This Obamacare Flaw Could Give Taxpayers a $345 Million Windfall

Image: HealthCare.gov.

One of the criticisms of the Patient Protection & Affordable Care Act, better known as Obamacare, has been how complicated some of its provisions are. When it comes to the subsidies that many Obamacare participants receive, that complexity could cost the government $345 million -- and much of that money could go to the same taxpayers who did the worst job in complying with the healthcare reform law's subsidy provisions in the first place.

IRS Commissioner John Koskinen reported to Congress last month that about 400,000 Americans received a total in $345 million in improper Obamacare subsidies. Whether those people made honest mistakes or deliberate took advantage of the complicated subsidy system to reap that extra money is unclear, but lawmakers seem reluctant to make a big effort to get the money back. Let's take a look at the provisions of Obamacare that allowed this to happen and whether this problem will last into the future.

How Obamacare subsidies are supposed to work
One of the most important aspects of Obamacare in getting low-income Americans to participate was the financial help the law gave them on health insurance premiums. The law provides for subsidies for those who earned between 100% and 400% of the federal poverty level, with very specific amounts tied to the amount of income earned. Although the subsidy is treated as a premium tax credit under IRS jurisdiction, the federal government made provisions to pay out the subsidies in advance.

Since participants couldn't know in advance how much income they would earn, Obamacare provided for people to make estimates instead. Participants were supposed to make those estimates using documentation like past-year tax returns or paystubs, and the hope was that for most people, incomes from year to year would remain relatively constant, and so any errors in the estimate would be small. Yet a study from the Kaiser Family Foundation earlier this year found that between 20% and 30% of families in the income range likely to receive Obamacare subsidies saw their incomes jump 20% or more over the course of 2014.

Those who underestimated their income received subsidies that were larger than they should have been. Yet when it came time to pay that amount back, a couple of factors helped taxpayers avoid the full financial brunt of the repayment provisions, allowing them to keep some of the money they improperly received.

Repayment problems
The first reason why the government will end up footing some of the bill comes from Obamacare's own provisions. The law contemplated the possibility of overpayments, but policymakers also didn't want to put low-income recipients in the financially disastrous position of having to make huge repayments. To avoid that situation, repayment limitations set a maximum repayment amount of $300 for single filers and $600 for other filing-status taxpayers if they earn less than 200% of the federal poverty level. Higher repayment amounts apply to those between 200% and 400% of poverty level, but if the advance credit amount was higher than the limit, then participants are allowed to keep the overpayment legitimately without violating the law.

Yet more important from a policy standpoint is the apparent lack of will to try to collect from taxpayers who didn't actually comply with the Obamacare subsidy repayment provisions. Koskinen said that over three-quarters of a million taxpayers chose not to attach IRS Form 8962 to their tax returns, which is the form that provides the information necessary to calculate the appropriate repayment. Although the IRS is asking those taxpayers to file Form 8962, lawmakers are acutely aware of the political balancing act that the government has to walk. As Sen. Chuck Grassley put it, "The challenge is to balance cracking down on the intentional gaming of the credit with fairly treating taxpayers who have been overpaid through no fault of their own."

Will Obamacare keep making mistakes?
Federal agencies have said that they've corrected some of the problems that led to many of the errors with respect to household income during Obamacare's first round of sign-ups for healthcare exchange coverage. As a result, they hope that the amount of lost money from improper advance payments of Obamacare subsidies will decrease in the future.

Nevertheless, the problem shows how Obamacare will continue to remain controversial in the years to come. Even though the amounts of money are relatively small in federal-government terms, a lack of enforcement only encourages people to take advantage of flaws in the legislation. With a substantial portion of Americans opposing the bill, such flaws could become more popular targets for exploitation if the government doesn't take aggressive steps to fix them and to punish those who deliberately flaunt the law.