Payback Requirements Surprise Obamacare Subsidy Recipients

Published February 26, 2015

Roberta and Curtis Campbell typically look forward to tax time.

Most years they receive a refund, a little extra cash to pay off credit card bills, but this year, the California couple got a shock. According to their tax preparer, they owe the IRS more than $6,000.

That’s the money the Campbells received from the federal government in 2014 to make their health coverage more affordable. Roberta, unemployed when she signed up for the plan, got a job halfway through the year, and Curtis eventually found full-time work. The couple’s total yearly income became too high to qualify for federal subsidies. Now they have to pay all the money back.

“Oh, my goodness, this is just not right,” said Roberta Campbell, who lives in the Sacramento suburb of Roseville. “This is supposed to be a health care safety net, and I am getting burned left and right by having used it.”

Hundreds of Thousands Affected

As tax day approaches, hundreds of thousands of families who enrolled in plans through the insurance marketplaces could be stuck with unexpected tax bills, according to researchers. Those payments could be as high as $11,000, although most would be several hundred dollars, one study found.

The result is frustration and confusion among many taxpayers whom the Affordable Care Act, known as Obamacare, was specifically intended to help.

The problem is many consumers didn’t realize the subsidies were based on their total year-end income and couldn’t reliably project what would happen over the course of the year, says Alyene Senger, a research associate at The Heritage Foundation.

“How do you know if you are going to get that promotion?” Senger said. “How do you know what your Christmas bonus is going to be?”

Government Kept Quiet

Senger says the federal government didn’t go out of its way to publicize the tax consequences of receiving too much in federal subsidies.

“It isn’t really something the administration focused on heavily,” Senger said. “It’s not exactly popular.”

Obamacare enrollees now are realizing certain positive life changes, such as a pay raise, a marriage, and a spouse’s new job, can turn out to be a liability at tax time.

“We are definitely seeing some pain,” said Jackie Perlman, a principal tax research analyst at H&R Block.

H&R Block released a report in February showing 52 percent of customers who received health coverage through the government insurance marketplaces in 2014 underestimated their income and now owe the government. The report estimates the average subsidy repayment amount is $530.

Under Obamacare, the federal government made subsidies available to people who earned up to 400 percent of the federal poverty level, about $47,000 for an individual and $63,000 for a couple. For families who ended up making less than that, the federal government limits any repayments that might be due.

The poorest consumers will have to repay no more than $300 and most others no more than $2,500, but the Campbells’ income in 2014 exceeded the limit to receive federal help, so they have pay back the whole amount.

Did Right, Got Burned

Roberta Campbell, now 59, lost her job as a program director for the Arthritis Foundation in late 2012. She and her husband, who was working part-time as a merchandiser, downsized and moved into a smaller house.

They were left uninsured but were mindful of the federal mandate to be covered as of January 2014. They signed up for a plan through California’s insurance marketplace Covered California. The plan cost about $1,400 a month, but they were able to qualify for a monthly subsidy of about $1,000. They barely used the coverage. Roberta and Curtis each went to the doctor once for a check-up.

About halfway through the year, Roberta got a job at the University of California-Davis and became insured through the university. Curtis, who had been working part-time, got a full-time job for a magazine distribution company.

They notified Covered California, which Campbell said cancelled the insurance after 30 days. But with the new salaries, his pension from a previous career, and a brief period of unemployment compensation, the couple’s year-end income totaled about $85,000, making them ineligible for any subsidies.

Penalized for Success

Their tax preparer told them they would have been better off not getting insurance at all and just paying the fine for being uninsured. In that case, the Campbells say their financial obligation would have been much smaller, only about $850.

“The ironic thing is that we tried to pull ourselves up by our bootstraps,” Curtis Campbell said. “Now they are going to penalize us. It’s frustrating.”

For those who must repay money, the IRS will allow payment in installments, even after the April 15 tax deadline. Interest will continue accruing, however, until the balance is paid.

Covered California spokesman Dana Howard says he understands paying back excess subsidies puts some in a difficult position, but he says consumers who think their circumstances might change can decline the money or just take a portion of it.

Howard says the subsidies were designed to give those who need it a leg up in affording health coverage. He says when people get good jobs, they don’t necessarily need the federal help to get insurance anymore and should pay back what they received.

“When you get that really good fortune, that has to be shared back,” Howard said. “That is just how the ACA law was written.”

Anna Gorman ([email protected]) is a writer for Kaiser Health News, a nonprofit national health policy news service.