Health and Science

Obamacare sticks some enrollees with unexpected bill

CNBC explains: Obamacare in 2015
CNBC explains: Obamacare in 2015

Last year, a study found that about four out of every 10 people who received financial help from the government while buying their Obamacare health plans had no idea they were getting any assistance.

This tax season, many of those people may be in for a rude surprise when they're asked to pay some—or even all—of that money back.

That's despite government and tax preparers last year repeatedly urging those enrolled in Obamacare plans to report changes in income during the year, to avoid a situation where they owed back—or were owed by the government—more in the way of subsidies come tax season.

"I wasn't very happy," said Mike Highsmith, 61, a retired US Airways flight attendant who learned after having his taxes done that he has to pay back every cent of the $6,624 in federal subsidies that helped pay the lion's share of his plan.

"This shocked me ... I didn't know this was coming."

Highsmith was one many Obamacare financial-aid recipients in 2014 who didn't know their plans were being subsidized.

An agent from Sunshine Life and Health Advisors offers insight to potential enrollees in Miami about the plans available last year under the Affordable Care Act.
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The subsidies were given to recipients whose estimated annual income came in between 100 percent and 400 percent of the poverty level. The amount a person receives in subsidies varies, but as a rule the less someone earns, the more they get in subsidy.

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"I was paying $89 per month and they [the federal government] were paying $736," said Highsmith, who only learned about the subsidy and its value when he received a 1095-A form from the IRS this year. He said he wasn't told about the subsidy when he applied for insurance over the telephone assistance line.

"I would have canceled it if I had known that," he said, referring to the plan's retail price.

Highsmith also had no idea that if his actual annual income ended up being higher than the $22,000 he had estimated at the time when he applied for the insurance that he would owe at least some of the subsidy back to the federal government.

And because Highsmith's income ended up being more than 400 percent of the poverty level—the cutoff point for receiving such subsidies—he owed back the entire amount in aid he had received. Highsmith went over the income "cliff" because he withdrew about $30,000 from his 401(k) retirement plan to buy himself a Harley-Davidson motorcycle and a car for his son, who is a college student.

"If I had any luck at all, it's been bad luck," he said

Highsmith noted that he never even used the insurance plan last year.

Subsidy cliff looms with many unaware

Not every Obamacare subsidy recipient will owe money back when they file their tax returns this season. An estimated 45 percent will receive subsidy money because their actual income ended up being lower than what they had estimated when they applied for insurance. About 5 percent will neither owe back any part of their subsidy nor get more money in the way of a subsidy for last year.

But about 50 percent of subsidized Obamacare customers will owe money back, which will offset their tax refunds or wipe them out altogether, according to a recent Kaiser Family Foundation report.

The US Treasury Department estimates that most Obamacare customers will still get an income-tax refund, meaning they won't have to cut a check to the IRS for repaid subsidies. A Treasury spokesman said average refund is about $2,900, which would offset any repayment in most cases.

Still, repaying the subsidies could leave people with lower refunds than they were hoping for, or worse. The average subsidy repayments range from $667 from low-earning subsidy recipients to $1,380 among people who earn between 300 and 400 percent of the poverty level.

But, "If you are below 400 percent of poverty, there are limits on what you have to pay back," said Bradley Heim, an associate professor at Indiana University's School of Public and Environmental Affairs, and former economist in the U.S. Treasury's Office of Tax Analysis.

For a lot of people, this will only be a trivial amount, Heim said. But the "absolutely worst-case scenario" is someone in Highsmith's position, who ends up earning more than 400 percent of the poverty level after receiving subsidies during the year.

While the number of people likely to go over that "cliff" last year is tiny compared to the 6.7 million Obamacare customers, Heim noted that people who go over the 400 percent poverty threshold by even a dollar can end up owing several thousands of dollars back in subsidies.

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"All those subsidies go to zero once you hit 400 percent of poverty," Heim said.

"You can go from a $10,000 [subsidy] to be eligible for nothing."

Jamie Long, who prepared Highsmith's taxes, said he was the one of three people who visited her office who owed back subsidies this season.

"The lower [amount] was about $550, and the middle was around like $3,800" in repayments, Long said.

All of those people reacted with "genuine surprise" when they were told they owed a repayment, she said. "They weren't aware that was something that could happen, that they could receive so much in the subsidy and have to pay it back."

The cost of not acting earlier

Some Obamacare participants knew they might be subject to a repayment but didn't take steps that could have avoided it or lessened the amount they owe.

Brenda Hubbard, a 45-year-old single mother living in Warrenton, Oregon, knew that she was getting a monthly subsidy of about $167 per month to help pay for her insurance plan, after estimating her 2014 income from working at a crab processing plant would be $22,000. As a result, she paid just $67 month herself in premium.

Hubbard was also aware that officials had urged subsidy recipients to update their income estimates during the year if it changed. That's so that their subsidy could be increased or decreased, reducing their risk of owing a repayment or having to pay more than they needed in monthly premiums.

So, when she realized last August that she had already reached her earnings estimate for the year, she said she knew she ought to update her income statement with Oregon's Obamacare marketplace.

"I knew I should have called, and I didn't," Hubbard said. "I just kept putting it off."

Obamacare check up
Obamacare check up

Hubbard said that at the time she believed any repayment she ended up owing for the subsidy would be small.

"Then, in December, the whole month of December, we really worked a lot and that bumped it up like $4,000," she said.

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By the end of the year, Hubbard had earned about $30,000, or $8,000 more than her estimated income.

As a result, when she did her income tax return on TurboTax, Hubbard ended up owning the IRS about $600 in subsidy repayment.

"I kind of kicked myself for not having called them," she said. "I'm not happy with it."

But Hubbard noted she still ended up getting a total tax refund of $2,823, partly as a result of the earned income credit. "So I can't complain," she said.

Hubbard has since updated her estimated 2015 income to $26,000, which in turn has reduced her subsidy and increased the amount she pays in premium each month.

"Now I pay $100 per month, and they pay $135," she said.

Birthday windfall

For other Obamacare customers who didn't adjust their income estimates last year, this tax season is leading to an even bigger refund than they otherwise would have received.

Mark McDaniel, an independent agent who represents Aflac Insurance in Muskogee, Oklahoma, was personally paying about $287 in monthly Obamacare premiums last year, with the balance of $113 being paid by subsidies from the federal government. McDaniel qualified for that subsidy amount after estimating his annual income would be $45,000.

"As a salesman, I have to give myself a goal," McDaniel noted. "I don't really know what I'm going to make every year."

"My goal last year was the amount I put in. And I didn't quite make it."

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In fact, his actual income was close to $30,000, a lot less than his target.

Because of that, when Jackson Hewitt Tax Service did his income tax return, "I actually got quite a bit more back than I thought I was going to get," he said.

The $1,432 in refunded subsidies accounted for nearly all of his total tax refund.

"Surprised, for sure," McDaniel said of his reaction. "I think they [tax preparer Annette Mitchusson] were surprised also, after they calculated it."

"My birthday was soon after," he said. "So I used part of the money to take myself and a friend to Branson, Missouri, for my birthday weekend."

For this year's Obamacare enrollment season, McDaniel signed up for the same insurance plan.

And for his estimated income, "I think I put in the same amount."

"Because I expect to make it," he said.