Obamacare Facts

The Psychology of ObamaCare’s Advanced Tax Credits and Repayment Limits

Psychology, Loopholes, and Other Considerations in Regards to the Affordable Care Act

Do you take more than you need and pay it back, or do you risk missing out on advanced credits? Either way, it’s as much tax strategy as it is psychology.

I guess we have to ask, “can you make smart choices now, knowing that you might have a bad experince a year and a half later”? If so, how many of the 320 million other Americans do you think are in your shoes?

Not everyone is in this situation, but once you see what i’m getting at, you’ll be like, “WTF?!”

FACT: Everyone loves a refund, everyone loves an upfront tax credit, no one likes repaying money, no one likes forms, and many don’t feel comfortable taking large loans from the federal government for high deductible coverage. How do we address this?

TIP: We cover the major ACA sticking points here, but there are a few minor ones that are causing minor havoc. This of course, must be said along side acknowledging the ACA success stories, tens of millions with coverage, decreased long-term spending in some areas, and general progress. The ACA is working, but as someone who actually cares, it is my duty to critique. Now that we gave a nod to what the legislation got right, let us complain about some things it got wrong.

When Greed is Good: The Advanced Tax Credit

I’m going to come right out and say it, for those making less than 400% FPL, financially speaking, you are better off being an “advanced tax credit hog” and then paying back the IRS as needed, than you are being “conservative”, and only taking credits at the end of the year.

This is especially true if you are self employed, take contracts, or have income you can’t predict.

In one “hilarious” example, a self-employed gentlemen paid his full premiums all year thinking that he would get payment from a big contract in December. Payment didn’t come until after the 1st of January, and given this, his income for the previous year was about $5,000. This means he qualified for Medicaid the whole year, for free. Had he projected say “110%” FPL he would have gotten nearly free coverage through the marketplace after tax credits and out-of-pocket subsidies (100% a legal and legitimate thing to project in his shoes).

Had the payment come in in December, oh well, so he pays back the part of the tax credit he owed (cost sharing isn’t owed back). No big deal. The IRS only wants the full amount back if you go over 400% FPL, otherwise limits are reasonable. (see repayment limits)

On the flip side, go below 100% and the IRS doesn’t even care if you file taxes (as you are below the tax filing threshold). We can’t expect such things out of those with low incomes… but then this calls into question the difference between wealth and income

It gets even more “hilarious” though, because we haven’t factored in one of the top complaints I get running ObamaCareFacts.com, “people pissed off about repaying tax credits” (most others are 1095-A forms, ideology, employer coverage, and costs).

You see, psychologically, the really mad ones, are the ones who “advanced tax credit tax hogged” and now are being asked to pay money back. They are MAD and vocal… and they are the ones who made the smart move the other gentlemen didn’t.

This is to say, both those making the right and wrong move are upset?!

Repayment limits for 2014 coverage (about the same as 2015).

The Negative Psychology of Repayment (and the Positive Psychology of Refund)

Ask any social psychologist if advanced tax credit repayment is a good idea, and they will tell you, “no”. Or, “no, are you nuts, have you listened to anything we said about bias or perception for the past century… are you seriously asking me this?” Or, something like that.

There is a lot of positive psychology in a refund, and some people get refunds, but repayment actually eats in to people’s overarching refund about 1/2 the time, and these people tend to be more vocal.

I can see how this would seem to work on paper, but in practice people don’t understand the ACA in regards to refunds or repayment. When a person gets a year-end bill to repay the $3,000 they borrowed, they aren’t seeing it as a loan. They see it as the government taking their money. When they get a refund, well, they overpaid and it is on to the next thing.

This is made worse by high deductibles and insurance people feel like they aren’t using. So while the mechanics aren’t broke mathematically speaking, when we factor in the human condition, we see a glaring problem.

In Truth, on Paper, This is All Fair

In truth, advanced tax credits are a smart and fair system that favors the user, the government, and the industry. The faults of this aspect are largely just psychological (negative for under- and over-taking) and incentive-based (it incentivizes “hogging” and disincentives thrift).

The system incentivizes borrowing tax credits from the government, which get paid to insurers today, for coverage today.

A year and a half later when taxes are owed people no longer feel the “value” of their coverage or loan, and instead are just pissed about owing money or not taking enough up-front. This is only made worse by large deductibles that people don’t use unless they have a catastrophic accident.

Would someone making $40,000 a year really want to spend $3,500 on coverage if it wasn’t subsidized? How can you get someone to value you that? This is largely an issue of psychology over economics.

Tax Tips For Avoiding the Repayment Blues

I haven’t yet, and will not, write a “grey-hat ObamaCare tax tips” page, but if I did, let’s just say it wouldn’t be blank. (see our white-hat tax tips and white-hat subsidy tips pages)

I am a blogger, and our team helps people understand the ACA, we aren’t “insiders” and we aren’t beholden to a party or industry.

In our years of studying the law and helping people, a few sticking points have popped up. This is one glaring sticking point.

I can understand legislation making flubs and needing reform, I can imagine Gruber wiping the sweat from his brow attempting to please all parties and get health reform passed, but I’m missing the part where rooms of smart people are zero’d in on the ACA in the interest of reforming it for the people.

If that is happening, then dear room full of people, “consider the psychology of advanced tax credit repayments”, “consider the psychology of deductibles”, and also, “consider the psychology of low-income employee plans costing more than everyone else”.

In truth, a lot of the ACA sticking points are psychological, sometimes that is even the psychology of a drug company who jacked up the price of a drug… but hey, one topic at a time right?

TIP: The rejection of Medicaid and the expansion of pre-existing conditions are also having odd effects. Lots of negative psychological effects on people who pay more, but a lack of vocalization on behalf of those who benefit. Is it that negative effects are more powerful, what can we learn here?