How the Obamacare "Honor System" Will Encourage Fraud
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How the Obamacare “Honor System” Will Encourage Fraud

How the Obamacare “Honor System” Will Encourage Fraud

Chris Jacobs

July 29, 2013

Seal of the United States Internal Revenue Ser...

Seal of the United States Internal Revenue Service. The design is the same as the Treasury seal with an IRS inscription. (Photo credit: Wikipedia)

Earlier this month, the Obama Administration—in a 600-plus page regulation—announced that for 2014, Obamacare insurance subsidies will essentially operate on the “honor system.” This will create incentives for fraud, as some applicants may report an income that is actually lower than their true income in order to qualify for the taxpayer-funded subsidy.

In most cases, the IRS will not attempt to verify an individual’s income when he or she is applying for subsidies. Supporters of the law claim that the changes will not encourage fraud, because “applicants who receive [subsidies] for which they are ineligible will have to pay them back when they file their taxes.” Unfortunately, that claim isn’t entirely accurate. Some individuals will only face a maximum $2,500 in repayment, while receiving far more in benefits.

Before explaining the loophole, some background about the subsidies. Obamacare provides exchange insurance subsidies for Americans who do not have access to “affordable” employer-sponsored health coverage. The subsidies are provided on a sliding scale based on income. Americans with incomes between 138 percent and 400 percent of the federal poverty level (FPL)—between about $31,800 and $94,200 for a family of four—qualify for premium subsidies, and applicants with incomes under 250 percent of the FPL—about $59,000 for a family of four—will also receive additional subsidies to reduce or cover cost-sharing requirements (e.g., deductibles and co-payments).

Subsidies will be based on an applicant’s self-reported income at the time of application, meaning that subsidies for 2014 will be calculated based on income reported by applicants in fall 2013. However, the income reported on applications in fall 2013 could vary significantly from income reported on 2014 tax returns, filed with the IRS in spring 2015—either because of a change in life circumstances (e.g., divorce, birth, death, change in job, etc.), or because an individual misrepresented income on his application.

If an individual receives subsidies in error, he will have to pay the subsidies back—but there are limits on the amount individuals will have to repay. Those who should never have received an income-based subsidy—because their income exceeds 400 percent FPL—will have to repay the full amount of the subsidy they received. However, those with incomes under 400 percent FPL—who qualify for some level of subsidy, just not as much as they actually received—will only have to pay back up to $2,500 of the difference between the subsidies they actually received and the subsidies they should have received.

via How the Obamacare “Honor System” Will Encourage Fraud.

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