The day of reckoning is coming for the Affordable Care Act, widely called Obamacare. March 31, the day nearly every American is supposed to have health insurance, is fast approaching. And judging from the government’s February enrollment numbers, many uninsured people still have not signed up.
While these numbers surely will be higher by the end of March, it’s a safe bet that millions still will be without coverage and subject to a tax penalty for failing to buy a policy.
The idea behind the Affordable Care Act was to bring health insurance to more Americans but not through a universal national health system like other countries have, where everyone is covered as a matter of right. Instead, Congress wanted to give more Americans the right to buy an insurance policy on the private market. After March 31, nearly everyone will be required to have insurance through Medicare, Medicaid, an employer, the military or a state shopping exchange.
To make this private market work and keep premiums reasonably low, insurance companies needed a good mix of healthy and sick people. If there were too many sick people and not enough healthy ones enrolled, insurers wouldn’t collect enough in premiums to pay for the claims of those who had high medical expenses. As a result, insurance companies would raise their rates, and premiums would go through the proverbial roof.
To solve that problem, everyone is required to have insurance or pay a tax penalty, which kicks in next year unless Congress delays it. The House of Representatives voted to do that last week, but its bill has no chance of becoming law because the Senate won’t pass a similar bill, and the president would veto it anyway.
The penalty is pretty weak, and it may not be big enough to make everyone buy coverage. For some families, it might be cheaper to pay the penalty and skip the insurance. Of course, they won’t have any insurance protection if they do that.
What exactly is the penalty? Like most things in the Affordable Care Act, even the penalty is not straightforward. For the first year, it’s $95 for each adult in a family up to $285, or 1 percent of family income. The penalty increases each year until it reaches $695 per person or 2.5 percent of family income in 2016 and afterwards.
When the penalty is fully phased in, here’s how it will work: one full penalty per each adult in the family and an additional half-an-adult penalty per child. The penalty cannot exceed $2,085 if it’s assessed as a flat rate. If it’s a percentage of income, it can’t exceed the cost of a bronze plan, the cheapest type of policy sold in the exchange.
But the tax penalty assessed through your income taxes may not be the biggest tax surprise. The subsidies Congress made available to coax families with low and moderate incomes to buy expensive health insurance have a pretty big string attached. It’s called the “clawback,” and very few consumers who’ve received a subsidy through a state exchange know what can happen. Health researchers at the University of California, Berkeley, UCLA and the Economic Policy Institute estimated that nearly 40 percent of families might be affected by the clawback.
How does the clawback work? A family’s subsidy is based on last year’s tax return. When they apply for a subsidy, the family must make its best guess about their income for the current year. That may be tough for self-employed people or those with seasonal jobs. If the family’s income increases during the year the family receives its subsidy — say a family member gets a raise — they will have to pay back some of the subsidy they’ve received.
Their tax return will show they owe the government money it paid the insurance company on their behalf, and families will have to dig into their pockets to pay it back. The money will be “clawed back” to the government.
This arrangement also might work in a family’s favor. If their subsidy turns out to be too low relative to their income for the year, say if a family member lost a job, then the family’s next tax return will show a tax refund.
What’s the backstory? When the law was written, Congress had to find a way to pay for the subsidies and needed to raise money from other sources in the federal budget. One way was to raise some $22 billion by requiring small firms to report more of their business transactions. They complained, and Congress chose to make up the lost revenue from the very people who received subsidies in the first place.
Timothy Jost, a law professor at Washington and Lee University, summed up the dilemma: “Many Americans are going to be shocked to discover when they figure up their taxes at the end of the year that what they thought was a grant (to help pay their premiums) was in fact a loan.”
The Rural Health News Service is funded by a grant from the Commonwealth Fund and distributed through the Nebraska Press Association Foundation, the Colorado Press Association and the South Dakota Newspaper Association.