The DC Health Benefits Exchange will create new opportunities for DC families and individuals to access health insurance, and the federal Affordable Care Act created a new set of subsidies — mostly in the form of federal tax credits — to keep the premiums in those plans affordable. While tax credits can be efficient, they also can create complications for enrolled families. That is because the tax credits will be based on projected income for the year, but if any family’s income turns out to be different than projected, the tax credits they receive may be too high. That could put families in the difficult situation of having to repay some of their credits.
This means it will be important to help families project their annual income accurately and to set up a way for families to report when their income changes substantially in the middle of the year. In the months ahead, District officials will need to decide how eligibility for tax credits will be determined and when families will have to report income changes. It will be important to make sure this system helps families get the right amount of tax credits without burdening them with frequent income reporting.
In general, District residents with incomes below 400 percent of the federal poverty line will be eligible for federal tax credits to help them pay health premiums, and the value of the credit will vary based on family size and income — with the largest credits going to lower income families. The advantage of these “advanced” tax credits is that families can claim them at the beginning of the year and will not have to wait until after they file their taxes to receive reimbursement. This means credits will begin offsetting monthly premium costs as soon as the family enrolls on the exchange
But two things could cause complications in administering credits: 1) the value of the credit is based on projected taxable income for the year and 2) individuals will have to “reconcile” their credits with their actual earned income at the end of the year. If actual income is greater than projected income, an individual will have received more credits than they were eligible for and will owe money back to the federal government. If actual income is lower than had been projected, then the individual will have received fewer credits than needed and will receive a refund.
Among low income families, incomes can vary greatly over the year, and due to the way the credit values are determined, a small change in income can yield a substantial change in the value of a tax credit. If not properly monitored, many Exchange enrollees who benefit from premium tax credits could face a large financial burden every tax season if their incomes increase — owing up to $2,500 for a family.
One way the DC Exchange can remedy this problem is to require families to report increases in income so that credits can be adjusted — limiting individuals’ exposure to end-of-year tax liability. However, a requirement to report all changes of income may become overly burdensome for both the enrollee and for the District. Enrollees may forget about or not notice very small changes in income, and the administrative resources needed to monitor such reporting would be substantial. Also, small income changes may not need to be reported, because they will have no effect on the subsidy.
Instead, the Exchange should only require enrollees to report increases in income that will substantially reduce the credits they can claim. The reporting requirement could be a flat dollar amount such as the $150 threshold in Wisconsin or it could be tied to a percentage of income such as a five to ten percent increase. Another option is to require Navigators and other assisters to educate residents on the penalties they will pay if they end up claiming more tax credits than they were eligible for and could encourage enrollees to report all substantial increases in income. These options will reduce errors in reporting by enrollees and help staff concentrate on needed adjustments.
Exchange staff are still in the early development stage of the credit’s program rules, with meetings open for public comment and discussion.
