The Obamacare Cliff

The Cliff  - by CapCat

You've heard of the Fiscal Cliff, but what's the Obamacare Cliff?

2014 Note: The numbers below were done in 2012 using the old Berkley and Kaiser calculators. These calculators were updated in late 2013. New numbers will be available soon, but the Cliff still exists, just at different levels.

The 'Obamacare Cliff' makes you ineligible for government subsidies for your health insurance premiums. If your income is greater than the 'Cliff' amount, you will not get any government help in paying your insurance premiums under Obamacare.

The 'Cliff' occurs at the 400% Federal Poverty Level (FPL) income which makes a person eligible (at 400%), or ineligible (at 401% or above), for a government insurance premium subsidy. This is written into the Patient Protection and Affordable Care Act (ACA) , known more popularly as 'Obamacare'. The 2012 400% FPL limit is shown here for different family sizes.

Family Size 400% FPL
1 \$44,680
2 \$60,520
3 \$76,360
4 \$92,200
5 \$108,040

It works like this: Take a single individual who's income is \$44,680. This is exactly 400% of the FPL, and the government will pay for any insurance premium over 9.5% of their income. For example, say the yearly insurance premium for a single person age 55 is \$6,828 (this is an estimate from the Congressional Budget Office). The person pays a premium amount equal to 9.5% of their income. This 9.5% is equal to \$4245.  The government then pays the rest of the premium as a subsidy which is given as a tax credit. In this case the subsidy is \$2583 (\$6,828 - \$4245 = \$2583). This is paid directly to the insurance company. However, if the person's income is \$44,681, or \$1 over the 400% point, the government pays \$0, the person pays all \$6,828! This is the Obamacare Cliff!

Here's what the Cliff looks like for different ages and family sizes. The data is computed using the Berkeley Calculator developed by the UC Berkeley Labor Center. The calculator estimates how much eligible individuals and families will spend on premiums under Obamacare. The table shows the government subsidies for family income of exactly 400% FPL, then \$1 over the 400% FPL level.

Age 35-44 The Cliff
Family Size Income Subsidy Income Subsidy
1 \$44,680 \$300 \$44,681 \$0
2 \$60,520 \$6,588 \$60,521 \$0
3 \$76,360 \$5,088 \$76,361 \$0
4 \$92,200 \$3,576 \$92,201 \$0
5 \$108,040 \$2,076 \$108,041 \$0

Age 45-54 The Cliff
Family Size Income Subsidy Income Subsidy
1 \$44,680 \$1,440 \$44,681 \$0
2 \$60,520 \$9,672 \$60,521 \$0
3 \$76,360 \$8,172 \$76,361 \$0
4 \$92,200 \$6,660 \$92,201 \$0
5 \$108,040 \$5,160 \$108,041 \$0

Age 55-64 The Cliff
Family Size Income Subsidy Income Subsidy
1 \$44,680 \$2,580 \$44,681 \$0
2 \$60,520 \$12,756 \$60,521 \$0
3 \$76,360 \$11,256 \$76,361 \$0
4 \$92,200 \$9,744 \$92,201 \$0
5 \$108,040 \$8,244 \$108,041 \$0

The Tax Code for the Patient Protection and Affordable Care Act (ACA)

Here's the situation. It's 2013, after October 1st, and Joe D, 59 yrs old, has a wife and two children living with him (the kids never moved out). None of them have insurance. Their total income is estimated to be about \$85,000 dollars in 2013 and is not expected to change in 2014, so they're eligible for insurance subsidies under Obamacare since their income is at 363% of the FPL, below the 400% cutoff point.

I'll use another insurance calculator for this example, the Kaiser calculator, which uses premium estimates in 2014 dollars. According to this calculator, a family of four health policy costs \$23,047 in 2014 dollars. The good news is that Joe is eligible for a tax credit of \$14,972, payable right to the insurance company on a monthly basis, so the insurance costs Joe \$8,075, or \$673/month. Not cheap, but they're glad to have the insurance, and they'll avoid the ACA tax penalty.

OK, it's now March, 2015 and Joe is collecting his tax receipts. He did well this year, he got a raise, and his wife found a decent part-time job. So after all the W2's, etc., came in, his income added up to be \$95,000. But this is not good as far as Joe's health insurance goes, because his income turns out to be at 406% of the poverty level, and he's not eligible for government tax credits! Joe now owes the government an additional tax of \$14,972 for the subsidy payments made to the insurance company on his behalf!

Joe fell off the Obamacare Cliff!!

Here's a link to the IRS Final regulations for the Health Insurance Premium Tax Credit published in May, 2012. Here's an example which shows how 'D' fell off the Cliff.

Page 19 of the PDF document
Example 5. Repayment limitation does not apply.

"(i) Taxpayer D is single and has no dependents. The Exchange for D’s rating area approves advance credit payments for D based on 2014 household income of \$39,095 (350 percent of the Federal poverty line for a family of one, applicable percentage 9.5). D enrolls in a qualified health plan. The annual premium for the applicable benchmark plan is \$5,200. D’s advance credit payments are \$1,486, computed as follows: benchmark plan premium of \$5,200 less contribution amount of \$3,714 (projected household income of \$39,095 × .095) = \$1,486.

(ii) D’s actual household income for 2014 is \$44,903, which is 402 percent of the Federal poverty line for a family of one. D is not an applicable taxpayer and may not claim a premium tax credit. Additionally, the repayment limitation of paragraph (a)(3) of this section does not apply. Consequently, D has excess advance payments of \$1,486 (the total amount of the advance credit payments in 2014). Under paragraph (a)(1) of this section, D’s tax liability for 2014 is increased by \$1,486."

D's case is not as bad as Joe's, he only owed \$1,486 against Joe's \$14,972. Joe fell 10 times as far off the Cliff. Joe signed up for Obamacare, but it ended up costing him \$15,000! The IRS should have used Joe's case to get people's attention!

Do you think something's wrong with this? Just \$1 over the 400% poverty line can cause Joe to lose \$15,000?? There's got to be some method to convert the Cliff to a gradual slope. Tell me if I'm wrong!

Another point in this discussion is..where is the Affordable Health Insurance for those making more than the 400% FPL point? Here's the insurance premium rates in 2014 dollars using the Kaiser calculator.

 Kaiser Calc 2014 Dollars Age 35-44 Age 45-54 Age 55-64 Subsidy for Family Size Income Avg Premium Avg Premium Avg Premium All Ages 1 >\$46,100 \$4,647 \$6,889 \$9,334 \$0 4 >\$93,700 \$12,410 \$16,686 \$23,580 \$0

- This is supposed to be the Affordable Care Act, where's the Affordable part? Can a 60 yr old with a family of four afford an insurance premium of \$24,000, or 25% of his income? What about a single 50 yr old paying \$7,000 or 15% of his income? These are not exactly 'Affordable' rates. Where's the 9.5% premium limit for these people? Where's the affordable insurance for the middle class? This insurance structure, with the Cliff cutoff, is totally unfair.

- The Cliff is also going to hit potential early retirees who have been tied to their jobs because of health insurance, and have been waiting for Obamacare for insurance coverage help. A lot of them are going to be over the Cliff amount and won't be eligible for any subsidy. In addition, if you're an early retiree close to the Cliff amount, you'll have to be very careful to control your income amount so you don't fall over.

- What about small business owners with less than 50 employees who are thinking of dropping their health insurance for their workers? They better be very careful with this, they may have an employee revolt when the cost of insurance coverage and the Obamacare Cliff is exposed!

Agree or disagree? If you have any comments, please mail them to capcat@obamacarecliff.com. I'll post relevant info as it comes in.

Here's some charts showing the Cliff for both the Kaiser (2014 dollars) and Berkeley calculators (2012 dollars). The insurance premiums are somewhat different, but the general 'Cliff' results are the same.

Also, see the Fix the Cliff page to look at some solutions to the 'Cliff'.

The 'Obamacare Cliff' can be fixed, but the people in Washington have to know that the people are not happy with the way it is now. Contact the President and your Congressional Representatives!