The Obamacare Subsidy Cliff

 

I am looking at a case involving the premium tax credit.

We are talking about the Affordable Care Act, also known as Obamacare.

Obamacare uses mathematical tripwires in its definitions. That is not surprising, as one must define “affordable,” determine a “subsidy,” and - for our discussion – calculate a subsidy phase-out. Affordable is defined as cost remaining below a certain percentage of household income. Think of someone with extremely high income - Elon Musk, for example. I anticipate that just about everything is affordable to him.

COMMENT: Technically the subsidy is referred to as the “advance premium tax credit.” For brevity, we will call it the subsidy.

There is a particular calculation, however, that is brutal. It is referred to as the “cliff,” and you do not want to be anywhere near it.

One approaches the cliff by receiving the subsidy. Let’s say that your premium would be $1,400 monthly but based on expected income you qualify for a subsidy of $1,000. Based on those numbers your out-of-pocket cost would be $400 a month.

Notice that I used the word “expected.” When determining your 2022 subsidy, for example, you would use your 2022 income. That creates a problem, as you will not know your 2022 income until 2023, when you file your tax return. A rational alternative would be to use the prior year’s (that is, 2021’s) income, but that was a bridge too far for Congress. Instead, you are to estimate your 2022 income. What if you estimate too high or too low? There would be an accounting (that is, a “true up”) when you file your 2022 tax return.

I get it. If you guessed too high, you should have been entitled to a larger subsidy. That true-up would go on your return and increase your refund. Good times.

What if it went the other way, however? You guessed too low and should have received a smaller subsidy. Again, the true-up would go on your tax return. It would reduce your refund. You might even owe. Bad times.

Let’s introduce another concept.

ACA posited that health insurance was affordable if one made enough money. While a priori truth, that generalization was unworkable. “Enough money” was defined as 400% of the poverty level.

Below 400% one could receive a subsidy (of some amount). Above 400% one would receive no subsidy.

Let’s recap:

(1)  One could receive a subsidy if one’s income was below 400% of the poverty level.

(2)  One guessed one’s income when the subsidy amount was initially determined.

(3)  One would true-up the subsidy when filing one’s tax return.

Let’s set the trap:

(1)  You estimated your income too low and received a subsidy.

(2)  Your actual income was above 400% of the poverty level.

(3)  You therefore were not entitled to any subsidy.

Trap: you must repay the excess subsidy.

That 400% - as you can guess – is the cliff we mentioned earlier.

Let’s look at the Powell case.

Robert Powell and Svetlana Iakovenko (the Powells) received a subsidy for 2017.

They also claimed a long-term capital loss deduction of $123,822.

Taking that big loss into account, they thought they were entitled to an additional subsidy of $636.

Problem.

Capital losses do not work that way. Capital losses are allowed to offset capital losses dollar-for-dollar. Once that happens, capital losses can only offset another $3,000 of other income.

COMMENT: That $3,000 limit has been in the tax Code since before I started college. Considering that I am close to 40 years of practice, that number is laughably obsolete.

The IRS caught the error and sent the Powells a notice.

The IRS notice increased their income to over 400% and resulted in a subsidy overpayment of $17,652. The IRS wanted to know how the Powells preferred to repay that amount.

The Powells – understandably stunned – played one of the best gambits I have ever read. Let’s read the instructions to the tax form:

We then turn to the text of Schedule D, line 21, for the 2017 tax year, which states as follows:

         If line 16 is a loss, enter ... the smaller of:

·      The loss on line 16 or

·      $3,000

So?

The Powells pointed out that a loss of $123,822 is (technically) smaller than a loss of $3,000. Following the literal instructions, they were entitled to the $123,822 loss.

It is an incorrect reading, of course, and the Powells did not have a chance of winning. Still, the thinking is so outside-the-box that I give them kudos.

Yep, the Powells went over the cliff. It hurt.

Note that the Powell’s year was 2017.

Let’s go forward.

The American Rescue Plan eliminated any subsidy repayment for 2020.

COVID year. I understand.

The subsidy was reinstated for 2021 and 2022, but there was a twist. The cliff was replaced with a gradual slope; that is, the subsidy would decline as income increased. Yes, you would have to repay, but it would not be that in-your-face 100% repayment because you hit the cliff.

Makes sense.

What about 2023?

Let’s go to new tax law. The ironically named Inflation Reduction Act extended the slope-versus-cliff relief through 2025.

OK.

Congress of course just kicked the can down the road, as the cliff will return in 2026.

Our case this time was Robert Lester Powell and Svetlana Alekseevna Iakovenko v Commissioner, T.C. Summary Opinion 2002-19.

What ObamaCare Tax Forms Should You Expect For Your 2014 Return?

Are you wondering what, if any, new ObamaCare tax forms you will either be receiving in the mail or including with your tax return come April?

This was a topic at a tax seminar I attended very recently. What may surprise you is that the ObamaCare tax forms are still in draft; yes, “draft,” and I am writing this in the middle of December.

Let’s go over the principal tax forms you may see and how they fit into the overall puzzle. The 2015 filing season will be the initial launch, and some rules have been relaxed or deferred until the 2016 filing season. This means you may or may not see or receive certain forms, depending upon the size of your employer and what type of insurance is offered. Let’s agree to speak in general terms and not include every technicality, otherwise we will both be pulling out our hair before this is over.

The key form (I suspect) you will receive is Form 1095-B.

Form 1095-B

You will be receiving the “B” from the employer’s insurance company. Its purpose is to show that you had health insurance (“minimum essential coverage” or “MEC,” in the lingo), as failure to have health insurance will trigger a penalty. The form has four parts, as follows:

(1) The name and address of the principal insured person (probably you)

(2) The name and address of the employer

(3) The name and address of the insurance company

(4) The name and social security number of every person covered under the policy for the principal insured person. There are boxes for all 12 months, as the ObamaCare penalty is a month-by-month calculation.

What if your employer did not provide health insurance and you purchased coverage on the exchange? Now we are talking Form 1095-A, and the exchange will send it to you. It has three parts:

(1) The name of the principal insured person, as well as information about the marketplace itself and some policy information.

(2) The names and social security numbers of those covered under the policy.

(3) Monthly information, such as the premium amount and the amount of any subsidy (“advance payment”) received.

Form 1095-A

You will have received this form because you or a family member obtained health insurance through the exchange. You already know that the principal insured person (likely you) has to settle up with the IRS at year-end, comparing his/her household income, any subsidy received and any subsidy actually entitled to. The information on the “A” will – in turn – be reported on that form, which we will discuss in a minute.

We still have one more “1095” to talk about: the 1095-C. Frankly, I find this one to be the most confusing of the three.

Form 1095-C

The employer issues the “C.” Not all employers, mind you, only the “large employers,” as defined and subject to the $2,000/$3,000 penalty for not offering health insurance or offering health insurance that is not affordable.

You will not receive a “C” in 2015. Rather, you will receive one in 2016 if you were a full-time employee anytime during 2015. It can be included with your 2015 W-2, should your employer choose.

It has three parts:

(1) Employee and employer information, including identification numbers and addresses

(2) Recap of insurance coverage offered the employee, detailed for each month of the year. There are a series of codes to fill-in, depending upon a matrix of minimum essential coverage, minimum value, affordability and availability of family coverage.

(3) The third part applies only if the employer is self-insured.

BTW, you may have read that there is 2015 transition relief for employers having between 50 and 99 employees. That applies to the penalty, not to filing this paperwork. An employer with between 50 and 99 employees still has to file the “C.” You will receive this form in 2016 - if your employer has at least 50 employees.

NOTE: The IRS has said that employers can file this form “voluntarily” in 2015 for the 2014 tax year. Uh, sure.

Let’s recap. You would have received the “A”or “B” from a third party and (unlikely) a “C” from your employer. You now have to prepare your individual tax return. What new forms will you see there?

If you acquired insurance on an exchange, you will receive Form 1095-A. You will in turn use information from the “A” to complete Form 8962. Since you are on an exchange, you have to run the numbers to see if you are entitled to a subsidy. Combine this with the possibility that you received an advance subsidy, and you get the following combinations:

(1) You received a subsidy and it is exactly the subsidy to which you are entitled. I expect to see zero of these in my practice.

(2) You received a subsidy and it is less than you are entitled to. Congratulations, you have won a prize. Your tax preparer will include the difference and your tax refund will be larger than it would otherwise be.

(3) You received a subsidy and it is more than you are entitled to. Sorry, you now have to pay it back. Your refund will be less than it would otherwise be.

(4) You received no subsidy and you are entitled to no subsidy. I expect this to be the default in my tax practice. I suspect that we will not even have to file the form in this case, but I am waiting for clarification.

What if you did not have insurance and you did not go on the exchange? There are two more forms:

(1) If you have an exemption from buying insurance, you will file Form 8965. You have to provide a reason (that is, an “exemption”) for not buying health insurance.

(2) All right, technically the next one is not a form but rather a “worksheet” to Form 8965. The difference is that a worksheet may, but does not have to be, included with your tax return. A “form” must be included.

Form 8965

Form 8965 Instructions and Worksheet 

You are here if you did not go on the exchange and you do not have an exemption. You will owe the ObamaCare penalty, and this is where you calculate it. The penalty will go from here to your Form 1040 as additional taxes you owe.

And there you have it.

By the way, expect your tax preparation fees to go up.

What New Paperwork Does An Employer Have Under ObamaCare?

You are an employer. You are a bit unclear on the new paperwork you need to file to comply with the Affordable Care Act (ACA), also known as Obamacare.  As we go into the fourth quarter of 2014, this issue is taking on greater urgency.

You are completely normal. Many companies, including their advisors, are in the same situation. The rules are new, complicated and – and in some cases – repetitively postponed. Are you supposed to do anything different when you send out the 2014 Forms W-2 in early 2015, for example?

The easiest way to make sense of this is to divide employers into three categories. Why? Because each employer category has its own rules.

The first category is an employer with less than 50 employees (technically, “full-time equivalents”). The Government is quick to point out that this encompasses 96% of all employers, although of course it encompasses a much smaller percentage of employees.

If this is you:

·        You do not have to do anything different with your 2014 W-2s.

·        You are not required to provide health insurance coverage to your full-time employees.

·        You are not required to pay an employer penalty.

·        This is true for 2014, 2015 and all years thereafter.

So, if you are an employer in this category you may or may not offer health insurance to your employees, but this remains a business decision. You are not required to do anything – including filing any new paperwork – to be in compliance with the ACA.

Let’s make our second category employers with 100 or more employees. Why? Technically the original ACA divided employers into two groups: under 50 employees and 50 employees and over. There have been numerous regulatory changes to the law, and one change divided employers further into 50-but-99-and-under employees and 100-employees-and-over.

If this is you… you need to get ready to make changes. 

·         You do not have to do anything different with your 2014 W-2s (fortunately). However, see below for your 2015 W-2s, which you will file in 2016.

·        You will have to provide health insurance to your employees starting January 1, 2015.

o   The ACA itself defines what is acceptable insurance, referred to as “minimum essential coverage.”

§  It also has to be “affordable.”

§  These are areas you want to review with your insurance agent or benefits consultant.

o   There is a sub-rule in here that may or may not impact you. The ACA originally required employers to cover 95% of their full-time employees in 2015. That rule has been changed. You are now required to cover 70% of your full-time employees in 2015 and then 95% for 2016 and later years.

·        You will be required to pay an employer penalty if you don’t provide minimum essential and affordable health insurance.

o   Interestingly enough, this penalty will not appear on your business income tax return. The IRS has to wait until your employees have filed their individual tax returns, then match any information provided to the IRS by the health-care exchanges and by you as the employer.

o   This is expected to be in the form of an IRS notice. You will be given time to respond, after which the IRS will issue another notice and demand for payment.

o   You can therefore expect that this notice will not go out until the end of 2016 or more likely in 2017. This is approximately one-year after you paid the underlying payroll itself.

§  We should expect that this penalty will also eventually be required to be paid via estimated tax payments.

·        You will have new paperwork when you file your 2015 year-end payroll tax returns in 2016. These are known as the “Section 6056 rules” and are in place to provide employees the information they need to calculate their ACA penalty, if any, on their individual tax returns.

o   You will file Form 1095-C Employer-Provided Health Insurance Offer and Coverage. A copy of this goes to your employee. It will also go to the IRS with its transmittal – Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns.

§  It is therefore similar to sending the W-2s with their transmittal Form W-3.

o   By the way, filing Forms 1095-C and 1094-C are optional for 2014 (to be filed in 2015). The IRS has said it would like you to file and consider them a “trial run,” but you do not have to.

o   But they are mandatory for 2015 (to be filed in 2016).

Finally, our third category: employers with 50 to 99 employees.

This category is different because in February, 2014 the IRS segregated what it called “midsized employers” (that is 50 to 99 employees). These employers received a one-year delay before facing ACA penalties – until January 1, 2016.

The “large employers” (100-or-more employees) received no such break and have to comply starting January 1, 2015.

If this is you… you need to get ready to make changes. 

·        You do not have to do anything different with your 2014 W-2s (fortunately). However, see below for your 2015 W-2s, which you will file in 2016.

·        You will have to provide health insurance to your employees starting January 1, 2016 (not 2015).

o   There is an interesting requirement, though.

§  You will have to certify – for 2015 - that…

·        You have not reduced your workforce to qualify for this relief; and

·        You have not materially reduced or eliminated any health coverage.

§  This certification is on Form 1094-C, which you will be filing anyway.

o   Otherwise, the requirements are the same as 100-and-more employers, as discussed above.

·        You will have an employer penalty for not complying, but you do not have to comply until January 1, 2016. That is, you have one additional year to comply (as compared to 100-and-more employers).

o   Otherwise, the requirements are the same as for 100-and-more employers, as discussed above.

·        You will have new paperwork when you file your 2015 year-end payroll tax returns in 2016. These are known as the “Section 6056 rules” and are in place to provide employees the information they need to calculate their ACA penalty, if any, on their personal tax returns.

o   You will file Form 1095-C Employer-Provided Health Insurance Offer and Coverage. A copy of this goes to your employee. It will go to the IRS with its transmittal – Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns.

§  It is therefore similar to sending the W-2s with their transmittal Form W-3.

o   By the way, filing Forms 1095-C and 1094-C are optional for 2014 (to be filed in 2015). The IRS has said it would like you to file and consider them a “trial run,” but you do not have to.

o   But they are mandatory for 2015 (to be filed in 2016).

You now have a high-altitude view of what you, as an employer, are to do to comply with the ACA filing requirements. Unless you are a less-than-50 employer, you will have additional reporting requirements. Please consider that some of this information is not presently collected as part of your routine accounting process. Both 50-to-99 and more-than-100 employers should review that new procedures will be in place to collect the information needed to complete these new ACA tax forms. Whereas these forms will not be filed until early 2016, they will contain information going back to January, 2015.