The Obamacare clawback provision, a trap door.

I have to excuse myself for stopping daily posting the last couple weeks. I of course have been doing a bit of translating of material that is coming out about the IBM Japan dispute with the All-Japan Metal and Information Machinery Workers Union (JMIU). Additionally, the Fiscal Cliff produced H.R. 8, the American Taxpayer Relief Act. Not sure what the handle for that one is going to be, but probably “ATRA” or “the Fiscal Cliff act”.

Here is an emergent issue for you, if you are following my Affordable Care Act (Obamacare) posts.

As you may know, starting next January, the government will be subsidizing insurance purchased through Health Care Exchanges, provided that the insured has adjusted gross income (AGI) between 100% and 400% of the federal poverty level. This tax break is found in the Internal Revenue Code at Section 36B, right next to the my old favorite, the Making Work Pay Credit, Section 36A.

What’s generally not discussed is that the Section 36B credit is providing for an advanced tax benefit which may be subject to repayment. For example, when the Health Care Exchanges are up and running in October, the only solid income information on file with the IRS will be people’s 2012 tax return. So it is likely that the 2014 subsidy, the tax benefit, will be calculated off 2012 data.

However, if you end up with a good 2013 or 2014, income-wise, Section 36B also has a provision directing the government to clawback some or all of the “excess” credit that you were advanced.

The formula for this clawback has actually been changed twice since Obamacare was passed in March 2010. Originally, there were modest paybacks for anyone who was still under the 400% of poverty level threshold, and full recovery of the credit for anyone above. Sometime later in 2010, an amendment was passed that limited what people up to 500% of poverty level would have to pay back.

Then, in 2011, when Congress changed a rule about what businesses have to report using 1099 forms (a technicality), Congress also added a provision changing the payback protection to vanish at the 400% poverty level, and make amounts higher at 200% and 300% than they had been. Anyone making over 400% in the relevant, subsequent year, would have to pay the whole subsidy back.

What does this all mean? Well, for one: 400% of the federal poverty level is a very important number for tax planning. You really want to know what that number is for your family size, and do whatever necessary planning you need to, if you are earning around that level of income.

Secondly, that the Section 36B clawback provision is already one of the more controversial aspects of Obamacare. We are already on the third payback schedule in the law—and that part of the law isn’t even effective for another eleven-and-a-half months.

Can you imagine what’s going to happen when people in that 400% range end up on the wrong side? There is going to be quite a ruckus raised.

It’s pretty clear that the latest revision was an attempt by the Tea Party Congress, just ended, to sabotage the Affordable Care Act. I suspect that the White House agreed to it in 2011, knowing full well that the ruckus wouldn’t happen until sometime in 2015 (when the 2014 health care subsidy would be reconciled). President Obama plans for playing a long game, so no doubt there is already something in the works for that one, that the House Republicans won’t be able to get around.

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6 thoughts on “The Obamacare clawback provision, a trap door.

  1. Pingback: Obamacare credits start, based on 2012 adjusted gross income. | Hoofin

  2. Three things concern me which are not being addressed: 1) a little addressed matter that dependents of an employee with affordable/minimum value coverage will not be eligible for the Exchange subsidy but will be enrolled any way; 2) in 2015 the claw back may be a very pleasant surprise; 3) the IRS functionally will not be able to recover the claw back and it wil be so controversial that the claw back will be forgiven and added to the federal deficit.

  3. @Hoofin:

    Wow! I am a bit slow I guess. It is the middle of October and just now I am waking up this fact. Either that or you are a genius, or both!

    This 400% threshold is a number so important and very few have any clue about it.

    In my particular case, since I am not on a steady W2 income, I have some flexibility in structuring my income — primarily by taking up nor taking up freelance work, timing of capital gains, ROTH conversion etc. Now, tax planning around this magic number is a high wire act and a nightmare.

    If I go over it by one dollar, I mean just one dollar, I will lose subsidy worth $7,500. This is obscene.

    I am a Obamacare supporter through and through. But these discontinuities need to be fixed which are very corrosive to the society. I may be able to pay this if it happens to me, but I don’t see how this is workable.

    • I agree the 400% MAGI FPL number is critical, but there are amounts even below that which can cause a sizable clawback (up to $2500 in 300% to 400% band, for example). For a while, there had been leeway in a range of 400% to 500%, that there wouldn’t be a full clawback. But the Tea Party Republicans wanted that taken out.

      It’s a way to sabotage the program and make it less popular when people find out they are in a clawback range, but that won’t occur to large numbers of people until early 2015.

      • I plugged in some numbers, and the issue seems to be qualitatively different at the 400% band. The transition at the 300% band is sharp – but not precipitous. Yes, change in AGI (higher) will result in claw back — but it’s just like your taxes going up with income.

        If you plot the subsidy amount against AGI, the graph is a line which has some angles at other FPL band transitions, but the line just falls off the cliff at 400%..

        As I said one additional dollar of income will impact me by $7,500 in subsidies. That is with a 3 person household. If I forego the subsidies and choose Bronze the impact is a bit less but I still will be out about $6000 plus for basically a catastrophic coverage.

        If you have only passive income, there is not much you can do to fine tune MAGI in the last minute as an IRA is ruled out. Donating the dollar to charity will not help as MAGI calculated pre deductions. .

  4. Pingback: IRS to take flak for 2015 Obamacare clawbacks. | Hoofin

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