An asterisk to Obamacare’s income verification delay

IRS 1040 Tax Form Being Filled Out

Last Friday the Obama administration released a chunk of final rulings (PDF) on regulations concerning the implementation of the Affordable Care Act. This came on the heels of the much more scrutinized announcement of a one year delay for the employer mandate (see my two cents here). Of the many delays and adjustments included in the ruling is a scaled back requirement for income and coverage verification on the state-based individual health insurance exchanges.

Sarah Kliff summarizes the the income portion:

In preliminary rules, the Center for Medicare and Medicaid Services had proposed a system where they would audit anyone who reported an income that was 10 percent lower than what federal data said they earned in the previous year. It might turn out, the discrepancy was warranted, if the applicant lost their job, for example. Or, it could also be an attempt to game the system, using a lower income to qualify for higher tax credits.

The federal government has since decided to scale back these requirements, and, in 2014, only audit a statistically significant number of these people with large income discrepancies, rather than the entire group. Unlike the delay on employer insurance verification, this provision effects all 50 states.

The initial news reports for the income verification delay led many to believe that beyond the (small) possibility of an IRS audit, the government would essentially be relying on an “honor system” for applicants applying for subsidies on the exchanges. This in turn led to a plethora of social media conjecture about gaming the system, some wackadoo conspiracy presumptions from Rush, and dubious claims to immorality against a backdrop of the uninsured masses lying to get their Obamacare.

However, there’s one heck of an asterisk that so far has gone unreported in the major outlets. Judy Solomon of the Center on Budget and Policy Priorities explains (my emphasis in bold):

[…] Moreover, a rigorous income verification process remains in place in all states, including those that will operate their own marketplaces. All marketplaces must first check the income level that an individual reports on his or her application against a federal database that contains data on the applicant’s federal income tax returns, as well as information on his or her Social Security benefits if any.

[…]

If an applicant reports a significant drop in income (more than 10 percent) from the income shown on his or her last tax return, then both the state and federal marketplaces must check additional electronic data sources, such as state and commercial databases that provide information on employment income, to verify the income decline.

Here’s where the change comes in:  it applies to the small percentage of cases where 1) an applicant reports income to the state marketplace that is substantially lower than the income level on the applicant’s last tax return, and 2) no additional electronic sources of income data are available that can confirm the drop in income.

[…]

It is critical to note that even if this process results in some inaccuracies for a small share of subsidy recipients, there is a back-up that will come into play in virtually all such cases.  The marketplaces only determine the amount of advance payments of the premium tax credits.  The final amount of an individual’s premium credit is determined based on individual’s actual income for the year as reported on the individual’s tax return, filed after the year is over.  Individuals who under-report their income will have to pay back excess advance payments of premium credits when they file their taxes.

So, to recap, this delay in extra verification procedures only affects the 16 states (and DoC) that have chosen to operate their own exchanges. Every state is still required to initially verify income. Only in the case that no additionally information on income is available — which I find difficult to imagine in happening in great numbers — would the verification rely on a temporary “honor system.” It’s temporary, again, outside of the delay because the final tax credit for coverage in the exchanges will be decided when you file your taxes. In this sense the interaction with the subsidy tax credits operates much like anything you report to the IRS. Which is to say, there is no difference here in the possibility of erroneously claiming income. If you under-report your income now, you’ll definitely pay for it later.The same disincentives for lying to the IRS for any other reason will still apply, thus downplaying the likelihood of mass dishonesty on the part of uninsured Americans trying to get insurance coverage next year.

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