The Theory, or What the Government and the Insurance Companies Want You To Believe.
The “Advance Premium Tax Credit” (APTC) is a tax credit you can take in advance to lower your monthly health insurance payment (or “premium”). When you apply for coverage in the Health Insurance Marketplace, you estimate your expected income for the year (the gov’t knows we’re all clairvoyant). If you qualify for a premium tax credit based on your estimate, you can use any amount of the credit to lower your premium.
- If at the end of the year you’ve taken more premium tax credit than you’re due based on your final income, you’ll have to pay back the excess when you file your federal tax return.
- If you’ve taken less than you qualify for, you’ll get the difference back.
(https://www.healthcare.gov/glossary/advanced-premium-tax-credit/; my emphasis)
Apparent Benefit to the Consumer.
Because of the Affordable Care Act, many people who buy their own health insurance can get financial assistance that lowers your costs. This assistance is called a subsidy … The Advanced Premium Tax Credit goes toward your health insurance premium—what you pay each month to maintain your health coverage (http://www.bcbsm.com/index/health-insurance-help/faqs/topics/buying-insurance/advanced-premium-tax-credit.html; my emphasis.)
What The Consumer Is Supposed To Understand From This.
The APTC is a simple tax-related credit which is calculated against a consumer’s estimated income in order to reduce the cost of the consumer’s health insurance making it affordable for those with low incomes.
There are no strings attached!
Don’t read the small print!
Nothing can possibly go wrong … click … nothing can possibly go wrong … click … nothing can possibly go wrong …
The Practice, or What You May Experience After You Have Drunk the Government Kool-Aid.
The Advance Premium Tax Credit (APTC) is taxable as income. What the government giveth, the government taketh! Whatever amount is applied to the monthly healthcare premium is counted as income by the IRS. The consumer is liable for income tax!
What a consumer earns vs. what the IRS thinks the consumer will earn.
The initial calculation of APTC is based on consumers’ estimate of what their income will be for the upcoming year. During the year, should the IRS glaze into its crystal balls and decide the consumer will make more than the initial estimate and, as a result of this metaphysical breakthrough, provide an income update that is contrary to the aforementioned estimate, the APTC might be adjusted.
This is government code for reduced.
So, let’s say that Connie Consumer has been granted an APTC based on Connie’s own estimate of her yearly earnings.
Based on that estimate, the kind and benevolent government grants Connie an APTC that reduces her monthly healthcare premium to $100 a month!
Connie, who believes that the government and her insurance company are really upright and honest players who truly care about her health and well-being, sets up a monthly automatic deduction from her checking account to pay her $100 a month health insurance premium. Connie then budgets her extravagant monthly expenses for luxuries such as rent, utilities, food and a monthly pizza (large, with extra cheese) based on her medical insurance expense being $100.00 a month, just like the benevolent government seems to have promised.
Meanwhile, in a dark cubical somewhere in the bowels of the IRS, Pete “The Johnson” Johnson, an IRS auditor and the villain of the piece, reviews Connie’s estimate of her annual income based on her tax returns. Not knowing, or caring, that Connie was recently downsized out of her job with a large corporation and is now trying to make ends meet by working shifts at Mickey D’s and driving an UBER in an Amish neighborhood, this IRS Johnson decides that Connie, like all scum-sucking, tax-cheats, has purposely sandbagged her income estimate in order to reduce her insurance premium. So good old Peter gives Connie the Johnson by unilaterally increasing the estimate of Connie’s annual earnings, and thereby reducing Connie’s APTC.
Connie’s kind and benevolent insurance company, in order not to leave a spare sheckle in the pockets of any of its consumers, now automatically withdraws $500 from Connie’s checking account to cover the adjusted premium instead of the expected $100.
Connie’s bank allows this increased withdrawal to happen without explicitly telling Connie. After all, Connie did authorize the bank to allow the insurance company to withdraw funds automatically from her checking account. Nothing suspicious going on here!
How does Connie find out?
Her rent check bounces for insufficient funds!
Connie’s bank, of course, charges her $35 for the bounced check … so there goes the monthly pizza.
And, Connie’s landlord charges her a late fee of $50 on her unpaid rent and informs her that, if the rent is late again, her ass is out on the street.
Connie, of course, calls her insurance company thinking this is all some horrible mistake. After navigating through the phone-answering robot, who has changed the menu for her convenience, and listening to Montovani Does the Beatles and being told repeatedly that “Your business is important to us. Please continue to hold!” for an hour and twenty minutes, she finally gets an agent on the line. This poor schlep is suffering from PTSD and is on anti-depressants (Generics made in a third-floor apartment in Mumbai; the real ones aren’t covered by the plan) from having the crap – and any sense of empathy – beaten out of him by irate and raging consumers, who have been screwed just like Connie.
The agent informs Connie that what has been done to her is covered in paragraph 317, subparagraph A, line items VII thru XXI of an IRS circular Connie has never seen.
In other words, whatever the government can do to you, it will. If it can’t do it, it will create an administrative regulation authorizing it to do it. Then, it will do it to you.
So, at the end of the day
- The insurance company is happy! They got their premium money and has not had to pay out any benefits (will get to that in a later piece).
- The government is happy! It can still claim it has increased healthcare coverage AND it uncovered another dastardly attempt to cheat the IRS.
- The bank is happy! It did exactly what Connie authorized it to do and made an extra thirty-five bucks in the process.
- The Landlord’s Happy. Rent’s paid, and an extra fifty against the inconvenience of waiting a few extra days to get paid against the loss of three cents interest on the float.
Connie? Not so much!
What Could Connie Have Done?
- Implement the “Scrooge McDuck Strategy”; never give anyone direct access to your cash.
Connie thought that, when she authorized the insurance company to withdraw funds from her checking account, the withdrawal was limited to the expected amount. Unfortunately, that’s not the way it works.
Once she opened the door, it’s open … wide open. The bank does not limit the amount of the withdrawal.
If she wanted to pay automatically, she could have
- Used use the “Bill Pay” section of her bank’s on-line checking service. Specify that the bank “write a check” for her premium in the designated amount on a specific day each month. This way she controls the amount to be paid each month, not the benevolent insurance company.
- Another possibility is to put the payment on a credit card. Connie should only do this if 1) she pays off the card each month; 2) the credit card does not charge interest when the monthly amount is paid in full. The downside is, like automatic withdrawal, the insurance company is not limited to how much it puts on the card each month. The upside is Connie would have at least thirty days to react to any unexpected surprises.
- Or, Connie could just regress to nineteenth-century technology writing a paper check each month and mailing it in. A hidden benefit to this is that it costs the insurance company about twenty-five bucks to process manual payments.
Regardless, Connie, like all consumers, should keep an eye on her money. Check the account balance on line at least once a week!
- Read the Mail!
If Connie gets a thin envelope from the IRS, the healthcare marketplace, or from her insurance company, she should read it. Granted, no one likes to open thin envelopes from the IRS, and insurance companies never use language in the least bit comprehensible to human beings. But, Connie’s in a better position talking to these money-grubbing pencil-necks before they actually snatch her money!