Federal Health Law Could Bring an Unwelcome Tax Surprise

Some families may end up owing Uncle Sam a sizable refund if they accept government help on buying health insurance next year under President Barack Obama?s Affordable Care Act.

A study published Monday in Health Affairs estimates that 38 percent of families that qualify for federal premium subsidies might have to repay some portion if changes in their household income aren?t reported to the government.

These subsidies are a crucial part of the federal health care law intended to help make insurance more affordable for lower- and middle-income people. Individuals earning less than $46,000 and families earning less than $94,000 annually may qualify for these premium tax credits.

But a raise, bonus or other unexpected income during the year could alter a person?s eligibility and subsidy amount, triggering a repayment when the person files income tax forms for 2014. Some policy experts worry that experience could sour people on the health care expansion.

?There?s the potential for some sizable repayments,? said Ken Jacobs, the study?s lead author and chairman of the University of California-Berkeley Center for Labor Research and Education.

?Even if a small number of people owe a lot of money back that could generate fear of taking the subsidies. You don?t want to scare people from enrolling,? Jacobs added.

At particular risk of refunds, researchers said, are people who are near the eligibility cutoff for the subsidies. The tax credits are on a sliding-scale basis up to 400 percent of the federal poverty line.

For instance, a family of four in California that receives a year-end bonus that puts them over that 400 percent income threshold could be required to repay more than $7,000, according to Jacobs.

The subsidy repayments are capped for lower-income people under the law.

The study said prompt notification of income changes so the subsidies can be adjusted could reduce the number of people who owe repayments by as much as 41 percent. Also, the size of the typical repayment could be cut by as much as 60 percent, according to the study.

?Timely reporting will make a very big difference,? Jacobs said.

In most cases, the federal government will pay the monthly subsidy directly to the customer?s private health insurer and the policyholder will pay any remaining premium.

In Washington, D.C., Jacobs said, the district?s exchange has set the default subsidy to 85 percent of the full amount to give people some financial cushion against receiving too much throughout the year. Even in that case, he said, consumers can still elect to take the full amount if they want.

Peter Lee, executive director of Covered California, said the state?s health exchange will work hard to educate residents about how the subsidies work and the importance of promptly reporting changes in income to avoid surprises later on.

?We don?t want to be on the paternalistic side of saying, ?We think you should save more to the end,? ? Lee said. ?But we do want to reach out and let people know what the risks are. It is a big deal.?

Source: MCT Information Services