Health

Some Californians have to pay back Obamacare subsidies

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As Americans file their 1040 forms with the IRS this spring, those who signed up for subsidized health insurance under the Affordable Care Act are experiencing for the first time the tax consequences of the federal law. For some that means extra cash in their pockets, but for others, it means they will have to pay back some of the subsidies they received. 

In a study published last week, the non-profit Kaiser Family Foundation (not affiliated with Kaiser Permanente) estimates 45 percent those who received subsidies for health insurance will get money back when they file their taxes, while about 50 percent will have to pay back some or all of the assistance they received. 

The study closely mirrors statistics released by tax preparation giants Jackson Hewitt and H&R Block, which have reported that 53 percent (Jackson Hewitt) and 52 percent (H&R Block) of their early filing clients have been required to pay back a portion of their Obamacare subsidies. 

And for Reseda accountant and tax preparer Mario Valverde of Green Financial Services,  it's all adding up to big-time frustration for him and those of his clients who were surprised to learn that they have to pay back some of their subsidies. 

" I love that everyone has insurance. I love that everyone can feel safer about that," Valverde says.  "My frustration is that people just weren’t educated."

Under the federal health law, financial assistance to help pay insurance premiums is available to people who meet certain income requirements. These subsidies are provided either every month or at tax time. The IRS considers them tax credits. And the size of the subsidy is based on the taxpayer’s estimated income for the upcoming year.

If a taxpayer ends up earning less than he estimated, he’s likely due a refund. But if he ends up earning more than he estimated - perhaps because he got a higher-paying job - he may have to pay back some or all of the subsidy. Valverde says some of his clients have had to refund the government anywhere from several hundred to several thousand dollars.

 "Most of them are just completely bewildered. People just don’t understand," he says.  “They feel the system is taking advantage of them, which it really isn’t. The system  does work."

It's just that not everyone got the message about the full consequences of the subsidies, says Larry Levit, senior vice president and health policy expert for the Kaiser Family Foundation.

"I think a lot of people are confused about many aspects of Obamacare but in particular about the subsidies," he says, adding that last week's study found "reconciliation payments" averaging about $800 nationwide.

And that's problematic, Levitt says, when you consider that those who received the subsidies in the first place are typically low- or middle-income families with very little discretionary income.  So a whopping tax bill or a much smaller-than-expected refund can hurt.

"The sad part is a lot of these people actually fall back to [thinking] 'Oh wow, I should have just stayed without health insurance,"' Valverde says, "because for now…it’s cheaper to pay the penalty than it is to have been paying your health insurance."

But that changes somewhat starting  this year, when the penalty for being uninsured climbs from $95 a person or 1 percent of income – whichever is greater -- to $325 a person or two percent of income.  And it goes up again next year. 

Valverde says those who have yet to buy insurance can reduce their 2015 tax penalty by getting a policy during a grace period that lasts through April 30th.

And he suggests that those who buy a plan now should use an experienced broker, who knows the ins and outs of the health law.

"Get an agent you trust," he says. "It's free, they get paid by health insurance companies."

Meanwhile, Levitt  says despite the confusion and frustration of the 2014 tax season, he’s confident the problems are only temporary.

"As with much of the law this first tax season is going to be a little rocky," he says. "But it should get better over time as people have a better understanding of what to expect."

Levitt notes that those on subsidized health insurance plans who experience a change in income this year should report it promptly to Covered California. That way the exchange can adjust the subsidy right away, and hopefully minimize what's owed come tax time next year.