September 2, 2016
By HELEN KARAKOUDAS, CHRS | Director, ACA Insights
For employers adrift in the landscape of Affordable Care Act compliance, a new report from the Internal Revenue Service has signposts you can use.
The report is titled “Individual Income Tax Returns 2014.” It’s the latest edition of Publication 1304, an August deliverable from the IRS’s Statistics of Income Division.
Though not ACA-specific nor about employer data, the spreadsheet-heavy compilation of 359 pages published August 31, 2016 gives us the very first picture of how – on a household basis – individual taxpayers are squaring up for their part in Affordable Care Act compliance.
By examining breakdowns about the premium tax credits in Tax Year 2014 – the go-live year for enforcement of the ACA individual mandate – employers can get a crisper view of the play-or-pay stakes for their own side of the shared responsibility equation.
Fact-checking for subsidies paid in advance
The most compelling intel comes from data on subsidy reconciliation.
Before we see what didn’t align in this 2014 tax data on personal returns, let’s define the term that all the following numbers will center on: Advanced Premium Tax Credit, or APTC. This is a subsidy that helps offset the monthly cost of a health plan and which could be taken as a year-end tax credit but isn’t. At the recipient’s request, the help with a premium is sent directly to the insurance company to offset the plan’s cost month after month.
Advances of this subsidy are subject to repayment at tax time when the income and family size reported on a 1040 form do not reconcile with the figures that the subsidy was based on – those furnished when the individual enrolled in through an exchange. Repayment of an advanced premium tax credit is called a clawback.
According to the IRS report, almost 3.4 million filers of personal returns in 2014 reported receipt of an Advanced Premium Tax Credit. Almost $12 billion was advanced in monthly increments to help people who sought coverage on an exchange pay for the plan they enrolled in. The average monthly help was $297.
When info for an exchange doesn’t align with a 1040
Now, let’s see how extensive the corrections were to the original accounting for this assistance.
The following numbers are all about Advanced Premium Tax Credits and how they were reconciled.
When the expected income and household size that an exchange enrollee had listed on the marketplace application was compared with the actual income and household size reported on their 1040 form, we find that:
- 53.6% of the filers (1,803,176 of 3,362,356) who got advanced payments of their premium tax credit – that is, money sent directly to the insurance company month after month to offset their cost of the plan – had to repay some or all of that subsidy. The reconciliation showed their subsidy was too much.
- 44.5% of the filers (1,499,446 of 3,362,356) who got advanced payments of their premium tax credit were able to take more of a tax credit. The reconciliation showed their subsidy wasn’t enough.
- 1.9% of the filers (59,734 of 3,362,356) who got advanced payments of their premium tax credit faced no correction to their subsidy. The reconciliation showed their subsidy was just right.
The clawbacks amounted to more than $1.4 billion. The average clawback was $794.
The additional tax credits totaled $1 billion. The average additional tax credit was $674.
Making sense of the number soup
As with most usage of the word “average” for figures in a report, the numbers presented here as averages must be read cautiously. They are simply frames of reference. If one of your employees was in either of the first two situations, the help they couldn’t keep (or get as soon as they needed) could have been significantly higher or lower than the average listed.
Nevertheless, the likelihood – and frequency – of each situation is instructive.
Firsthand experience with this reconciliation process at tax time may prompt serious rethinking – and employers should note the risk that follow-through on this rethinking can eventually have for their organization.
When that great deal on an exchange doesn’t turn out to be so rosy after all – and the tax for not having coverage gets steeper, an employee motivated to avoid a penalty under the ACA individual mandate will not be so quick to dismiss the coverage they can get through work.
Impact of the ‘shared responsibility’ interplay
Surprising as the relatively low acceptance rate among newly eligible employees has been, an employer’s offer of coverage could now be a head-turner.
Remember, there was a three-year phase-in of the ACA individual penalty – the tax on those people who either actively or unknowingly chose the compliance option of paying rather than playing. The phase-in started in 2014, the tax year for which this IRS report is telling us that 8 million returns were flagged with a coverage penalty – or, in ACA-speak, an individual shared responsibility payment – for not showing coverage every month that year; the average individual shared responsibility payment for Tax Year 2014 was $210. That year, the penalty for not having coverage was $95 per adult or 1% of household income, whichever was greater. For the current tax year, the penalty for not having coverage is $695 per adult or 2.5% of household income, whichever is greater.
As more people who are uninsured look to their employer for coverage, the greater the ACA tax risk is for employers that don’t immediately know of their newly eligible employees and offer them coverage in time.
Your employees have had a two-year head start in sorting through consequences of their ACA play-or-pay decisions. When IRS penalty enforcement for ACA compliance reaches employers – as it will in 2017 after data crunching of Tax Year 2015 data for their inaugural reporting in 2016 – we will be in another sphere of ACA reality checks.
According to projections from the Congressional Budget Office (CBO), the nonpartisan federal agency that monitors the nation’s long-term financial picture, the IRS – starting in 2017 – will be levying 300% more in ACA penalties on employers than on individuals: $9 billion for employers compared with $3 billion for individuals, as shown above. Projections for employer ACA penalties rise to $16 billion for Tax Year 2017 and to $20 billion for Tax Year 2018. Throughout this period, CBO projections for individual ACA penalties remain constant at $3 billion.
This difference is stark.
By 2019, it’s expected that the IRS will levy 670% more in ACA coverage penalties on employers than on individual taxpayers.
Now is the time for you and everyone on your ACA compliance team to understand nuances in the interplay of forces that lead to penalty triggers.
A version of this article first appeared on LinkedIn Pulse.