Obamacare Pinches the Poor (Updated)

 Unfortunately, this highlights another problem with Obamacare implementation, and that is the contradictory and confusing information on compliance. The chart directly below the text on the IRS website indicates that the only way to claim this exemption is on the tax return, consistent with the information on the healthcare.gov site. 

Interestingly, neither of these sites contains any sort of citation as to the source material for these statements.  One can only assume that the information provided therein is intended to paraphrase the relevant regulations.  So, what does the law actually say on this point?

The Centers for Medicare & Medicaid Services (CMS) published final regulations on exemptions on July 1, 2013.  The filing threshold exemption was finalized at 45 CFR 155.605(g)(3) and, according to a CMS September 18, 2014, memo, “applies to an individual who was not required to file an income tax return for such calendar year because his or her gross income was below the filing threshold, but who nevertheless filed a return, claimed a dependent with a return filing requirement, and as a result, had household income exceeding the applicable return filing threshold.”  This exemption would be claimed on the tax return.

The September 14 guidance goes on to say that “any individual who does not have enough gross income to met the minimum threshold for having to file a tax return also should be entitled to a hardship exemption,” and provides that the Secretary, by virtue of her own authority, is providing that this should be the case, “regardless of whether they file a return and regardless of whether they claim a dependent.”

While it is commonplace for agencies to publish guidance as to interpretation or the agency view of its enforcement obligation, in this case, the guidance is actually in conflict with the letter of the regulations.  Even the author of the memo acknowledges that mere guidance does not in itself change regulations that have been finalized after proper notice and comment:  “CMS intends to propose to amend 45 CFR 155.605(g)(3) in this regard to include this hardship exemption in future rulemaking.”  It appears that no such rule change has yet been proposed, never mind finalized.

So, while the language cited from the IRS website does, in fact, accurately reflect CMS’s intentions, it appears that neither site accurately portrays the rather narrow filing threshold exemption currently provided for under the regulations as they currently stand.

Original post below:

Despite the extensive problems associated with Obamacare — both those known at the time of enactment and those discovered since — one significant perversity that disproportionately affects the poor seems to have gone largely unnoticed.

During these busiest two weeks of tax season, when up to 25 percent of returns are filed, our attention turns to compliance. Many Americans are just now beginning to appreciate that health insurance compliance must be reported on their tax returns, and that failure to have coverage results in a penalty that shows up as an additional tax on the return.

Of course, there are a number of exemptions available that can be obtained through the marketplace or claimed directly on the return. These exemptions allow particular groups of uninsured to avoid the penalty. One particular exemption is of special interest stemming from its especially perverse impact. According to the www.healthcare.gov web site, you can get an income-based exemption if “you don’t have to file a tax return because your income is below the level that requires you to file.”

Sounds simple enough, right? Until further investigation reveals that this exemption is claimed directly on the tax return. That’s right – the tax return you’re not required to file.

While the circular nature of this exemption is ludicrous on its face, its effects are far-reaching and incredibly regressive. According to Scott Hodge of the Tax Foundation, an estimated 11 million individuals and households did not file in 2010, presumably because they did not make enough money to meet the IRS filing threshold. Of course, some who do not meet the filing threshold file anyway in order to obtain a refund. And some below the filing threshold actually have qualified coverage, usually through a government program. But what about the uninsured who do not file?

It’s a safe bet that many members of this population will not be cognizant of their need to file simply to avoid the Obamacare penalty for being uninsured. Those who do realize it in time are less likely to be equipped to file their taxes on their own, and are also not likely to be aware of or have access to free-file programs, whether through the Internet or community resources, such as VITA. This situation forces those who can least afford it into the offices of tax preparers like H&R Block, burdening them with an added expense they can ill afford.

Those who not realize they have to file a return to claim the income-based exemption predicated on the fact that they “don’t have to file a tax return because [their] income is below the level that requires [them] to file” are likely to get hit with an unexpected tax bill later on.

President Obama frequently touts Obamacare’s benefits for the lower and middle class:

Yet compliance with this behemoth law disproportionately burdens the poorest of the poor.  Like a shark silently stalking its unknowing prey, Obamacare lurks waiting to take a bite out of the unwary. And in this case, it’s the poor.

Kimberly Pinter is a tax policy lawyer and writer in Northern Virginia.