 2018. It still isn't as good as the tax-free employer provided subsidy though.

What do you think?

*Here is a summary of the recent case: (see my 7/20/17 post for another case on this topic)

McGuire, 149 TC No. 9 (8/28/17) – The McGuires received an advance Premium Tax Credit (APTC) in 2014 of $591 per month ($7,092 for the year). The monthly premium on their Silver plan was $1,182. This was arranged through Covered California in 2013. Still in 2013, Mrs. M started working and “promptly notified Covered California.” This was a significant change because it caused the couple’s household income to exceed 400% of the federal poverty line (FPL) for 2014 making them ineligible for the PTC. It was not until mid-June 2014 that Covered California (CC) acknowledged their reported change in household income. This letter also stated:

“The Covered California website shows how much your premium assistance lowers your premium. Your premium assistance is based on our records and the income you put on your application that you expect this year. If you take the full premium assistance to pay the premium, and your income is higher, you may have to pay some back at tax time.”

The court noted that it was not clear whether the couple could have changed to a plan with a lower premium. The court also notes that it would not have mattered what was in the letter because the couple never received the letter. Per the court, the couple made several attempts to alert CC about the change in their income, but to no avail. CC also did not react to the couple’s request to change their address. The McGuires also never received Form 1095-A from CC.

On their 2014 Form 1040, the couple checked the box on line 61 to indicate they had coverage for every month of the year. They did not include Form 8962 on the PTC or indicate receiving an APTC of $7,092. The IRS received the Form 1095-A and issued a notice of deficiency.

The court agreed with the IRS. Because the McGuire’s household income exceeded 400% of the FPL, they are not entitled to a PTC and must pay back the APTC. The couple noted that they would not have taken the coverage if they had known they had to cover the entire cost. While the court was sympathetic, it noted that there was nothing it could do. We “are not a court of equity, and we cannot ignore the law to achieve an equitable end.”

The court did waive the negligence penalty and found reasonable cause to waive the substantial understatement of tax penalty. The McGuires did not receive the Form 1095-A and did not receive the APTC directly so were not completely aware of the additional benefit or amount. Also, they attempted a few times to get CC to correct the APTC. In addition, the couple relied on a CPA to prepare their return.

ACA tax hits the court

This is the first case I've seen dealing with application of the Affordable Care Act (ACA). Yes, we had cases in the U.S. Supreme Court dealing with legality of some of the taxes and mandates, but this July 12, 2017 decision from the U.S. Tax Court gets at application of the advance Premium Tax Credit (APTC). When an eligible person purchases health insurance on the exchange (such as Covered California), and their household income is 400% or less of the federal poverty line, they get a credit that can be applied to the monthly premiums (by having the government send the money directly to the insurance provider) or claimed when filing that year's income tax return.

If you get the credit in advance and it turns out your income exceeds 400% of the federal poverty line, you have to pay the entire advance credit back!  That can be a hefty bill, as the Walkers discovered.

In Walker, TC Summary Opinion 2017-50, the court agreed with the IRS that the couple owed $12,924 for 2014 because their modified AGI exceeded 400% of the federal poverty line making them ineligible for the PTC that Covered California provided to them in advance. The IRS had originally also assessed a §6662 penalty of $2,584, but dropped that,

The couple’s monthly premium before the APTC was $1,378 but only $301 with the APTC. On their 2014 return, they reported AGI of $63,417 which included wages, retirement earnings and taxable Social Security income. After the return was filed, the couple separately filed Form 8962 for the PTC reconciliation. That form showed modified AGI of $75,199 (included the non-taxable Social Security income). As this exceeded 400% of the FPL, they were ineligible for the PTC. For 2014, the FPL for a family of two in California was $15,510; 400% of this amount is $62,040.

The couple told the court that if they had known they did not qualify for the PTC, they would not have purchased the insurance. While the court noted that Covered California may have erred in its information provided to the couple, the statute is clear that a taxpayer with income above 400% of the FPL may not claim a PTC.

That's a harsh result, but what the law provides. The exchange is supposed to use past tax return information along with information from the individual to determine eligibility. It sounds like the Walkers are retired (but not on Medicare which would make them ineligible for the exchange and PTC). A good question that should been asked of this couple was whether they might continue to have some earned income despite being retired. That is what may have put them over the 400% of the FPL (wages or perhaps a larger than planned withdrawal from their retirement plan).  They should have been counseled to take a much smaller APTC and to check their income monthly to see if they should be getting an APTC at all.

And note that the Walker's PTC is high because insurance costs more for older couples. However, affordability is still tied to 400% of the FPL even though when insurance costs more, you need much more income to pay for it. The law expects that the Walkers can use 22% of their income here to pay for health insurance! This is one of a few fixable flaws in the PTC.

One small potential consolation that I think is only explained in the  IRS Publication 502 on medical expenses is that the PTC paid back by the Walkers is treated as a health insurance payment rather than a tax. They can deduct it if they have enough to itemized and to the extent their medical expenses exceed 10% of AGI. This might not yield any deduction for them though and doesn't make up for the fact that they would have skipped the insurance if they had know they were not going to get a subsidy to help pay for it.

There are likely many other taxpayers in this situation.  If such individuals filed their return correctly, the payback of excess APTC will show up. If they fail to do the reconciliation, the IRS has enough information from the 1040 and Form 1095-A to determine how much, if any, needs to be paid back.

What do you think? Is there a better way to help a couple like the Walkers? 

Repealing Obamacare - Costs and Issues!

The 115th Congress started on January 3 and repeal of Obamacare (the Affordable Care Act) has begun.  Here is information from Majority Speaker Paul Ryan including the budget resolution to help with the repeal. He states:

“This is the first step toward relief for Americans struggling under Obamacare. This resolution sets the stage for repeal followed by a stable transition to a better health care system. Our goal is to ensure that patients will be in control of their health care and have greater access to quality, affordable coverage. Today we begin to deliver on our promise to the American people.”

The ACA is certainly not perfect and I'm speaking from a tax perspective. The ACA included some complex tax rules.  It also included some inequitable ones, which I've written about before (such as 12/14/14 and 10/18/14 and 3/8/15). Some of the key tax issues/inequities:

• If you purchase health insurance on the exchange, you only get a tax credit if your household income is under 400% of the federal poverty line (about $42,000 for a single person). In contrast, if you're fortunate to have your employer subsidize your health insurance, that income is excluded from your taxable income regardless of your income level.

• The eligibility for the Premium Tax Credit doesn't factor in age even though health insurance costs a lot more as you get older.

• The employer mandate is too complex. Reg 1.4980H-1 includes 50 definitions! and that's just part of its complexity.

The ACA enabled millions of people to afford insurance and to obtain it even if they had a pre-existing condition.

The Congressional Budget Office and Joint Committee on Taxation estimate that repeal of the ACA will increase the budget deficit by $137 billion over 10 years.

Two of the ACA taxes - the net investment income tax (NIIT) and the .09% additional Medicare tax on higher income individuals bring in more revenue than the individual AMT! That was over $35 billion for 2014. Repeal of the AMT would provide a better benefit because the AMT generally is not paid by the highest income individuals. But, where will the replacement funds come from or how much will repeal cost us in increased budget deficits and interest expense on the debt? [Per IRS data for 2014]

When will repeal be effective? Will people who purchased their insurance on the Exchange for 2017 lose it? Will they lose their subsidy (Premium Tax Credit) that helps most people be able to afford the insurance? What happens to people with pre-existing conditions? What happens to the ability for parents to include children up to age 26 on their health plan and if provided by their employer, to exclude that income benefit from income?

Challenges of repeal include:

• If there is a replacement, will it be better? 
• Why not just fix Obamacare (and call it something new)? 
• How will it all be paid for (see above dollar issues)?

Why not help pay for it by reducing the largest tax subsidy in the tax system - the income exclusion for employer-provided health care which benefits the roughly 60% of employees with such coverage?  It costs the budget about $266 billion per year! The House Republicans identify that as one of the three largest government health care subsidies. They also note that this subsidy increases the cost of health insurance by about 10 - 15% (page 15)!

Per the House Republican Health Care Blueprint (page 15):

"The non-partisan CBO projects this job-based subsidy will lower federal revenues by $266 billion in fiscal year 2016 alone and $3.6 trillion over the next decade. This benefit is so massive that, in terms of federal support, it would be the third largest health expenditure, after Medicare and Medicaid."

The Republican plan does call for taxing this benefit, likely if the benefits exceeds a specified amount. I think that's a good idea.  This is the biggest tax break in our tax system and taxing some portion of it would help fund health care for more people and even allow for lower tax rates.

We'll see what happens. Repeal won't be easy and likely won't be popular.

What do you think?

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?

Filing Season and Affordable Care Act

I think it is correct to say that all taxpayers are affected by the Affordable Care Act in some way. Certainly individuals living in the US.  All must answer a question on the 1040 as to whether everyone in the "shared responsibility family" (basically those listed on the return), had health coverage for all months of the year. If there are any uncovered months, the next step is to see if an exemption applies for that month. If no exemption for any month, a penalty is computed and reported on the 1040.

Some individuals obtained coverage on the Exchange or Marketplace and if their household income is at least 100% of the Federal poverty line but not more than 400% FPL, they get a Premium Tax Credit. Most likely they got it each month via reduced monthly premium amounts, but they must reconcile it by filing a 1040 or 1040A and attaching form 8962.

I've got an article in the AICPA Tax Insider (2/18/16) - "What Individuals Need to Know About the Affordable Care Act for 2016." It covers items relevant to filing 2015 returns as well as for dealing with our current year 2016.

What do you think about the tax provisions of the ACA?  I find most to be some of the most complex tax provisions we have - particularly the employer mandate of IRC Section 4980H.

Video - What's New for 2016 Filing Season

Something different - a video from the AICPA of me discussing a few new items for the 2016 filing season.  Enjoy!

Obamacare - can pieces be removed?

Presidential candidate Clinton has called for repeal one of the numerous parts of the Affordable Care Act (aka Obamacare).  Reuters reports that on September 29, 2015, she called for repeal of the "Cadillac tax" provision that goes into effect starting in 2018 ("Clinton calls for repeal of 'Cadillac tax' on healthcare plans," by John Whitesides, Reuters, 9/29/15).

A few observations on this:

• What happens when one piece of the complete healthcare reform plan is removed? The Cadillac tax raises revenue by imposing an excise tax on certain expensive plans offered to employees (see IRC Section 4980I).  Likely it also is an incentive not to offer these generous plans that can result in increased health care costs (the insured in these plans might be getting services not needed when the cost to them looks free, but employers are paying a lot). Does repeal of one provision make the system not work?  Perhaps.
• Politicians and many others keep skirting around the many inequities in the system.  One of the longstanding, costly inequities is that employees can exclude from income and payroll taxes, the value of the health insurance premiums paid for by their employer.  About 60% of  employees get this benefit.  It is worth more to individuals in higher tax brackets. That is part of the inequity (a credit would be more equitable). Another part is that it is so costly in terms of reduced revenue.  For example, if Jane's employer covers $10,000 of her annual health insurance costs, Jane excludes this from her income. If she is in a 30% tax bracket, she saves $3,000 of taxes compared to if her employer just increased her wages by 30%. And Jane and her employer don't have to pay Social Security and Medicare taxes on this health subsidy income (another savings of 15.3%). This exemption also makes it easy to increase the costs of health care because the insured don't necessarily see it.  Why not reform this costly provision (it is the most costly tax break in the system and isn't even available to everyone).
• Why not address inequities such as the Premium Tax Credit ending once the insured's household income crosses 400% of the federal poverty line?  The employer-provided health subsidy exclusion (prior bullet) has not such end point? That means that someone with about $43,000 of income getting insurance in the Marketplace, won't get any government subsidy, where as someone making $200,000 with employer-provided health insurance gets to keep their tax break (the exclusion). Why isn't anyone talking about this
• If the employer-provided health care exclusion were reduced, such as my having employees include 10% (or perhaps 15% or 20%) of the value of what the employer pays in their income, perhaps that would help pay for a better Premium Tax Credit and removal of the complicated Cadillac tax?  And the cost of this is minimal to the employee.  For example, Jane, in the earlier example would have to include $1,000 in her income (if 10% of the employer-provided insurance were taxable).  At her 30% bracket, her taxes go up $300.  That is a small price to pay for $10,000 of coverage!

A bigger discussion is needed.  Obamacare has too many complicated tax provisions in addition to many complicated non-tax provisions.  Has health care improved?  Is it all costing less?  What about removing health insurance from the employer-employee situation?  An many more questions that should be in this tax policy and social policy discussion.

What do you think?

Supreme Court Premium Tax Credit Decision - 4 thoughts

IRS Flowchart on whether you qualify for the PTC - from Pub 974. Also see IRC Section 36B.

As we all know by now, the US Supreme Court upheld the government regulations that provide that an otherwise qualified individual who obtains health insurance through the federal exchange (rather than a state exchange) is entitled to a Premium Tax Credit (PTC). This is the 6/25/15 decision in King v Burwell. I think this is the logical ruling because the Act does provide that if a state doesn't create an exchange, the Department of Health and Human Services (HHS) is to establish one. Also, since this is the "Affordable Care" Act we are talking about, the PTC is a key part that helps make insurance affordable for many who have household income at or below 400% of the federal poverty line (more so for younger people in regions where the cost of living is not high - not for all individuals).

Four quick thoughts about the PTC and ACA:

1. It seems that states with exchanges should consider ending them to save costs and let people go to the federal exchange.  This seems to be an unintended consequence of the decision and the feds might not have sufficient resources to handle this possible action.
2. This survival of the PTC should lead Congress and President Obama to fix it.  It is too complex (see the flowchart above and the Section 36B and regulations). Also, the IRS likely does not have the resources to determine if people properly claimed it.
3. Address policy issues with the PTC and other tax benefits tied to health insurance: The PTC unrealistically behaves as if individuals of all ages and all geographic regions can spend about 8% of their income to obtain health insurance.  Because insurance costs more as you age and housing costs a lot more in some regions, that assumption is unrealistic.  Health insurance tax rules should be examined as a whole to try to better equalize the treatment among different ways to obtain health insurance.  The best deal is to get employer-provided coverage because it is tax-exempt to the worker - no income or payroll tax. And you get this benefit regardless of your income level - whether your household income is at the federal poverty line of 100 times or more of the federal poverty line. In contrast, you can only get a PTC if your household income is at or below 400% of the federal poverty line.  This is a completely unfair way to subsidize health insurance costs.
4. Why not take the bold step of divorcing health insurance from employment?  It drives up costs, it creates unfair tax advantages for those who have it, and the cost to employers helps make them uncompetitive in the global market.  The tax cost of the employer-provided health insurance exclusion is over $200 billion per year.  Why not use this money to lower rates and improve and expand the PTC?  Also - note that the King ruling also affects the employer mandate.  With more individuals eligible to avail themselves of the PTC, it is more likely that an applicable large employer can have at least one full-time employee claiming it thereby possibly exposing the employer to the employer mandate penalty.

What do you think?

Guest Post - Resolving a Premium Tax Credit Problem

In a 3/26/15 post, I described an Affordable Care Act oddity of someone starting the year getting the Premium Tax Credit (PTC) in advance because their income qualified them for it. But later in the year, their income increases and they lose all or part of their PTC.  That caught the attention of financial executive Randall Bolten, author of Painting with Numbers: Presenting Financials and Other Numbers So People Will Understand You (John Wiley & Sons, 2012).

He suggests that a compensation practice can be used to help address this payback problem. He notes that this problem is caused by the legislation’s failure to address the impact of significant income fluctuations throughout the year. An approach that could deal with this takes a page from “accelerated” sales commission plans, where commission rates increase as sales volume increases. To see how this might work, he offers an explanation along with charts and graphs.

Please click here to see Randall Bolten's full post with all of the graphs and details. Thank you.

What do you think?

IRA Contribution by April 15 May Prevent Paying Back Premium Tax Credit

The Premium Tax Credit (PTC) for individuals who purchased health insurance on the Exchange (Marketplace) is an important tax break.  As income goes up, this subsidy in the form of a refundable credit decreases. Then, it hits a cliff and completely disappears if one's household income exceeds 400% of the Federal poverty line (FPL). This can result in a tax bill of thousands of dollars!

Here is an example. A married couple, both age 64, thought their 2014 income would be about $62,000. Being eligible for insurance on the Exchange, they purchased a policy and obtained a PTC of $14,112. When they file their return, they realize they actually have $63,000 of income for 2014. this is above 400% of the FPL so they must repay all of the $14,112 PTC!  If they can drop their income to $62,040 (400% of the FPL for 2014), they don't have to repay the $14,112 (which they already used to be able to buy the insurance so no longer have). If they are eligible for an IRA deduction, and make a contribution of at least $960 (let's say $1,000 for safety) by April 15, they have engaged in some terrific tax planning (click here for IRS info on an IRA contribution by April 15). If they paid someone to prepare their return and that preparer was astute enough to give this advice - and the couple gets their return completed and filed in time to get the IRA contribution made on April 15, great for everyone. [Note: I used a 64 year old couple to generate a high PTC - health insurance costs more when you are older. See this 12/31/14 post.]

Given how the Administration wants to promote retirement savings, I'm puzzled why the IRA contribution idea wasn't built into the Form 8962 for the PTC.

This cliff is bad tax policy for the reason noted above AND because it makes the law inequitable. If this couple instead had employer-provided health insurance and the employer paid all or part of the cost of coverage, that benefit would not be taxable to the couple regardless of their income level.

What do you think?

Another Affordable Care Act Oddity

To help more people obtain health insurance, the Affordable Care Act (ACA) provides a subsidy in the form of a refundable, advanceable tax credit - the Premium Tax Credit (PTC). Generally, if your household income is at least 100% of the Federal poverty line, but not over 400% of that line, and you are not offered affordable coverage from your employer, you are eligible.

For many people, their household income is roughly the same each month. But not for everyone. Perhaps you started the year with monthly income within the eligibility range and obtained subsidized insurance for those months. But, then you get a better paying job or a bonus (but still no offer of affordable health insurance from your employer), and your annual household income goes above 400% of the FPL?  Well, then you have to repay the subsidy you got in the earlier months even though for those months, you could not afford the coverage.

Sounds rough, but not easy to resolve.  If the PTC were changed to be based month by month on your income, it would favor those who can defer lots of income to the last month of the year. Perhaps the problem is more tied to the "cliff" in the PTC that causes someone to completely lose the subsidy once their income crosses the 400% of the FPL (more on that here).  And, all of this puts the PTC person in a situation that an employee with employer-subsidized coverage is not in. That is, there is no cliff that causes an employee to lose his or her income exclusion for what the employer pays towards the employee's health coverage.

What do you think would work to make the PTC more fair?

Obamacare confusion - real and made up

Our health care system is too complex. I'm not only referring to the numerous tax provisions in the Affordable Care Act (ACA or Obamacare), but the system itself.  For example, if you have health insurance, do you know what it covers, how costs are computed, how insurance companies and the medical profession make money?

On March 4, the US Supreme Court heard oral argument in King v Burwell on whether individuals who obtained health insurance through the federal exchange (because their state did not establish its own exchange), are entitled to a Premium Tax Credit (PTC).  The PTC provision in the Code (Section 36B) makes reference to state exchange. The Administration interprets that as also meaning a federal exchange. Millions of individuals have obtained (in 2014) and are currently obtaining for 2015, a PTC to help pay for health insurance.

When requested in advance, the PTC funds go directly to the insurance company to lower monthly premium costs. When the insured files his or her tax return, he or she must reconcile the advance PTC to the actual PTC based on true household income that is not known until after the end of the year.

A Wall Street Journal op ed on March 2, 2015 by Congressmen Ryan, Kline and Upton ("An offramp from ObamaCare"), bemoans the problems of Obamacare.  I think a good part of it plays off the complexity of the system and the low understanding the public has of the ACA and our health care system in general.  For example, these lawmakers present an alternative subsidy proposal (alternative to the PTC):

"The credit would be “advanceable”—that is, you would get it when you needed it; you wouldn’t have to wait for tax season. It also would be “refundable”—that is, you would get the full amount no matter the size of your tax bill. And would adjust the size of the credit for age; the elderly, who face higher coverage costs, would get more support."

Their statement makes it seem that the current PTC is not advanceable when it is and most individuals likely get it in advance in order to be able to afford the monthly premiums.  The current PTC is also refundable. That is, if it exceeds your tax liability, you get the balance.  Their statement about adjustments for age is partially correct.  The PTC is based on age because the PTC ties to the cost of the second lowest cost silver plan. That cost is higher the older you are.  But, there are other ACA flaws for age, such as assuming health insurance is affordable for everyone if it is less than 9.5% of their household income (the percentage is the same for all ages - see my "tax oddity" post of 12/31/14).

The lawmakers do acknowledge the significant subsidy employees with employer-provided coverage get. What is missing is that starting in 2014, millions more get subsidies through the PTC or expanded Medicaid. BUT, millions continue to get no subsidy at all and likely can't afford coverage. These individuals have income above 400% of the Federal poverty line and no employer-provided health insurance. If they don't qualify for Medicaid or Medicare, they are out of luck if they can't afford coverage.  Meanwhile, they are helping to support subsidies for the majority. 

Improvements are seriously needed. The current system is too complex, confusing, inequitable, expensive, - and, not providing health care commensurate with the costs.

What do you think?

King v Burwell references:

• Oral argument transcript and audio files
• 4th Circuit opinion (7/22/14)
• Nellen, Can individuals on federal exchange claim the premium tax credit? AICPA Tax Insider, 10/16/14

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.

An odd result for Premium Tax Credit or is it?

A few people have already pointed out this oddity in the Affordable Care Act including National Taxpayer Advocate Nina Olson in her 2013 Annual Report to Congress. Her excerpt notes that in determining if a person had affordable health coverage available to them from an employer, the measure is whether the self-only lowest cost coverage available to the employee costs 8% of less. It doesn't matter if the family coverage offered by the employer is affordable. The relevance is that the family members won't qualify for a Premium Tax Credit.

That seems odd if no "affordable" coverage was offered to the rest of the family. Isn't that the point of the Affordable Care Act? To help make coverage affordable to everyone?

There is an example in the instructions to the new Form 8965, Health Care Exemptions. See Example 2 on page 8.  It involves a family with two children and $90,000 of household income. The mother's employer offers coverage to the mother (Susan), self-only coverage that costs $5,000. The employer also offers family coverage that costs $20,000. To avoid the Individual Shared Responsibility Payment (the new penalty of Code section 5000A that became effective starting in 2014), you need to have "minimum essential coverage" (basically employer or government or Marketplace provided coverage) or meet an exemption or pay the penalty. If Susan declines the self-only coverage, she likely will owe the penalty. This is because one key exemption - unaffordability, won't apply to her because the cost of her self-only coverage ($5,000) is less than 8% of household income ($7,200). She should see if another exemption applies (there are 9 categories of them - see page 2 of the instructions).

The Example 2 in the instructions goes on to note that if the family doesn't take the family coverage costing $20,000, the husband and two children will meet an exemption because at $20,000 cost, it is unaffordable as it exceeds 8% of household income. If Susan did not get the employer-provided coverage and doesn't have any other coverage or meet any other exemption, she owes a Shared Responsibility Payment (ISRP) of $697 for 2014. That will go on new line 61 of her 2014 Form 1040 (still in draft form as of 12/9/14). Her family members don't owe an ISRP (but they also don't have coverage).

What the example doesn't say (because it is looking only at the exemption from the penalty), is that because the family was offered employee self-only coverage that was affordable, the husband and children are not eligible for a Premium Tax Credit (PTC). (See FAQ8 from the IRS.) This may not be a big deal for this family because their income is close to 400% of the federal poverty line which is where the PTC ends.

But is it odd that eligibility for the PTC is based on the affordability of employee self-only coverage?  Seems that way.  Or, perhaps the goal is to encourage Susan to go to her employer and ask that the cost of family coverage be lowered.  She should at least ask that the employer not offer unaffordable coverage to her husband because then he would potentially be eligible for a PTC (I say potentially because household income is close to 400% of the federal poverty line).

We'll keep learning more as filing season begins and individuals and preparers start dealing with these rules to complete the 2014 Forms 1040.

More later on the PTC and ISRP and the employer shared responsibility payment (effective starting in 2015, but things to deal with now to get ready to avoid it).

What do you think?

Premium Tax Credit Saga - New Developments and Dilemmas

On Friday (11/7/14), the US Supreme Court granted cert in King v. Burwell, 759 F.3d 358, No. 14-1158 (4^th Cir., 7/22/14). This is the case where the court found valid, the IRS regulations allowing individuals to claim a premium tax credit (PTC), even if they obtain coverage on a federal exchange rather than a state exchange. In contrast, in Halbig v. Burwell, 758 F.3d 390, No. 14-5018 (DC Cir., 7/22/14), a divided court found the IRS regulation invalid. The King and Halbig decisions were issued on the same day in July.

In September 2014, the Eastern District Court of Oklahoma issued a decision, State of Oklahoma v. Burwell, No. CIV-11-30-RAW (ED Ok, 9/30/14), finding the regulations invalid.

The DC Court of Appeals vacated its July decision, agreeing to hear the case en banc. Now, with the US Supreme Court agreeing to hear the case, there is no need for the DC appeals court to rehear the case.

So, perhaps we'll have resolution of the issue by mid-2015, after most 2014 returns claiming the PTC have been filed. Given the millions of individuals involved and significant dollars, even if the Court finds the regulations invalid, it doesn't seem likely that the government will be able to get money back from those who obtained insurance on the federal exchange (because their state did not have an exchange) and claimed a PTC. In addition to the practicality issues, there would be equity issues: (1) if people had known they were not eligible for a PTC, they may not have purchased the insurance in the first place, and (2) the unfairness of people in a state with an exchange getting subsidized health insurance when people in a state without an exchange may not (meanwhile, employees in all states who have employer-provided coverage get the longstanding subsidy of the income exclusion for employer-provided health insurance). The second equity issue might raise an equal protection challenge* although I think it would be a weak one because perhaps Congress had a plausible reason for only allowing a PTC on a state exchange because it wanted to encourage states to set up exchanges and manage more of the health care system.

There is also an issue here for return preparers. The Halbig case which the government lost was vacated; the King case which the government won still stands, although the Court will hear the case. The Administration says the PTC is available to anyone who purchased insurance on any exchange in 2014 (Dept of Justice release of 7/22/14). Thus, it seems that now, anyone eligible for the PTC can claim it on their 2014 return. What if the government loses the US Supreme Court case? Unless the Administration says otherwise, it would then seem that 2014 returns filed after that date could not claim the PTC and individuals would have to repay what they obtained in advance.  Would there be an obligation to amend 2014 returns? What should practitioners tell those individuals? Practitioners serving individuals who are otherwise PTC-eligible, but in states without an exchange face filing dilemmas. It would be helpful for the IRS to provide specific guidance for 2014 to address this issue.

For more on the litigation, see my 10/18/14 blog post.

What do you think about all of this?




* A recent case included a helpful summary of the equal protection issue at the federal level: “A tax classification is “constitutionally valid if `there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decisionmaker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.” Id. at __, 132 S. Ct. at 2080 (quoting Nordlinger v. Hahn, 505 U.S. 1, 11 (1992)). There is deemed to be a plausible policy reason “if `there is any reasonably conceivable state of facts that could provide a rational basis for the classification.” Id. at __, 132 S. Ct. at 2080 (quoting FCC v. Beach Commc'ns, Inc., 508 U.S. 307, 313 (1993)). Moreover, “because the classification is presumed constitutional, the 'burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it.” Id. at __, 132 S. Ct. at 2080-2081 (quoting Doe, 509 U.S. at 320).” Field, TC Memo 2013-111.

  

Premium Tax Credit Problems

Two of three recent federal court rulings held that the premium tax credit (PTC) is only available to individuals obtaining coverage through their state exchange, not the federal exchange. This is a big deal because the PTC serves to help make health insurance affordable to individuals with income between 100% and 400% of the federal poverty line. Also, the majority of states did not create their own exchange, forcing individuals in need of insurance to go to the federal exchange (if they are eligible for a PTC).

Resolution of this big issue likely won't happen until next year. Meanwhile, the upcoming filing season will involve millions of individuals having to reconcile the PTC they may have received in advance, with their true amount. There is also a lot of complexity for practitioners too. Another key piece of the Affordable Care Act that comes into play in 2014 is the individual mandate. How many people are subject to it will also depend on the outcome of the PTC litigation.

I've got a short article in this week's AICPA Tax Insider on the three cases and the relevance to individuals and employers.  I hope you'll take a look.

Can individuals on federal exchanges claim the premium tax credit?

What do you think?