Think your coverage is unaffordable? Watch out for this Obamacare pitfall

October 25, 2013
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Americans don’t know much about their health benefits. That was made clear by a survey earlier this year in which half of Americans couldn't explain the difference between premiums, deductibles and co-pays.

But the Obamacare exchanges--assuming they actually start working soon--will require working Americans to grasp minute details of their employers’ health plans in order to avoid a nasty surprise from the Internal Revenue Service.

Obamacare, formally known as the Patient Protection and Affordable Care Act, requires all employers with 50 or more workers to provide adequate and affordable health insurance for their workers—or pay a fine.

The law also provides sizable tax subsidies to help individuals buy insurance on newly created online exchanges. But for workers, these tax subsidies are only available if their employer has failed to offer adequate and affordable health insurance.

How do workers know if they are eligible for a subsidy? Well, for 2014, they’re pretty much on their own. And if they make a mistake, it could cost them thousands of dollars.

Let me explain how:

The Affordable Care Act has very specific definitions for the terms “adequate” and “affordable.”

Adequate coverage means the employer offers at least one plan—regardless of whether an employee is in that plan or not—that has an actuarial value of 60 percent. In English, that means the health plan would pay for 60 percent of the medical bills that actuaries predict would be incurred in one year. The insured cutomers would be on the hook for the other 40 percent of the bills.

Affordable coverage means that an employer offers a health plan for single-only coverage that does not exceed 9.5 percent of a worker’s household income. Employers do not have to offer a family health plan that meets this standard.

Of course, there are immediate problems with these definitions.

First of all, employers have been given a one-year reprieve on these requirements, and so many have not hired actuaries to render a determination on whether or not their plans meet the 60 percent threshold. Even if they have, the IRS could ultimately determine otherwise.

Second, employers have no way of knowing what their workers’ household incomes are. That would require them to know not only the wages the employer pays, but also any other jobs or income the person has, as well as any income the worker’s spouse has. In short, an employer would have to have each of its worker’s individual income tax returns—which they don’t, and have no right to have.

So employers, fundamentally, cannot tell their workers if the company health plan is adequate and affordable or not.

Yet the Obamacare application form tells applicants to ask their employer for information on whether the company health plan meets Obamacare’s “minimum value standard” and whether the employer provides at least one plan that would be affordable to the employee.

The form also instructs applicants to ask their employer for the amount of premiums it requires employees to pay for the lowest-cost plan it offers for single (non-family) coverage that meets the minimum value standard.

Jessica Waltman, a D.C.-based lobbyist for the National Association of Health Underwriters, told me that most employers--the clients of her association's members--are simply saying, “We don’t know," when their workers ask these questions.

If that’s true, then it leaves quite a few workers on their own to determine whether or not they qualify for a tax subsidy. I’m a bit concerned that could lead some well-meaning folks to claim tax subsidies that they later have to pay back to the IRS.

Here’s how that could happen. If I try to sign up for coverage through Obamacare, and I don’t get the information I need from my employer, I could innocently conclude that my health coverage is, indeed, unaffordable.

I could make this mistake if I am enrolled in family coverage that costs more than 9.5 percent of my household income, but I fail to see that my employer offers single coverage that does fall under that threshold.

Or I could make that mistake if I conclude, correctly, that the type of plan I’m in—a PPO plan, for example—has a single-coverage option with premiums that are more than 9.5 percent of my income; but I forget that my company offers another kind of plan—a high-deductible health plan—that would be under the 9.5 percent income threshold.

If I claim a tax subsidy and go ahead and buy insurance on the Obamacare exchange from, say, Anthem Blue Cross and Blue Shield, the federal government will send thousands of dollars to Anthem to reduce my premiums on that insurance policy. I will never see the money.

But the IRS will, at some point, contact my employer to tell it that it owes a penalty because I received a tax credit in the exchange due to the company’s inadequate and unaffordable coverage.

At that point, my employer will likely do everything it can to show that, in fact, it did offer adequate and affordable coverage to me—I just didn’t enroll in the plan that met those standards.

And then the IRS, especially once it receives my 2014 tax return in 2015, can tell me that I underpaid my taxes because I incorrectly claimed a huge tax subsidy to which I had no right.

Who will this affect the most? Perhaps not people with the lowest incomes, who may not even be required to file income tax returns. But for households with two low-level incomes, this could bite.

For example, according to Anthem’s published rates, a family in Indianapolis made up of two 30-year-old adults, both non-smokers, with two kids, and with family income of $50,000, would receive a subsidy of $5,600. That’s a lot of money for a family of that means to give back.

I have no idea how common this will end up being. Let’s hope not very. And since the Obama administration has shown itself willing to delay enforcement of parts of the Affordable Care Act, perhaps it will excuse these mistakes during this first year.

Still, if I were trying to enroll in exchange coverage, I wouldn’t bet on such leniency. I’d be exceedingly careful to avoid this kind of mistake in the first place.

  • Turning feature into problem
    I always find it disappointing that every feature of the Affordable Health Care Act, like, for example, setting minimum standards for health policies, is treated as if it's a BIG PROBLEM that citizens must worry about. I think, if you look at the balance and uniformity that the regulations will bring to a fractured, decisive, broken health care system, it might put the regulations in a different light. Every step forward has been hounded and dogged by politicians and the press. Yet, at the end of the day, many people who don't have coverage would simply like to have health care insurance that works. I don't see or hear people dramatically complaining about Medicare, the Federal Government's program for Seniors. Yet, you'd think this step of standardizing policies so they are fairly priced and easier to understand by the people is an entirely new thing that no one has ever accomplished. It really is time that we all work together and stop fighting, and a first step could be for the Indiana media to start helping citizens understand the ACA and it's benefits.
    • Fighting?
      I doubt the writer is looking for a fight. He is making the point that no one should assume anything about this new healthcare law.
    • To MilestoGo
      You are right that many people just want "healthcare insurance that works." And that's the phase of reporting we are in: determining how well or not this whole thing works. We have had more than four years to debate the general pros and cons of this law. Now that the centerpiece of it is rolling out, how well or how poorly it works is critical not only to the success of Obamacare overall, but is also crucial for determining if the exchanges become an attractive option for employers and their workers or if they come to be perceived as a second-tier option to other routes to coverage. In short, sorting through glitches, points of confusion, etc., are vital for whether Americans embrace this or not. If you support the law, I suggest you should also favor full disclosure(and therefore fixes) of the problems, rather than glossing over them. For more on this point, read this excellent piece by Ezra Klein at Wonklog:
    • The dialogue is needed
      Good points to consider JK...nicely written...
    • Marketplace Notice
      Employers are required by the DOL to submit to employees whether they offer a plan or not a Marketplace Notice that outlines the Marketplace, premium tax credits and that they may lose the benefit of an employer contribution and pre-tax contributions. Employers then have the option to state whether their plan meets the minimum value standard. The model notice can be found: Employers should provide this information so that they avoid notices from the IRS if employees seek tax credits in the Marketplace.
    • penalties
      J.K.- You hint that perhaps the Obama administration will excuse mistakes made during the first year, but using your example, why should any family get to keep a subsidy of $5600 that they were not entitled to? Even on the assumption that any "mistake" was made due to the confusion of the way the law is written, and they might have had totally innocent intentions, ignorance of the law is still not an excuse, and that $5600 is still a lot of money that somebody somewhere has to account for, correct?
      • To Steve
        Of course, under the law, my hypothetical family would owe the money back to the government. Of course, under the law, all employers are required to provide health insurance in 2014. But the Obama administration has chosen not to enforce the law on that point for one year. All I'm saying is, if the administration has made such exceptions before, they might do so again. I'm not saying anything whether this is good or bad policy, whether it's legal or not. I'm just saying the Obama administration has been willing to postpone enforcement on certain parts of the law.
      • Not likely?
        Most people on large group plans are not going to take the time and try to get a plan off of the exchange. Once they see the plans designs they will look at their plan and say not bad. Even with subsidies, the out of pocket could be higher than a large group plan. Not to mention narrow networks. The people that are going to go to the exchange are the ones that do not have access to group health.
      • To Milestogo
        Your angst would be better directed where it belongs, not at the media for reporting factual stores, but at the extremely poorly written law and the those that wrote it. I do not have issues with some of the "features" of the law as you call it. I do have issue that the administration felt the need to rework the entire healthcare system to include a few "features" that could have easily been passed without up-ending healthcare as we know it. To quote President Obama, "...and you can keep your current plan if you like it." Well, I just found out today that I can't keep my current plan because my employer has decided to drop it becuase under the Affordable Care TAX Act it has been deemed a caddilac policy.
      • Misstatements in article
        A couple mistaken points in the article. All employers are not required to offer health insurance (paragraph 3). Only businesses with more than 50 employees. According to Kelley School of Business, median business size in Indiana is only 5 employees, meaning half of all businesses have less and half have more than 5 employees. A great majority of businesses are under 50 employees, and there are tax incentives for those over that. To the notion that a family of 4 with $50K income could be on the hook for $5600 subsidy if they miscalculate their annual income, they would have to nearly double their income to have that much exposure, which means they could probably afford to pay back wasn't deserved. They would presumably still qualify for most of that subsidy if their income remained around the same, within a few hundred dollars. In the world of personal responsibility, we already have the same risk in calculating our withheld income taxes. To the overarching point that we all must carefully analyze our options during any time of transition, absolutely true. Due diligence, careful comparison of the options, are musts. What I am finding is that, while I may not qualify for a subsidy, I still see better coverage on the exchange than I currently have for a family of three for about the same premium I have now. By comparison, for the past 20 years, my premiums have gone up an average of 10-15% per year, every year. Premiums will go up for some, but not most. But it would be disingenuous to claim the full amount of increases are due to the federal law when premiums went up 131% from 1999 to 2009, and projected to increase 161% from 2009 to 2019 - an assessment in Time magazine that was written BEFORE "Obamacare". Based on an average $48K household income in Indiana, a great majority of households are likely to benefit. The theory that more preventative care and wellness policies will reduce overall healthcare costs seems pretty simple. For all the fear-mongering, and political posturing (and intentional roadblocks put in the way of the law by this and other state legislatures), it seems that ACA might just achieve an important moral imperative that the "market-based" (or profit-based system was not getting done here in America.
        • To Alan Schoff
          Thank you for pointing out my error in stating that all employers must provide health insurance. It is all employers with more than 50 workers. I have corrected that paragraph to reflect that. As to your second point, I think you have misunderstood my post. I did not describe a miscalculation of someone's income, but rather a misunderstanding about whether a person's employer is offering health coverage that is affordable and adequate. A mistake on those points of the Obamacare application could generate a large tax subsidy that is simply not allowed under the law. The amount of the person's income makes no difference in that mistake, other than to determine the size of it.
          • Yep and maybe
            I see that I did misunderstand the part of your post regarding affordable and adequate coverage. To the degree that forgetting about single- versus family-coverage and minimum coverages are plausible, the law states that employers have the responsibility to inform their employees of their options and if the company policy qualifies. While legally and technically the taxpayer could be responsible for subsidies they actually are not qualified to receive, I wonder what the practical requirements are for informing employees about their insurance options. I understand that employers only have to consider W2 income, not household income. As far as not being properly informed, there must be some sort of responsibility on the employers beyond the fines for having employees that should be on the company policy in the exchange. Unanswered questions! If it's not spelled out in the law, and it may not be, sounds like room for improvement and/or vetting that responsibility in the courts. Hope for all of our sakes that businesses and insurance companies provide adequate, affordable healthcare options and clearly explain those options.
            • Small employer coverage
              I'm hoping someone can comment on options for those of us who work for an employer with less than 50 employees that WILL offer coverage in 2014. This coverage if used to cover a typical "family of 4" is vastly more expensive than exchange based coverage with a subsidy in median incomes. The problem is that since employer coverage is offered no subsidy will be granted if the exchange is used. Does anyone know if I can negotiate with my employer to NOT offer me (just me) coverage since we have less than 50 employees? I'm not familiar with what criteria can be used to decide who can be offered insurance or not without being "discriminatory".
              • Employer coverage vs marketplace
                Hope this info. is helpful about your options if your employer offers you insurance You will not qualify for a subsidy, or even the marketplace/exchange, if your insurance cost is less than 9.5% of your household income for just your coverage, not your family's portion - as J.K. Wall pointed out in this article. Small businesses get up to a 50% tax credit for health insurance premiums paid for their employees if they buy through the small business portion of the exchange (SHOP) in 2014. And they can still write off the balance of premium payments as a business expense. So while it may cost employees more, it may not cost employers more after tax credits. While these tax credits could be used to offset premium increases to employees, they probably won't be applied that way. That cash flow won't be realized until tax-time in 2015. Not sure how small business plans will pan. Some small businesses under 50 employees will quit offering insurance, which allows their employees to benefit from the exchange plans and premium subsidies that most workers in Indiana would qualify for on the ACA marketplace.
              • Good stuff
                JK, as usual you are spot on. The reality is employers and employees most know these critical pieces of information, now! I have enjoyed our prior discussions on Private Exchanges. Check out benefitnext to solve the issues addressed above.
              • Gonna Crash On Its Face
                This stupid plan will not hit its minimum requirement of 5 million or so young people buying an insurance policy....they will pay the fine....then, the stupid democrats will try to tax the crap out of everything to make up for the gap.....isn't this what France is currently trying to do?? Tax "rich" people at 60% or something? And then when the rich leave the country....where'd all da money go?
              • unaffordable family coverage
                I can tell you how this is afftecting my own family. I have employer provided coverage, my husband does not (and will not) The coverage cost me for just myself $200 per month. We pay privately for my husband and daughter. Wehave just updated our policies, my daughter can keep her policy. My husband cannot because we made changesduring the time Obama said we could keep 2013plans rendering his ineligible. Anyway, ot would cost $1000 per month to insurey family. Obviously unaffordable when together we make around $70000. Through the exchange, we will now be paying an extra $300 per month to insure my husband with a lower quality plan. We do NOT qualify for subsidies because my employer plan is affordable for me alone. Now we are paying more and receiving less. Except my husband and toddler are now coveted for things like maternity and tubal ligation. Perfect

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