A taxing season for Obamacare

For more than a year, the Affordable Care Act (ACA), also known as Obamacare, has been racking up some pretty impressive enrollment numbers. It is now entering a particularly taxing season, though, that will test whether its gains can be sustained.

Let's start by recapping the good news, the growing number of Americans who have access to health insurance because of the ACA. By the time the regular 2015 open enrollment period closed on Feb. 15, nearly 12 million people were estimated to have signed up for a qualified health plan that meets the law's benefit and consumer protection requirements, through either the federal health insurance exchange or through their own state's insurance exchange. (The federal government runs the exchanges for 37 states, while the remaining states operate their own.) While there will be some attrition of people who end up not paying the premium to stay enrolled, 2015 paid enrollment is likely to exceed 10 million people, outpacing the administration's own announced enrollment goal of 9 million enrollees (new enrollees and 2014 re-enrollees combined).

But that's not all. Estimates are that another 8 million people will sign up for an ACA-qualified health plan sold outside the exchanges, and another 13.4 million will have signed up for coverage by the end of 2015 through the ACA's expanded Medicaid/Children's Health Insurance Program eligibility. This would bring the total number of people enrolled in an ACA-approved plan to 34 million Americans, or more than 1 out of 10 people.

Even before the new enrollment gains, the uninsured rate in the United States dropped dramatically after the ACA began signing up people last year, with an estimated 10 million previously uninsured persons gaining coverage in 2014. Similarly, the Gallup organization reports that the percentage of surveyed people who report that they are uninsured is at an all-time low. By any objective measure, then, the ACA is achieving its principal objective, which is to get as many people as possible covered in a qualified health plan that covers an “essential” package of evidence-based benefits and that does not discriminate against them based on their age, gender, or pre-existing health conditions, with millions of them getting subsidies to make it affordable.

Yet the ACA is about to enter a particularly taxing period, both literally and descriptively: literally, in the sense that when people file their 2014 federal income tax returns by April 15, between 3 to 6 million of them will have to pay a “shared responsibility payment” (tax penalty) for not having enrolled in a qualified health plan in 2014. For many of them, this will come as a surprise, because polls show that many of the uninsured are unaware that they could be fined for having failed to sign up in a qualified health plan last year or that financial assistance was available from the federal government to make it affordable. The 2014 penalty is $95 for an adult, or 1% of a person's income above a $10,000 filing threshold, whichever is higher. The penalty will come right out of any tax refunds that are due; subtracting the penalty out of refunds due is the only way that the ACA allows the Internal Revenue Service (IRS) to collect it.

And people who hadn't selected a qualified health plan by the end of the 2015 normal open enrollment period, which ended on Feb. 15, could have been automatically subjected to another, bigger, tax penalty when they filed their taxes next year, equal to 2% of their 2015 income above the $10,000 filing threshold, or $325 per adult, whichever is greater. To help mitigate the impact of people being fined in both 2014 and 2015 because they didn't know they had to enroll in a qualified health plan, the Obama administration has created a special “tax season” enrollment period running from March 15 through April 30. According to the Department of Health and Human Services, to be eligible for this special enrollment period, people must live in a state with a Federally Facilitated Marketplace and:

• currently not be enrolled in coverage through the Federally Facilitated Marketplace for 2015,
• attest that when they filed their 2014 tax return they paid the fee for not having health coverage in 2014, and
• attest that they first became aware of, or understood the implications of, the Shared Responsibility Payment after the end of open enrollment (Feb. 15, 2015) in connection with preparing their 2014 taxes.

Most of the states who run their own exchanges have created a similar special enrollment period, giving people who had to pay the 2014 fine (for not having qualified coverage) another chance to enroll so that they don't have the double whammy of also having to pay the (bigger) 2015 fine.

There is another category of taxpayers, a relatively small number out of the millions who received premium subsidies in 2014 to help them purchase a qualified health plan, who will have to repay the federal government because they got bigger subsidies than they were entitled to. This could be due to under-reporting their income when they signed up for coverage or to seeing an increase in their income after they enrolled and their subsidies were calculated. Take someone, for instance, who got a better paying job after he signed up for ACA coverage during last year's open enrollment period. He was supposed to inform his health insurance exchange that his income had changed so that his subsidy could be re-calculated, but if he didn't, he will have to pay the government back for the difference when he files his 2014 tax returns. (There are others, though, who will get a bigger refund because they over-reported their incomes when their subsidies were calculated).

Overall, though, the tax filing season will have a negative political impact on Obamacare's political fortunes. Let's face it, no one likes the IRS or having to pay money back to the federal government, and the simple fact that the ACA's coverage requirements are enforced through IRS tax collection has always been the law's political Achilles' heel, with polls showing that the individual insurance mandate is the least popular part of the law. The challenge for the ACA's supporters will be to try to focus the public on the tens of millions more who were previously uninsured who have gained coverage, or who have gained better coverage, because of the law, so that the story isn't mostly about the much smaller number who have to pay money back to the IRS.