Broker Check

Healthcare Regulations Make for Tax Filing Surprises

February 27, 2015
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Imagine my client’s surprise when she found out the health insurance policy she owns is not “qualified coverage” for purposes of the new healthcare rules, and that she would be paying approximately $1,100 in additional tax this year due to this new law.

The story goes back more than a year ago, when this client, who is a small business owner, called me rather excited about the new health insurance policy she had purchased.  Like many of our clients, she had received a notice from her former insurance company that her premiums would be increasing significantly.  She shopped around for alternatives, and found a policy that offered reasonable coverage for not that much more than her old policy.

Fast forward to a few days ago.  This client was talking to the agent for her new health insurance company when the agent mentioned that the policy was not “Obamacare approved”.  She emailed me to see if I knew what that meant.  I informed her that on this year’s tax returns, one of the questions that has to be answered is whether the whole family has had qualifying health insurance coverage for the whole year.  I instructed her to ask the agent if her policy met this requirement.  A couple of days later she let me know that it did not, meaning she would owe the additional taxes.

What this means is that a family who chose to purchase a lower cost health insurance policy, and was covered by that policy for all of 2014, will be penalized the same as someone who has no coverage.

When the new healthcare regulations were signed into law by President Obama, little was known about what was actually contained in the legislation.  As details began to surface, two things became apparent.  First, small business owners would face a number of difficulties under the law, and would see their costs increase substantially.  I have clients whose small businesses faced 80% increases in their health insurance premiums within a year.  Second, most people with good or average health, and average or higher incomes, would be paying much more.

Unfortunately, the law shifts the responsibility for determining whether a person owes the additional tax to the tax return.  Not only does the tax preparer have to ask his or her client whether the client’s entire family had coverage, the preparer has a rather complicated task of determining the amount of additional tax, or in some cases, the amount of health insurance premium credits (read: taxpayer subsidy) the family may receive.

Because of the amount of confusion about the laws, I suspect there will be millions of tax returns filed with incorrect information concerning the taxpayer’s healthcare.  I recently read in an article that 800,000 people had received tax forms with incorrect information from healthcare.gov, the federal government’s website for healthcare insurance.  If the government’s own information about the new rules has errors, many more errors are being made by tax software, the tax preparers, and of course by those who prepare their own tax returns.

Which leaves me to wonder what will happen over the next few years as the IRS tries to sort all this out.  Will the IRS subpoena the records of companies selling non-qualified policies?  Will millions of taxpayers receive IRS letters asking for additional money?  Will the IRS rebate money to millions who should not be receiving the money?  

It will be interesting to see how all this gets sorted out.

Dan Cook, CFP®, AIF®
CFO