Tax Experts: Brace for Insurance Tumult - Uncertainty About Health-Law Penalties Is Flagged as Potential Source of Confusion at Tax Time

From The Wall Street Journal:

Headaches over the health-care overhaul are likely to grow in the coming year as tens of millions of Americans face the task of establishing that they have insurance coverage to avoid paying penalties, tax experts say.

"We believe it's going to create massive confusion," said Mark Ciaramitaro, vice president of health-care enrollment services for H&R Block."There's so much now that confuses people. We think it gets much worse next tax season."

Perhaps the biggest problem is a lack of public understanding of the complex and frequently-changing program, tax experts say. They expect that to be compounded by a misunderstanding of the penalties, as many don't realize they could pay more than the minimum $95 for not having insurance.

"With respect to the individual shared responsibility provision under the Affordable Care Act, the rules are clear, and taxpayers should be able to determine very simply whether they had health coverage for 2014 or, if not, whether they owe a fee," said a Treasury spokeswoman, adding that the administration will impose the fee on anyone who doesn't have an exemption.

And Kathleen Sebelius, secretary of Health and Human Services, recently told lawmakers: "That's what the law says, and that is what will happen."

But the potential for confusion about the law is feeding speculation among some tax experts that the administration might end up waiving the individual-mandate penalty for 2014, or minimizing its impact by granting widespread exemptions.

The mandate—which generally requires consumers to get health coverage or face a tax penalty—is a pillar of the 2010 health law, designed to ensure that young, people become part of the insurance pool to help offset the cost of covering older, often less healthy individuals.

The administration's efforts to ease the burdens of launching the program, by delaying some deadlines for businesses, for example, have added to the public's bewilderment, experts say.

 

"Given the administration's repeated shifting of deadlines and changing requirements, I wouldn't be surprised if [President Barack] Obama decides to waive the 2014 penalty for some or all folks who would otherwise owe it," said Roberton Williams, a senior fellow at the Tax Policy Center, a think tank.

 

One worrisome finding: an Urban Institute study last month determined that knowledge of the individual mandate penalty is particularly low among those who lack health insurance—the people who would be responsible for paying it.

 

Given that the penalty can run into hundreds or even thousands of dollars, some tax experts worry that many consumers could be in for a nasty surprise when they file their taxes in 2015.

 

The $95 penalty for 2014 is only for low-income people. For most, the penalty would be higher—1% of adjusted income. For a married couple with two children making $50,000 a year, the penalty could run about $300 a year. The same couple making $100,000 a year on this basis could be fined nearly $800.

 

Another problem is that the government has made it difficult for the IRS to enforce the program.

 

For example, at least this year, the administration generally isn't requiring many insurers to report to the IRS on the coverage status of people they cover. That means the IRS won't have any ready means of double-checking the coverage claims of millions of filers as they send in their 2014 returns next year.

 

Reporting begins in earnest for the 2015 tax year. The IRS said it would provide instructions for calculating and noting the penalty as part of the Form 1040 for 2014, to be finalized this year.

 

Another question involves the numerous exemptions from the penalty. According to administration guidelines, there are 14 categories of reasons for allowing hardship exemptions, including floods or other disasters; death of a close family member; or cancellation of an existing health-care policy—a provision that the administration clarified this month will run through 2016.

 

A final category allows an exemption for "another hardship in obtaining health insurance."

 

Those provisions have raised questions—particularly among congressional Republicans—about whether the administration is laying the ground work for allowing many taxpayers who would otherwise face the penalty to avoid it for 2014.

 

Government officials say the final exemption isn't a blanket exemption, and some people might seek exemptions to qualify for catastrophic coverage.