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March 3, 2016

Next PR Problem for Obamacare

Summary:

Hundreds of thousands of people honestly believed they were entitled to subsidies under Obamacare -- and may be about to get a huge bill.

Photo Courtesy of Charles Fettinger

There is a big PR problem brewing, one receiving very little attention in the media or in industry publications. It’s one I think will resonate among those who typically support the politicians who supported the Affordable Care Act.

The issue stems from the delay in the 1094/1095 reporting under section 6055 and 6056 of the IRS code specifically created under the Affordable Care Act. In English: This is the reporting requirement for carriers and employers that lets the government know if an offer of coverage was made to a particular employee, if it met certain requirements and if it was “affordable” according to one of several calculations set forth by the bill. If an “applicable large employer” does not report or does not meet the minimum requirements for coverage and affordability, there are serious fines at play.

The deadline for the first reports, barring any further delays, is March 31.  (The initial deadline was pushed back because of the burden on employers.)

Why is this important? Well, Obamacare established subsidies to help reduce out-of-pocket costs. The subsidy amount is based on household income in relation to the federal poverty level. Your job also must not offer insurance that meets the requirements about the base level of coverage and affordability. Without employer reporting, however, the government has, thus far, relied on individuals’ assessments of coverage and affordability.

Even if the employer plan meets the affordability test, most people would still call their plans through their employer “unaffordable.” The confusion is compounded by something the industry refers to as the “family glitch.” Let’s say I am offered coverage at my job, and my employer pays 80% of the premium for me. But my employer pays nothing toward the cost of carrying my dependents, an all-too-common scenario. This coverage would likely meet the affordability test for my coverage alone, on the lowest-cost plan my employer offers. If my employer pays nothing toward my family, however, it could easily cost me $1,000 or more per month out of my pay to cover my family. That’s clearly not affordable to most Americans, but, because my coverage met the test, the entire household becomes ineligible for a subsidy.

You could have hundreds of thousands of people who honestly believed their coverage was not affordable, didn’t think their employers plan met the coverage requirements or outright lied because there appeared to be no one checking. These people received what could amount to significant subsidies they weren’t entitled to.

Technically, they received an advanced tax credit. If it is determined you were not eligible for that tax credit, you now have a liability, and it is widely believed the IRS will have the right to garnish wages, freeze assets and place liens on property.

How much are we talking here? Well, I have seen subsides as big as $1,500 per month. The average is around $2,890 per year, per person (according to the Kaiser Family Foundation). So, if a family of four owes the entire year back at the average subsidy, we are talking more than $10,000 a year plus (most likely) penalties and interest from the IRS.

What is the average working person going to do if he gets a demand for $1,000 from the IRS? $10,000?  More? And if the IRS exerts the same force it does on normal tax debts, things such as frozen bank accounts, liens and garnished wages could follow pretty quickly.

All in all, this reporting we are now preparing for employers will likely have significant financial impact on many American workers who should not have received the subsidy to begin with. In all likelihood, many did not fully understand that.

The timing of all this will largely depend on how quickly the government aggregates the data it is collecting from numerous sources.

But get ready for what I believe will be a vocal, angry and desperate group of people with compelling stories facing a very difficult financial situation.

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About the Author

David Contorno is president of Lake Norman Benefits. Contorno is a native New Yorker and entered this field at the young age of 14, doing marketing for a major life insurance company.

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