A reconciliation process to recoup excess subsidies

Now that tax season is over, Uncle Sam will be turning his attention to another pressing matter.

The task at hand involves recapturing from 2014 federal income tax returns any excess premium subsidies that were advanced to enrollees in public health insurance exchanges based on lower-stated income. This so-called reconciliation process also includes assessing penalties owed or overpaid premiums based on a discrepancy between estimated and actual earnings, which would be added to an individual’s tax refund.

Given the high cost of health insurance, subsidies are expected to easily top thousands of dollars per individual — raising questions about how this monumental task will be handled and enforced, as well as affect the online marketplace’s evolution.

Also See: Report: 26 Million Eligible for HIX Subsidies

Since the premium subsidy is an advanced payment, the Affordable Care Act put in place a system to recoup any excess amounts that individuals weren’t eligible to receive in the first place, according to Chris Condeluci, an attorney with Venable LLP who helped draft the law.

“This is a big deal for people purchasing an individual-market plan through the exchanges,” he says. Condeluci adds that the issue may be of interest to HR and benefit professionals whose company discontinues health insurance coverage for their employees, or attempts to help part-time, seasonal, or temporary workers obtain coverage.

Income often fluctuates in the course of a given year relative to previous years for a variety of reasons — from a change in jobs or hours worked to a promotion and bonus payments, according to a Henry J. Kaiser Family Foundation bulletin.

Researchers at the nonprofit foundation expressed concern that the reconciliation process may “suppress participation in the exchanges and limit the number of people obtaining coverage.” The issue could be exacerbated by “raising or eliminating the repayment caps,” they added.

ACA subsidy repayment caps were established so that a family of four earning less than $47,000 a year, for instance, would have to repay no more than $600 – an amount that would be capped at $1,500 for between $47,000 and $70,000 in annual income and capped at $2,500 for between $70,000 and $94,200 in annual income for that same family. Families whose earnings exceed this level would have to repay the entire subsidy.

“These caps will prevent those who were over-subsidized from repayment of the entire over-paid amount,” observes Dan Farrar, a co-founder of BenefitNext, a technology company providing a web-based solution to assist businesses in navigating health care reform.  He also says there are “few enforcement mechanisms other than to withhold the overpayment from a household’s tax refund. The IRS was not given real teeth to attach wages or assets.” 

Mark Ciaramitaro, vice president of health enrollment services at at H&R Block, explains that “any excess subsidy is really no different from any other tax liability you might have for any reason, such as under-withholding, or claiming a credit you weren’t eligible for.” It also should not be confused with the noncompliance penalty for which he says the IRS has limited authority to collect.

Individuals are expected to reasonably estimate their income and report back to the exchange if there’s a change in circumstances, he notes, adding that “those who deliberately try to game the system by understating income — and certainly those who commit fraud — could face serious consequences.”

Also See: Court Cases Challenge Legality of Federal Exchange Subsidies

Ciaramitaro says it’s unclear how the IRS would reconcile lower subsidized co-pays with what the client should have had to pay based on their actual, albeit higher, household income, as well as cost-sharing subsidies tied to the metal-level of the HIX plan selected.

The public exchanges are supposed to mail enrollees a statement showing the amount of their premiums and advance credit payments “by Jan. 31 of the year following the year of coverage,” according to the IRS. The information will be used to compute premium tax credit on the individual’s 2014 income tax return and reconcile advance credit payments that were made.

Shutan is a Los Angeles freelance writer.