ObamaCare’s Unfair Treatment of Middle Class Families

Middle income families are about to encounter some real surprises as a result of the Affordable Care Act (ObamaCare). For example, many workers will soon discover that when they earn more money, they end up with less take-home pay. Others will discover that they are worse off if their employer offers them “affordable coverage” than if there is no health insurance offer.

What causes these bizarre outcomes? Read on.

Milliman’s Employee Benefit Research Group reports that under the IRS final rule, the affordable coverage requirements in the ObamaCare law apply only to single coverage for each employee. No matter how high the premium for family coverage, it is not counted in the affordability calculation.

Even so, an employee’s family members will not be eligible for health exchange premium subsidies as long as they are eligible to enroll in an employer plan that is deemed “affordable.” Firms with more than 50 employees must offer coverage for dependents, but not for spouses.

Meeting any one of the following conditions qualifies a plan as “affordable:”

  1. The employee share of the premium is not greater than 9.5 percent of an employee’s W-2 income.
  2. The employee share of the premium is not greater than the employee’s hourly rate of pay times 130 hours.
  3. The employee share of the premium is not greater than 9.5 percent of the federal poverty level for a single individual ($1,092 in 2013).

Here are some sample calculations for a wage earner couple with two children living in a state that offers Medicaid to households with incomes at or below 133 percent of the federal poverty level (FPL). Because the law allows 5 percent of income to be “set aside,” this is functionally equivalent to offering Medicaid to families with incomes under 138 percent of the federal poverty level. The federal poverty level for a family of four is currently $23,550. Allowing for the income set-asides and multiplying by 1.38, this family would be eligible for Medicaid as long as it doesn’t earn more than $32,499.

Now, suppose that the family earns an additional $501. It will now be ineligible for Medicaid. If the employer does not offer affordable coverage, the family will have to turn to a health insurance exchange.

According to the Kaiser Health Reform Subsidy Calculator, the premium cost for family coverage purchased through an exchange will be $1,143 per year (3.46 percent of annual income). Yet, after paying this premium and paying the additional federal income taxes it owes, this family is actually worse off as a result of its higher earnings. (See the table).

On average, however, the family will be much worse off if the employer offers affordable coverage. To be affordable, the employee’s premium for his own coverage cannot exceed 9.5 percent of his W-2 wages, or $3,135. But the employer can charge any amount for other family members. Assuming the employee must pay the national average family premium ($4,316), the employee will have about $4,000 less take-home pay!

The table below follows Chief Justice Roberts in classifying required insurance premiums as a tax. The base case is a family of four earning $32,499, enrolled in Medicaid. Marginal taxes are calculated as the sum of additional taxes ($54 as federal income tax rises from $699 to $753) plus additional premiums divided by the additional income earned ($501).

Effect of Earning More: $32,499 → $33,000

 

Premium Payments

(Insurance “Taxes”)

Additional Federal Income Tax

Change in all “Taxes” Divided by Change in Income

Percent Change in Marginal Tax

Get subsidized family coverage in an exchange

$1,143

$54

$1,197/$501

238%

Buy family coverage from employer, average subsidy

$4,316

$54

$4,370/$501

872%

Go bare, pay 2016 penalty (2.5 percent of income)

$825

$54

$879/$501

175%

Go bare, ignore penalty

0

$54

$54/$501

11%

If the family manages to increase its earnings by $17,501 to $50,000, roughly the U.S. median income, it will still be better off if its employer does not offer coverage, as it would be able to purchase a subsidized family exchange policy for about $1,000 less than if its employer offered coverage at average subsidy rates.

But a family that goes “bare,” ignoring the penalty/tax, would enjoy an income increase of $16,588 net of federal taxes. It would be able to buy a lot of routine medical care for the $3,385 that Kaiser says it would have to pay for a subsidized exchange policy, and it would still be able to sign up for coverage when it wants other people to bear its medical costs.

There are worse things than not having health insurance. One of them is enduring the high taxes and arbitrary, unfair, treatment meted out by comprehensive health reform. Apparently the reason why we had to pass the bill in order to find out what was in it is that had the proposed law been exposed to the normal deliberative process, no decent person would have voted to expose families to this kind of treatment.

Comments (23)

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  1. Stich says:

    “many workers will soon discover that when they earn more money, they end up with less take-home pay.”

    - Taxes are the mechanism by which the government will continue to expand its power over the country.

  2. Ken says:

    Good post, Linda.

  3. Buster says:

    You can talk about gouging the rich as political rhetoric. But if you really want to raise revenue, taxes have to fall on the Middle Class. That’s where there are sufficient numbers of people.

  4. Al Baun says:

    “But a family that goes “bare,” ignoring the penalty/tax, would enjoy an income increase of $16,588 net of federal taxes.”

    I suppose not paying one’s speeding tickets, income taxes, power bills, or car insurance would also increase one’s spendable income … for a time.

    Coaxing people to ignore the law and ignore penalties associated with those actions may have more of a consequence, for those that listen, than ‘enjoying an income increase’.

    Universal participation in the U.S. health care system is sound and will shift some costs away from the Federal Government (as demanded by the radical right). The decisions on how to best participate in the system must be left to the individuals and their employers. Advising people to ignore the law is both selfish and irresponsible.

  5. James R Chaillet, Jr. ,MD says:

    While Dr. Goodman is correct in his analysis, I have been suggesting to patients that: if they can afford to and are eligible, to get insurance through the exchanges instead of Medicaid. My reasoning from experience is that access to care, particularly, specialty care, is much better with commercial insurance than with Medicaid or , interestingly, no insurance. I have had patients who have tried to go to a primary care physician and be willing to pay cash and have been turned down. Apparently, at least in the Cincinnati market, some practices (most of which are now hospital owned) are not set up to easily take cash or credit card.

    I find it interesting being old enough to know that primary care physicians were paid with cash or check. And they made a good living.

  6. Skyler says:

    Hurting the middle class is never good policy. Hurt the biggest segment of a population and eventually things will go downhill.

  7. Ron says:

    “But a family that goes “bare,” ignoring the penalty/tax, would enjoy an income increase of $16,588 net of federal taxes. It would be able to buy a lot of routine medical care for the $3,385 that Kaiser says it would have to pay for a subsidized exchange policy, and it would still be able to sign up for coverage when it wants other people to bear its medical costs.”

    I can already envision people doing this and I’m not sure how long this country will be able to sustain welfare programs that enable some to take advantage of the system.

  8. Greg Scandlen says:

    Hal Baun –

    I don’t think anyone is advocating ignoring the law. Quite the opposite — we think they should pay close attention to the law and do what is in the best interests of their family. I guess your advice is to do what is NOT in the best interests of their own family.

  9. Gabriel Odom says:

    This is all the more reason for a flat tax. Flat taxes have flat marginal effective tax rates.

  10. Raiden says:

    “Many workers will soon discover that when they earn more money, they end up with less take-home pay. Others will discover that they are worse off if their employer offers them “affordable coverage” than if there is no health insurance offer.” That is such a powerful opening for this article. Great post!

  11. Marcus Weyland says:

    I’m very happy to still be single. It is getting so damned expensive to start a family these days.

  12. Al Baun says:

    @ Greg Scandlen
    “I don’t think anyone is advocating ignoring the law. Quite the opposite”

    Mr. Scandlen, by documenting the benefits of ‘Going Bare/ Ignoring Penalty’, the good doctor is in fact illuminating the virtues of violating the law through non-compliance.

    “— we think they should pay close attention to the law and do what is in the best interests of their family.”

    Suggesting Going Bare (not purchasing insurance) and ignoring associated penalty is most assuredly NOT in ones family’s best interest. Other than that option, through both Obamacare and existing insurance programs, the decision for the best path is left to the employee or the employee and his/her employer … or do you propose eliminating the average Joe’s new-found ability to join an exchange and get group discounts???

  13. Al says:

    @Al Baun:

    Smile when you see a federal tax that is toothless.

  14. Don Levit says:

    This portion of the law makes little sense. Why base the affordability of coverage solely on the cost of employee-only coverage?
    THE ACA ALSO REQUIRES DEPENDENTS TO BE OFFERED COVERAGE, BUT CURIOUSLY, SPECIFICALLY EXCLUDES spouses from dependent coverage.
    The cost for children should not be too much, so many employees may still be in “affordability territory.” .
    What the law does, do, in a somewhat positive fashion, is make spouses eligible for Exchange coverage. I expect spousal only policies to blossom.
    Don Levit

  15. Tony Nefouse says:

    Interesting article. Yes, there is no incentive to get off of Medicaid but this is nothing new. The Exchange should be effective with the families earning 150%-300% of FPL. http://www.indianahealthinsurance.com http://www.indianahealthinsuranceexchange.com

  16. Bob Hertz says:

    Don are you sure about that?

    Paragraph #4 in this fine essay says that family members will NOT be eligible for the exchange if they could have enrolled in an employer plan that was deemed affordable.

    The ACA funding assumptions were that the exchanges would only cover 15-20 million persons at most, with the employer market staying static; and also, that large employers who are stingy about benefits would be paying a lot of taxes at $2000 or $3000 per un-covered employee.

    The loopholes and other defects of the law were widely predicted about 3 months after the law passed, but Congress and Obama were ‘exhausted’ on the subject.
    So we have the coming chaos.

  17. Don Levit says:

    Bob:
    From a paper of the Department of the Treasury
    26 CFR Parts 1, 54, and 301
    REG-138006-12
    RIN 1545-BL33
    Shared Responsibility for Employers Regarding Health Coverage
    http://www.irs.gov/pub/newsroom/reg-138006-12.pdf
    Page 57 “Applying these principles to the words’employees and their dependents,’ the language cannot be construed to mean only employees. To accept the commenters’ argument that the statute requires an offer of coverage only to full-time employees would require ignoring the words ‘and their dependents’in their entirety.
    Accordingly, the proposed regulations provide that the words’and their dependents’ in section 4980H refer to an offer of coverage to dependents.”
    Pages 57-58 “The proposed regulations define an employee’s dependents as an employee’s child under age 26. The term dependents does not include any one other than children, including an employee’s spouse. Thus, an offer of coverage to an employee’s spouse is not required because section 4980H refers only to dependents (and not spouses). This definition of dependents applires only for section 4980H.”
    Don Levit

  18. Bob Hertz says:

    Don, thanks but I do not think you answered my question.

    The article that opened this blog stated that if an employee has affordable coverage at work, based on his premium plus the child premium, then his spouse could NOT go to the exchange for a subsidy.

    This would be true even if the spouse’s coverage would cost $5000 a year if bought through the employer, versus a net cost of about $1500 a year after subsidies if the family had a modest income.

    The law that you quoted did not refute the assertion above. But your comment suggested that the spouse COULD go to the exchange.

    This is not just an academic issue. It applies to my own extended family. Please clarify.

    bob

  19. Don Levit says:

    Bob:
    I have nothing in the documents I have accumulated which mentions that the spouse would be ineligible for subsidies if the coverage was affordable for the employee AND the children. In fact, affordability for children is expressly deleted from the excerpts and links I have accumulated. The only relevance for affordability is in reference to the employee only.
    Don Levit

  20. swampwiz says:

    I say that we should implement confiscatory taxes on the wealthy to fund Obamacare.

  21. KLO says:

    Bob,

    If an employer does not offer coverage to an employee’s spouse, the employee’s spouse may go to an Exchange and receive a subsidy. The firewall regulation only prevents spouses who have an offer of affordable employer-sponsored coverage from receiving a credit. “Affordable” here is measured by the cost of self-only coverage for the employee.

    Linda,

    Your analysis is incorrect. The amount of the premium tax credit is based on the cost of the second lowest cost silver plan. If the family with $33,000 of household income were to go to the exchange and buy the lowest cost bronze plan, Kaiser says their annual premiums would be $0. Thus, they would be no worse off than the family with less income on Medicaid.

  22. Jimbino says:

    Even worse happens to the family who spends six months overseas. They will be liable to pay taxes on all their income and to carry Obamacare or pay a fine, but will not find any local provider who can treat them under Obamacare. They will have to pay both Obamacare premiums and the entire costs of their own care!

  23. Linda Gorman says:

    @KLO–Yes, the Kaiser calculator is oriented towards the silver plan. That is because ObamaCare subsidies are keyed to the silver plan. However, the Kaiser calculator that you used (which is different than the one referenced in the post) does NOT say that the bronze plan cost would be zero. It merely says that the family “might” pay $0 for the bronze plan.

    Neither Kaiser nor anyone else knows if this is the case because the plan costs are currently unknown. That is why this analysis used survey based average employer subsidy to estimate the numbers for family coverage. At least we know the survey numbers.

    Bottom line is that the statute says that this family is now required to pay up to 3.31 percent of its income on health insurance premiums.

    Finally, keep in mind that the lower bronze premium isn’t free. It creates higher out-of-pocket costs and offers less stop-loss protection.