Last year was the first year that all provisions of the Affordable Care Act were fully functional. Since its passage in 2009, changes to health insurance have been incrementally made to give insurance companies time to adjust, as well as to make sure the exchanges were fully set up. This year, the IRS began administering the Individual Shared Responsibility Provision for the 2014 tax year, which requires everyone to have insurance or pay a fine. For those who cannot find affordable coverage, there is no penalty.
When people sign up for the health insurance through an exchange (either state or federal), they have a choice to receive their tax subsidy in advance by having their monthly premium reduced, or paying the full premium and getting a premium tax credit when they filed their return. In 2014, the vast majority of tax filers selected the advance premium tax credit to reduce their premiums. According to an IRS preliminary report presented to Congress on July 17, the tax returns received thus far represent approximately $10 billion of the estimated $15.5 billion the marketplaces paid out in 2014.
The average premium tax credit claimed was $3400, with nearly 20 percent of filers claiming more than $5000 in credits. About 40 percent of filers were actually due a larger subsidy than claimed and received an additional refund, with the average being about $600. However, nearly half of the filers claimed a higher premium tax credit than they were due and had to repay an average of $800. The report says that these claims represented over $1 billion of the subsidies paid, yet the majority of these filers were still due a refund.
Since the subsidy is based on estimated income, people may receive more of a credit when they take it in advance. However, the ACA puts a cap on how much of the credit they would have to repay. According to the ACA, only about 400,000 of the 1.6 million tax payers exceeded the cap for a total of $345,000.
One of the more controversial parts of the ACA is the Individual Shared Responsibility Provision. The purpose behind the provision is that the more people that are insured and paying premiums, the cost of the premiums are significantly lower on average since everyone is sharing in the risk. Everyone is required to have insurance or pay a penalty if they do not qualify for an exemption. The IRS did not enforce this provision the first year (2013) when the exchanges opened due to several glitches in the exchanges, though people were still technically required to pay. In 2014, the penalty for not complying was one percent of income above the threshold of $10,150. The maximum penalty was $95 for an adult and $47.50 for a child under 18.
Approximately 7.5 million filers made about $1.6 billion in shared responsibility payments, with 95 percent of them being less than $500. The $1.6 billion is more than the $1.3 billion in subsidy overpayments made. The IRS reports that there is obviously some confusion regarding the is penalty because 300,000 low-income filers that made the responsibility payment qualified for a coverage exemption and are due a refund. If the cost of the available premiums exceeds 1 percent of a person’s income, then they qualify for an exemption and are not penalized. Most of these people live in states that did not expand Medicaid or otherwise have insurance through their employer. Approximately 12 million of the returns filed thus far qualified for the exemption.
The IRS numbers reflect only returns filed thus far, of which about 81 percent indicate coverage. This tracks with a recent Gallup poll, which said that about 88 percent of Americans have health insurance. More states are looking to expand Medicaid coverage and the Supreme Court has ruled that the federal exchanges can continue. Furthermore, the penalty for not having coverage in 2015 is the higher of 2 percent of income or $325 per adult. With the average penalty payment of $200 for 2014, more people may opt for a plan to avoid the penalty. If things continue in this direction, it could mean that health insurance for every American is a real possibility in just a few years.
Date: July 23, 2015