In which a bunch of 2014 enrollees make like Lt. Renault from Cacablanca

Yesterday, Tami Luhby of CNN Money posted an article focusing on people who received a federal tax credit for part of all of 2014, but who will now have to pay some or all of it back to the IRS when they do their taxes because their household income ended up being higher than they had anticipated:

Janice Riddle got a nasty surprise when she filled out her tax return this year.

The Los Angeles resident had applied for Obamacare in late 2013, when she was unemployed. She qualified for a hefty subsidy of $470 a month, leaving her with a monthly premium of $1 for the cheapest plan available.

Riddle landed a job in early 2014 at a life insurance agency, but since her new employer didn't offer health benefits, she kept her Obamacare plan. However, she didn't update her income with the California exchange, which she acknowledges was her mistake.

Now, she has to pay back the entire subsidy, which is forcing her to dip into her savings.

Janice Riddle has to pay back her entire Obamacare subsidy.

"I was blindsided that the subsidy has to be paid back," said Riddle, adding she didn't even use the coverage, which she had until she qualified for Medicare in October. "I'm in shock...but I have no choice. Do I want to argue with the IRS or the Obama administration?"

I want to be clear about something: There's nothing wrong with writing a story about people in this situation; there's going to be a significant number of them, and we are coming up on the first tax filing season since the ACA exchanges kicked into gear.

I also want to stress that there's plenty of room for criticism or debate about how much of a tax credit people should receive, what the definition of "affordable" should mean and so forth.

I will further agree that there are many aspects of the ACA which can be confusing, such as the exact formula used to calculate the tax credits ("based on the 2nd least expensive Silver plan in your region" doesn't exactly roll off the tongue).

HOWEVER, the basic concept with the tax subsidies is not among these.

Here's how it works, Ms. Riddle:

  • Let's say the full-price premium for your policy is $500/month.
  • Let's say that you think you'll make $40,000 per year, and you qualify for a $300/month tax credit.
  • That means you'll pay just $200/month.
  • Let's say your taxable income turns out to be $80,000/year, so you don't qualify for any tax credit.
  • That means you'll have to pay the full $500/month.
  • If you've already received the $3,600 in credits for the full year, you'll have to pay it all back.

You received your tax credit based on what you claimed your income would be. Your actual income was much higher, so no credits for you!

At the same time, what are you complaining about? Your income went up an extra $40K. Even after paying the credits back, you're still $36.4K ahead of where you were.

This is neither rocket science, nor was it a "nasty surprise". You weren't "blindsided".

My wife and I happened to qualify for a small tax credit ourselves last year ($23/month, or $276 for the year). If our household income ended up higher than what we thought, we knew that we'd have to pay some or all of that $276 back. As it happens, that's what happened. When we do our taxes this year, we'll have to pay $276 more than we otherwise might have. This is not a "shock". We weren't "blindsided".

And yes, you could argue that I'm Mr. Bigshot Obamacare Expert, so of course I knew this...but here's the thing: I wasn't an "Obamacare expert" at the time that we enrolled.

Yes, I was plugging in the enrollment data, but I didn't know a damned thing about deductibles, co-pays, "narrow networks" or any of that silliness.

What I did understand was basic math. The government is willing to lend financial assistance to those who need it. In your case it was even more dramatic than my example above: You were unemployed when you first enrolled, and thus had a very low income.

The federal government provided a bunch of help ($470/month). Then you got a job with a decent salary, so you turned out not to need the help after all. You admit that you failed to inform them of that.

Just like if you were on Medicaid or food stamps, and then won the lottery, and failed to mention this minor tidbit to the government, they might be just a wee bit cranky when they find out, you know?

I'm not saying that you should be chastized for not reporting it at the time--most people probably didn't bother doing so--but to claim that you're "Shocked! Shocked I say!" about having to pay the subsidy back is disingenuous at best.