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Wednesday, March 16, 2016

3 Things to Know about Affordable Care Act Repayment Caps

This week, the House Ways and Means Committee in Congress will vote on legislation that would eliminate caps on how much money marketplace consumers must repay the federal government if they receive more premium tax credits (a form of financial assistance) than they should based on their projected annual income. Families USA is concerned that the bill—H.R. 4723—could deter people from signing up for health insurance if there is no longer a reasonable cap on how much they could be required to repay.

If passed, this bill could cause many low- and middle-income consumers to forgo health coverage or face increased health insurance premiums and financial uncertainty.  

How repayment caps work under the Affordable Care Act

When an individual buys health insurance through Healthcare.gov or a state marketplace, he or she can apply for premium tax credits to help pay for it. Today, more than 8 in 10 people who apply for marketplace coverage qualify for this help. These premium tax credits make health insurance more affordable for millions of Americans nationwide.

The millions of American who apply for these premium tax credits can choose either to have advance payments made directly to their health insurance company to reduce their monthly premiums throughout the year, or get their financial assistance when they file their taxes in April as a premium tax credit, or some combination of the two. The majority of consumers choose to receive tax credits in advance so that they are able to afford monthly payments.

When someone applies for tax credits, the marketplace reviews documentation of the person’s income in order to determine how much to pay. Because incomes can fluctuate, the amount paid in advance isn’t always correct and so people “reconcile” this on their tax return, either repaying money or getting money back if the estimate of their annual income turned out to be off.

Currently, the IRS caps what individuals must repay the government at tax time if they underestimated your annual income, unless they make more than 400 percent of poverty (more than $97,000 for a family of four for 2016 coverage).

Why raising or eliminating the repayment caps is a bad idea

  1. It can be hard for people to estimate their annual income, which can lead to overpayment.
     
    • Only 8 percent of those who received premium tax credits in 2014 estimated their income correctly and did not need to make any adjustments at tax time. This illustrates the difficulty in projecting income for the coming year.
    • People may be paid larger amounts due to unanticipated events that are no fault of their own, but will still make it hard to repay. For example, a worker who receives an unexpected large tip during the holidays may decide to use the extra money to pay off loans.
    • This person will most likely be unaware of how the tip increase will affect his or her health insurance and thus be unprepared to repay a large amount at tax time.
    • People try their best to calculate projected annual income when they apply for credits, but it’s hard to estimate for the coming year. Wages on their tax returns are a year old, and hourly employees may have fluctuating hours and pay. In addition, many individuals who apply for coverage through the marketplace have non-traditional jobs like artists, actors, and small-business owners. These individuals may have varying incomes from year to year. Caps protect people with fluctuating incomes from hardships when they have done their best to comply with marketplace rules.
  2. Current caps on what people must repay the government are reasonable, and in some cases, too high.
     
    • The caps are reasonable, or if anything, too high, for people with incomes at the poverty level. For example, for a person at 133 percent of the poverty line—someone who makes $26,800 a year for a family of three ($2,233 per month)—the cap is $600. Imagine paying rent, food, day care, and health insurance premiums in any city, on an income of $2,233 a month. Even affording a $600 repayment is difficult.
    • For the 2015 tax filing season, 26 percent (more than a quarter) of those who owed back money in tax credits hit the repayment cap. This cap offers an important protection, especially given that the majority of marketplace consumers have low incomes and rely on tax returns each year.
  3. Caps on repayment are important to the effective operation of the health insurance marketplace.
     
    • The repayment caps reassure consumers that it is not a great financial risk to apply for marketplace coverage and that if they have tried to comply with the law, their obligations will be limited. Higher caps would discourage enrollment.

We hope the House Ways and Means Committee will take into consideration that affordability and accessibility should be the top priorities for health care in America. If it votes to eliminate these repayment caps, it could harm millions of people who can’t repay and even cause many to forgo needed care.