Resources

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Treasury’s Office of Tax Analysis examines tax data on the uninsured & ACA incentives

Office of Tax Analysis, Working Paper 106, “What Can Tax Data Tell Us About the Uninsured? Evidence from 2014” (July 2016).

In a working paper, the Treasury Department’s Office of Tax Analysis (OTA) used 2014 tax return data to learn about the characteristics of persons that don’t have health insurance and understand the efficacy of subsidies and penalties under the Affordable Care Act (ACA). Its findings are intended to help IRS improve tax forms and instructions, as well as improve general outreach efforts aimed at encouraging coverage.

RIA observation: The report is a “working paper,” meaning that it is potentially subject to further revision. It notes that its “findings to date are tentative, because information about insurance status on 2014 returns is limited.” It is based on 2014 returns processed through the end of March 2016.

Background. The ACA created subsidies, including the Code Sec. 36B Premium Tax Credit (PTC), to help low and moderate-income people obtain affordable health insurance. The ACA also requires individuals to obtain health insurance coverage (the so-called individual mandate), receive an exemption from the coverage requirement (e.g., on account of having household income below the return filing threshold), or pay a penalty. (Code Sec. 5000A) In addition, large employers that do not provide affordable coverage to full-time employees may owe an assessable payment if one or more full-time employees receive the PTC. (Code Sec. 4980H)

In general, taxpayers who have full-year coverage for their full tax family report this by checking a box on Form 1040. Tax return filers who are uninsured for any part of the year, or who have a dependent who is uninsured for any part of the year, may claim exemptions from the health coverage requirement (see below) on Form 8965, Health Coverage Exemptions. Taxpayers who do not have coverage for themselves or for a dependent for at least one month, and who do not claim an exemption, report the individual shared responsibility payment (i.e., the penalty) on Form 1040.

Exemptions from the individual mandate are available for several specific circumstances provided under the statute, and for general hardship. Some exemptions are granted only by the Marketplaces, some are claimed only on the tax return, and some be taken in either way. Individuals may be eligible for more than one type of exemption.

The ACA also provided incentives for States to extend eligibility for Medicaid to all persons with incomes below 138% of the federal poverty line (FPL), but 23 states decided not to do so for 2014.

OTA’s findings. The OTA concluded that 14.5% of families that filed tax returns for 2014 reported a spell of uninsurance (i.e., a period as short as one month or as long as one year) for at least one family member.

The 14.5% figure is composed of, with respect to the 135.5 million families who filed 2014 returns:

…11.7 million that claimed an exemption only,
…7.2 million that paid a penalty only, and
…800,000 that reported both (i.e., an exemption and a penalty).

In general, uninsurance rates were higher for young adults, unmarried persons, low-income families, and families in States that did not expand eligibility for Medicaid. The OTA noted that families with children were more likely than those without children to report a spell of uninsurance. About 20% of head of household filers (i.e., certain unmarried persons with children) reported a spell of uninsurance, compared to 17% of single filers without children; and 12% of married couples filing jointly with children reported a spell of uninsurance, vs. only 7% of joint filers without children. The rate of uninsurance was highest for families in which the primary taxpayer was under age 25 (22%) or age 25 to 29 (22.5%).

Low-income families with income below the FPL accounted for 37% of uninsured families, and those between 100% and 138% of FPL accounted for another 16%. Lower-income families were also more likely to claim an exemption than to pay a penalty, but it also appears that some families paid a penalty when they could have claimed an exemption. To this end, IRS has contacted about 400,000 families to notify them that might have paid too much for tax year 2014.

Rates of uninsurance were generally lower in States that expanded Medicaid (12%) vs. States that did not (18%). Families in States that did not expand Medicaid were more likely than others to claim an exemption from the coverage requirement (11% vs. 7%). Families filing from a State that did not expand Medicaid eligibility accounted for 44% of all families, but 54% of uninsured families. According to the OTA, much of this difference in uninsurance rates was likely attributable to poor families who could have received Medicaid if they resided in a State that expanded eligibility (i.e., those with incomes under 138% of FPL), but rates of uninsurance were also slightly higher in non-expansion States for taxpayers with higher income levels. This suggests, says the OTA, that the lower rates of uninsurance were partly due to the Medicaid expansion directly, partly to spillover effects such as increased outreach generating more coverage among families with slightly higher incomes, and partly to “underlying State characteristics that are correlated with the choice to expand.”

The OTA found that, based on its findings, many of the uninsured were/are likely eligible for Medicaid or subsidized Marketplace coverage, and additional outreach could encourage them to obtain coverage.

Next steps. In addition to IRS contacting families that may have overpaid (above), the Departments of Treasury and Health and Human Service are partnering to send notices to taxpayers who paid a penalty or claimed an exemption for tax year 2015, and who appear to be eligible for Medicaid or Marketplace coverage, during the next Marketplace open enrollment period. Several notices will be tested in a randomized controlled study so that effectiveness of various messages can be measured.

References: For the requirement that non-exempt individuals maintain minimum essential health coverage, see FTC 2d/FIN ¶  A-6401  et seq.; United States Tax Reporter ¶  50,00A4  et seq.; TaxDesk ¶  867,300  et seq.; TG ¶  1811  et seq.