New Obamacare mess: Poor could get into premium crunch

(MoneyWatch) The Affordable Care Act has been dogged by problems in recent weeks. Now there's another one that could affect the millions who are eligible for subsidized healthcare plans.

The issue is the mechanism by which subsidies are delivered to recipients. The level of the subsidy, or the amount the monthly premium is subsidized by the government, is based on the recipient's annual income, but is broken into monthly installments. According to experts, that could be challenging for people with unpredictable or irregular incomes. It would leave them to either pay more sometimes than they can afford, or face an IRS bill when they file their taxes.

Obamacare uses tax credits to fund premium subsidies for low income workers. The Kaiser Family Foundation estimates that 17 million people will be eligible for healthcare subsidies.

Advance tax credits, eventual problems

Unlike most federal tax credits that can only be claimed when a person files personal federal income tax for the year, these must be available in advance in the form of payment to insurance companies. If the credits weren't available in advance, people with lower incomes would have to pay the full cost of healthcare plans and only be reimbursed at the end of the year, a requirement that by definition they would be unable to meet.

However, to avoid people seeing increased income during a year while retaining a level of subsidy higher than should be allowed, the tax credits are also refundable in a process called reconciliation.

"In order to receive a subsidy, people have to agree to file their taxes the following year," said Jennifer Tolbert, director of state health reform at the Kaiser Family Foundation. "Based on the person's annual income, there is a final determination that is made for what level of subsidy they were eligible for during the course of the year. If that amount differs from what they receive, they will either get an additional credit or they will have to pay more and they will owe more money."

"When Congress and President Obama repealed the 1099 reporting requirement for businesses, that resulted in less revenue coming into the federal treasury," said Michael Cannon, director of health policy studies at the libertarian Cato Institute. "They made up that lost revenue by increasing the maximum amount that people would have to repay the IRS under these tax credit 'clawback' provisions."

Income roller coasters

If someone's income is predictable and stable, the process should work smoothly. However, many low-income workers have erratic schedules and, therefore, incomes. In retail, for example, major companies have moved from between 70 percent and 80 percent full-time workers to "at least 70 percent part-time," according to a New York Times interview with Burt Flickinger, managing director of retail consultancy Strategic Resource Group. With part-time work comes last minute scheduling and unpredictable numbers of hours.

There are electronic systems that will allow workers to report any changes in income and react in "real-time," according to Toblert. "If their income drops and they report it, they will be eligible for a higher subsidy. There may be a month or two delay. It's a matter of when the individual reports the change in income, where in the month they are, and how quickly that change in income gets processed for a new subsidy eligibility level. We don't yet have experience in how these systems will work."

The Affordable Care Act has gained early attention for the disastrous performance of the Healthcare.gov website. These would be additional systems that have yet to prove themselves.

The more variable the income, the more difficult it will be for workers to keep the government apprised of how much they are making at any given moment and how much subsidy they therefore should receive. Workers might find that they have to regularly enter their incomes, forcing the systems to constantly recalculate appropriate subsidy levels. Any delays or mistakes could force workers to either pay more than they should, creating an additional financial burden, or face a potentially high bill from the IRS at the end of the year.

A Republican victory

"Most people don't have a lot of income in the month that they can float, based on the assumption they are going to make more money during the year," Tolbert said. "When they're making less money, it's hard to pay that extra premium. These are things that consumers will have to balance and it will require a lot of education for people to understand this whole process."

"This will either cause hardship for low-income households caught in that position, encourage them not to earn that extra income, or encourage them not to report that income to the IRS," Cannon said. The first two possibilities would "limit the upward mobility of low-income households" and the third would be illegal.

Cannon argues that during negotiation over tax credits, the Republicans were shrewd, "scoring a small policy victory on that 1099 tax, while paying for it with a measure that would increase public dissatisfaction with the law," which is also a result they wanted.