By Ryan Ellis
This week, the Senate GOP is reportedly putting pen to paper on their version of “repeal and replace” of Obamacare.
One of the key design decisions they have to make is how to structure the individual health insurance refundable tax credit. As Avik Roy has pointed out, it’s essential that the Senate get this right. No one is quite happy with the way the House (i.e., AHCA) version of this tax credit ended up. It’s a flat dollar credit variable by age, which creates difficulties for very sick individuals and creates a “poverty trap” for those emerging from Medicaid and needing help in the individual market. Again, Roy documents all of this very expertly and he’s right about his criticisms.
The solution, everyone seems to say (and taking the lead of Senator John Thune of South Dakota), is to switch the credit from flat-dollar (within an age band) to means tested. That way, those individuals who most need the assistance to pay for premiums will get it, and that assistance will phase out as income rises. The assistance would only be available to those individuals not eligible for workplace or government insurance. Supplemental premium support would be provided to states to help individuals who may face unaffordable insurance bills even with the tax credit assistance.
In any case, there’s also a consensus that the credit should be available in real time to pay for premiums month to month during the tax year, a feature known as a tax credit being “advanceable.” This requires the IRS to send payments in the tax year and then for the taxpayer to reconcile those advanced payments (either to her benefit or detriment) at tax time the next spring. It can often result in a nasty tax bill if the taxpayer made more than the IRS thought they did all year and they got more credit advanced to them than they had coming. It can also result in a windfall.
If all of that sounds familiar, it should–it’s a good rough justice description of the current Obamacare tax credit, besides being where the Senate GOP appears to be headed. Now, that’s not necessarily a bad thing. Just because something in sub-optimal form found its way into Obamacare is no reason to junk a better version of it from future policies. But it is important that the absolute disaster that has been Obamacare tax credits not be repeated again by the Senate GOP.
The Obamacare tax credit requires disclosure of nightmarish proportions
There are three information reporting forms to document health insurance coverage today. Presumably, something like this would also have to exist with a tax credit to purchase health insurance on the individual market.
IRS Form 1095-A is provided by insurance companies to the IRS and their customers to show that they obtained health insurance coverage on the individual market. Since Obamacare’s tax credit is restricted to Obamacare exchanges, only those customers are reported on today. Presumably, allindividual market customers will have to deal with a 1095-A under the new tax credit regime.
Form 1095-A contains all the information about the enrollee and his health insurance plan, who else is covered on it, for what months he is covered, and if he received any advance premium credit dollars.
Form 1095-B today reports all the non-Obamacare exchange insurance coverage (workplace plans, Medicare, Medicaid, etc.) with similar information as the 1095-A. It’s used primarily to determine whether a taxpayer is liable for the individual mandate non-compliance surtax. While that will be a moot point post-reform, a form like the 1095-B will still need to be used to document non-individual market health insurance coverage. Presumably, a taxpayer will not be eligible for an individual tax credit if they have been offered coverage elsewhere (this is the rule under the House bill).
Form 1095-C today reports the whys and wherefores of employer provided insurance. Again, while this is not likely to be replicated in full in a new reporting regime, at least the fact of the offer of employer provided coverage will be. The 1095-C works in concert with Box 12, Code DD of your W-2, which reports the amount spent on employer provided insurance.
Keep in mind this is simply disclosure of insurance or non-insurance. A copy goes to the IRS and the taxpayer, and is obviously also retained by insurance companies and employers. A rash of ID theft over several tax seasons was attributed to this bevy of information leaking out.
How to calculate the credit?
Nothing above actually calculates the credit itself. For that, taxpayers will likely need some version of today’s IRS Form 8962, Premium Tax Credit. This is not to be confused with IRS Form 8885, Health Coverage Tax Credit (which is for those victimized by trade adjustment or belly up pensions).
Form 8962 is where any means test would have to take place. A taxpayer would first put in their age (to get the age band adjustment, if that’s retained), and their modified adjusted gross income (MAGI). MAGI is then subjected to the sliding scale of allowed premium credit, means tested based on income (and perhaps incorporating the “10 percent of MAGI” rule that Roy and others think makes some sense). This allows one to determine the credit amount they are due, assuming they qualify for a credit at all.
The tentative credit amount is then reduced by any advanced credit dollars already paid to their insurance company month to month by the Treasury. If the resulting number is positive, the taxpayer still has some credit coming his way and will benefit to that extent in his refund or reduced balance due. If the resulting number is negative, however, the taxpayer received an advance credit that was too large.
Under Obamacare, the taxpayer must pay this overage back to the IRS in the form of a lower refund or a greater balance due. There are hardship brackets where working poor taxpayers can keep some or all of their too-large credit. Will the Senate GOP plan make taxpayers pay back any windfall? If so, will there be a hardship exemption? If not, how to prevent taxpayers from claiming the maximum credit knowing there is no downside to doing so?
What about the advanced credit and real time information?
That brings us to the advanced part of the advanceable, refundable tax credit. The credit is paid out in real time, month to month, to the taxpayer’s insurance company. If the credit is means tested, as Obamacare’s credit is and as the Senate GOP seems to want to go, that presents an information problem. In 2017, the IRS might only know your income based off your 2015 tax return (you may have extended the filing deadline for your 2016 return). This information is way out of date. This assumes you are either required or inclined to file a tax return at all.
This has created all sorts of problems for the Obamacare tax credit. Those problems get exacerbated when the credits (which are usually too large) have to be reconciled come tax time. What is the Senate GOP plan to avoid this minor disaster that the Obamacare credit has created and their own credit might replicate?
Are we going to have a more invasive reporting regime from (say) employers? Will the IRS make adjustments to the credits mid-year without the help of taxpayers? What role will insurance companies pay, since they are the ones getting the money. It’s a mess.
Senate GOP should bring in the tax nerds, including IRS staff.
One of the biggest problems health care experts in Washington, D.C. make is that they think the whole world is about health care. If a bill addresses the health policy, they think, it’s a good bill. Well, health policy has a lot of spillover today onto tax policy (there are twenty new or higher taxes in Obamacare, employer provided health insurance is the largest single tax break, etc.), employment law policy, family policy, etc. If the Senate GOP is going to “get it right,” they need to consult with those who have seen the way the sausage has been made under existing laws. Nowhere is that more true than in the area of the crucial individual tax credit.
If they do not, those who fail to learn from history might just be condemned to repeat it.
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