The Government Accountability Office (GAO) report, Patient Protection and Affordable Care Act (ACA): IRS Needs to Strengthen Oversight of Tax Provisions for Individuals, released July 29, 2015, is both one of the clearest and most succinct descriptions of how coordination is supposed to work between the Internal Revenue Service (IRS) and the ACA marketplaces in administering the ACA’s premium tax credit (PTC) and individual responsibility penalty, and the best description of how that coordination in fact functioned in the 2014 tax filing season, in 2015. As is often true with research involving the ACA, the report will offer ammunition both to the ACA’s supporters and opponents, although on the whole it shows a program with much room for improvement.
How Advance Premium Tax Credits Were Meant To Work
The ACA makes premium tax credits available generally to individuals with incomes between 100 and 400 percent of the federal poverty level who are not eligible for other forms of affordable coverage and who purchase a qualified health plan through a marketplace. These tax credits can be received in advance based on projected income to help pay health insurance premiums, but individuals who underestimate their income and receive excess advance premium tax credits (APTC) must reconcile the amount that they received with the amount they are actually entitled to when they file their taxes, and must pay back any excess amounts received (subject to limits). The Centers for Medicare and Medicaid Services (CMS) estimated that at the end of 2014, 6.3 million individuals received health insurance through the marketplaces; most received APTC. About $15.5 billion were paid out in tax credits in 2014.
The ACA also requires individuals who do not have minimum essential health coverage or qualify for an exemption to pay a penalty. These individual responsibility penalties were assessed for the first time during the 2014 tax filing season. Individuals who have coverage through a marketplace are supposed to receive a form 1095-A from the marketplace documenting their coverage and to check a box on their form 1040 to report coverage. Individuals who receive coverage through an employer or a government program should receive a form 1095-B from their insurer or the government, as well as a form 1095-C if they are covered through a large employer, and also check a box on the 1040. Because of the delay of employer and insurer reporting requirements, employers and insurers did not provide 1095-Cs and 1095-Bs for 2014.
Individuals who did not have coverage through the entire year must either file a form 8965 claiming an exemption or pay an individual responsibility penalty. Some exemptions, such as the religious conscience exemption or certain hardship exemptions, must be claimed through the marketplaces. Others, such as the affordability exemption, can be claimed at tax filing.
Logistical Challenges
The marketplaces were supposed to have sent 1095-As to enrollees and to the IRS documenting marketplace coverage and APTC amounts. Enrollees were to have used the information from this form both to verify their coverage for purposes of the individual responsibility requirement and to reconcile their APTC with the actual tax credit they were due using form 8962. Marketplaces are also required to send to the IRS by the 15th of each month an Exchange Periodic Data (EPD) transmission which reports cumulative information for each qualified health plan in the marketplace. The January 15 transmission in any year should contain complete data for the preceding year. The EPD transmission is also supposed to include information on coverage exemptions granted by the marketplace.
Because employers were not required to file 1095-Cs and insurers were not required to file 1095-Bs for 2014, the IRS was limited to using its standard examination processes (presumably audits) for verifying compliance with the individual responsibility requirement for 2014 for individuals who receive employer or government program coverage. It was able to verify claims of marketplace coverage using the 1095-As, to the extent these were accurate. The IRS should have been able to verify individual responsibility payment exemptions granted by the marketplaces using the EPDs due January 15, 2015, but as of May 31, 2015, the IRS had exemption data available from only 13 of the 51 marketplaces, and did not have data from the other 38.
Some marketplaces experienced delays in processing exemptions. The IRS allowed individuals who had not received a decision from a marketplace to file their taxes writing “pending” on their 8965, but it was not clear whether these individuals would need to file an amended return. The IRS also experienced technical problems causing its systems to return an error message when marketplaces submitted exemption data. Without the 1095-Bs and 1095-Cs or accurate EPDs, the IRS is limited in its ability to verify compliance with the individual responsibility requirement. It may pursue collection procedures against individuals who reported but did not pay the tax, or may review and recalculate the tax for returns examined for other reasons.
As of May 28, 2015, 130.6 million tax returns had been filed with the IRS. 101.5 million returns claimed full-year coverage. 11.5 million claimed an exemption from the requirement. 7.3 million taxpayers reported a penalty due. But 11.3 million returns, 9 percent of the total, did not claim an exemption, pay the penalty, or claim full-year coverage. The IRS estimates that 58 percent of these returns were filed by persons claimed as a dependent on another taxpayer’s return and thus not responsible for filing. This still leaves millions who simply failed to comply.
The IRS has determined that it lacks the authority to reject these “silent” tax returns. The IRS intends to work with tax preparers and tax software companies to ensure better compliance and to send “soft notices” to taxpayers to encourage voluntary compliance. Filing software can be modified to not permit filing without reporting coverage information, and preparers could be required to ensure compliance as part of their “due diligence” obligation.
The Challenges Of Verification
The IRS has established an ACA verification system (AVS) that is supposed to compare information regarding premium tax credits reported by taxpayers on their tax returns with that reported by the marketplaces before releasing a tax refund. For example, if the marketplace reports that a taxpayer has received APTC but the taxpayer does not report it on his or her return, the IRS may freeze the taxpayer’s claimed refund. The monthly EPD, described above, is the principal source of information that the IRS is to use for this purpose.
For 2014, however, the federally facilitated marketplace and four of the state-based marketplaces did not send full 2014 data until February of 2015. As of April 15, 2015, two state-based marketplaces had still not sent full 2014 data. The IRS could also use the 1095-As to verify APTC claims, but as of February 9, seven of the state marketplaces had not yet transmitted 1095-As to the IRS. As of June 8, 2015, three states had still not transmitted 1095-As. Hundreds of thousands of the 1095-As also had incorrect data, which the IRS could not correct using the more correct EPDs because they were not timely.
Marketplaces were not able to get complete and timely data to the IRS because they placed a higher priority on enrolling individuals for 2015 and on getting 1095-As out to taxpayers. CMS also said it lacked the resources to get out both January and annual EPD data at the same time. IRS processing of marketplace information was also delayed. As of March 21, 2015, the IRS had only processed complete PTC data for four of the 51 marketplace states (including the District of Columbia). Incomplete data, not including December 2014, were available for 38 states and no usable EPD information for 9 states. PTC information was only available for 3.1 million of the 4.4 million tax households expected to claim APTC. As of March 29, the IRS had complete EPD information for 46 of 51 states. As of July 7, 2015 it had complete data for 50 states and incomplete data for one.
The IRS allowed taxpayers who received incorrect 1095-As to file returns based on the information they received and waived various penalties, but the problems still resulted in some taxpayers’ refunds being delayed and some taxpayers receiving incorrect PTC. The GAO concludes that it is unclear whether this is a first year problem or whether it might be ongoing.
If the information reported by a taxpayer does not match marketplace data, the IRS is limited to requesting additional documentation or opening an examination. It cannot correct the tax return automatically using its “math error” correction authority. The administration has submitted to Congress requests for authority to correct incorrect returns in 2015 and 2016 but has not been granted this authority.
Problematic Delays
CMS has not yet given the IRS complete information on the total amount of APTC paid out in 2014. The IRS does not know, therefore, how much APTC was not reported. CMS paid out $15.5 billion in APTC in 2014, but some of this was for 2015 and some payments in 2015 could be for 2014. The IRS expected 4.4 million taxpayers to claim premium tax credits. As of May 28, 2015, 2.8 million filers had claimed APTC payments totaling $10.1 billion on their tax returns. 2.6 million filers claimed $8.9 billion in premium tax credits actually owed. 1.5 million taxpayers had received excess APTC totaling $1.9 billion while 1.2 million were able to claim an additional $717 million in premium tax credits which they had not received as APTC.
Part of the problem during the 2014 filing season was that the IRS did not get out some forms and guidance in a timely fashion. The IRS did not, for example, release the final publication 974 dealing with premium tax credits until late February 2015, and then revised it in March. These delays caused problems for tax preparers and tax filing software companies. The IRS is tracking its performance for 2014 and planning to improve performance and measurement of performance for the future. The GAO counselled the IRS to improve its coordination and communication with external stakeholders, such as the marketplaces going forward. Specific areas the GAO identified for further work included completing 1095-B and 1095-C forms and instructions, improving the marketplace exemption approval and reporting process, and clarifying how the IRS will notify the marketplaces regarding individuals who received APTC for 2016 but did not file 2014 returns and are thus ineligible for APTC in 2016.
ASPE Report Shows Increased Competition Holds Down Premiums
In another development, the Department of Health and Human Services (HHS) Assistant Secretary for Planning and Evaluation (ASPE) released an issue brief on July 30, 2015, reporting on Competition and Choice in the Health Insurance Marketplaces, 2014-2015: Impact on Premiums.
ASPE reports that 86 percent of qualified health plan (QHP)-eligible individuals had access to at least three insurers in 2015, up from 70 percent in 2014, with 59 percent of counties gaining at least one insurer and only 8 percent losing an insurer. The average number of insurers per county grew from 2.6 to 3.5 nationally. Markets with more enrollees attracted more insurers.
Sixty-four percent of enrollees had a choice of three or more plan types (HMO, PPO, Point of services, or exclusive provider organization), far more choice than is available in most employee plans. The ASPE report identified several factors that correlate with net changes in the number of insurers in a marketplace. Rating areas with more insurers in other markets were more likely to gain insurers, while rating areas that were larger or more concentrated before the ACA were more likely to lose insurers.
The average growth rate of the second-lowest cost silver premium—the benchmark for determining premium tax credits—was 2 percent, weighted for 2014 enrollment numbers (with counties with more enrollees given more emphasis than those with fewer enrollees), with some areas seeing a decrease in premiums. Benchmark premium growth was strongly related to increased competition. The benchmark plan premium growth between 2014 and 2015 was 8.4 percentage points lower in counties that saw a net gain in insurers than in other counties, with each net gain of one insurer associated with a 2.8 percentage point reduction in the rate of growth of the benchmark premium. Benchmark premiums were also 9 percent lower in counties with three or more insurers present than in counties with one or two insurers. In 42 percent of counties with new insurers, the new entrant offered at least one silver plan premium below the prior benchmark plan, thus reducing the benchmark.
Adding new insurers had less of an impact on average premiums. Average silver plan premiums growth was 1.5 percentage points lower in counties that had a gain in insurers, but growth in the number of insurers seems to result more in greater variation in premiums for plans offered than in reduction of average premiums.
Of course, because premium tax credits are linked to the second lowest-cost silver plan, enrollees may have to switch plans to take advantage of decreases or smaller increases in the premium of the benchmark plan. If they simply stayed with their 2014 plan for 2015, they may have seen larger premium increases. The ASPE report’s conclusion that increased competition holds down premium growth also raises interesting questions relating to the mergers taking place in the health care industry. These could result in fewer insurers and thus less competition in some markets, but because the national insurers involved do not compete in all marketplaces, it may be difficult to predict at this point to what extent the mergers may result in decreased competition.
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