As we move into fall, it’s time for the 10.6 million individuals with “Obamacare” insurance to start thinking about 2019 open enrollment. The Centers for Medicare and Medicaid Services (CMS) released three reports in July illuminating aspects of the Health Insurance exchanges (or Marketplaces) created by the Affordable Care Act (ACA). These reports are described in detail by Katie Keith on the Health Affairs blog. Unsurprisingly, most people with 2018 Marketplace plans are receiving advance premium tax credits (APTC) to subsidize their premiums (87%, up slightly from 84% in 2017). CMS points out that premiums in the exchanges are rising and may be pricing out consumers who do not qualify for APTC.
The Premium Tax Credit can make health insurance affordable for people without other options, but its structure of advance estimated payments combined with a sheer eligibility cliff when the advance payments are reconciled inevitably leads to harsh outcomes in some cases. (A few were discussed on this blog here.) As APTC absorbs the cost of premium increases, the stakes will only become higher for taxpayers. This blog post gives a brief background on APTC reconciliation in the context of the Tax Court’s deficiency jurisdiction, then highlights one circumstance in which taxpayers should be able to avoid APTC liability: fraudulent enrollment.
Reconciliation of Advance Premium Tax Credits in the U.S. Tax Court
The Premium Tax Credit is payable in advance through an ACA exchange, subject to reconciliation on each year’s tax return. See 42 U.S.C. § 18082; section 36B(f). (“Marketplace” is the federal government’s preferred term in public communications; however, this blog will follow the statute and regulations in referring to exchanges.) Under section 36B(f), excess APTC awarded by an exchange is considered an income tax liability, subject to certain caps. If a household’s modified adjusted gross income reported on the tax return is above 400% of the federal poverty guideline, the taxpayers must repay all APTC received by themselves or their tax dependents. This eligibility cliff leads to harsh results as many including the National Taxpayer Advocate and the Tax Court have recognized.
As an income tax liability, a taxpayer’s excess APTC may be redetermined by the Tax Court if the IRS issues a Statutory Notice of Deficiency and the taxpayer timely appeals. See sections 6211 through 6216. However, Tax Court review may not get the taxpayer the result they desire. Some of the most frustrating APTC cases for taxpayers involve government or third-party culpability. For example, in McGuire v. Comm’r, 149 T.C. 9 (2017), the exchange failed to process an income change that the taxpayers duly reported. It erroneously continued APTC payments even though the taxpayers’ income was too high. The Tax Court expressed sympathy but found there was nothing it could do to help the taxpayers avoid repayment, because they had received APTC to which they were not entitled. Likewise, in Gibson v. Comm’r, T.C. Memo. 2017-187, the taxpayers’ young adult dependent had signed up for APTC without the taxpayers’ knowledge. Since they did not disclaim their son as a dependent, the taxpayers were stuck with the repayment obligation.
The problem for taxpayers hoping to avoid strict reconciliation is that section 36B simply does not have a mechanism to consider equity in the reconciliation of APTC. The U.S. Tax Court was created by Congress, not the U.S. Constitution, and as an “Article I” court its powers are limited to those granted by Congress. See Rawls Trading, L.P. et al. v. Comm’r, 138 T.C. 271, 292; section 7442. In a nonprecedential case involving tax treatment of a retirement annuity, Judge Armen provided this explanation with helpful citations:
Petitioners should understand that the Tax Court is a court of limited jurisdiction and that we are not at liberty to make decisions based solely in equity. See Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Woods v. Commissioner, 92 T.C. 776, 784-787 (1989); Estate of Rosenberg v. Commissioner, 73 T.C. 1014, 1017-1018 (1980); Hays Corp. v. Commissioner, 40 T.C. 436, 442-443 (1963), affd. 331 F.2d 422 (7th Cir. 1964) In other words, absent some constitutional defect, we are constrained to apply the law as written, see Estate of Cowser v. Commissioner, 736 F.2d 1168, 1171-1174 (7th Cir. 1984), affg. 80 T.C. 783 (1983), and we may not rewrite the law because we may deem its “‘effects susceptible of improvement'”, see Commissioner v. Lundy, 516 U.S. 235, 252 (1996) (quoting Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)). Accordingly, petitioners’ appeal must, in this instance, be addressed to their elected representatives. “The proper place for a consideration of petitioner’s complaint is in the halls of Congress, not here.” Hays Corp. v. Commissioner, supra at 443.
Zedaker v. Comm’r, T.C. Summary Opinion 2011-64. Given the statutory language and the Tax Court’s limited jurisdiction, taxpayers must generally seek remedies elsewhere for inequitable APTC debts.
Addressing erroneous APTC: the exchange regulations
A taxpayer who disputes the enrollment or APTC information provided to the IRS by the exchange should try to resolve the dispute with the exchange. It is always a good idea to try to address disputes through the exchange, even if you have a plausible argument in Tax Court. (There have been instances in which the exchange’s Form 1095-A did not match the insurance company records; it might be possible to prevail in Tax Court in such a case.) Exchanges do not like to make retroactive changes, however. After all, the federal government is relying on private insurance companies to offer insurance on the exchanges, and those companies can lose money from retroactive enrollment changes. The exchanges have tried to balance the financial needs of insurance companies with the reality that Form 1095-A can bring genuine errors and other compelling situations to light.
In narrow circumstances, therefore, third-party misdeeds and exchange errors can entitle a taxpayer to nullify their exchange enrollment and avoid any APTC repayment obligation. Generally, the taxpayer must pursue this through the exchange or through their purported insurance company. Two recent practitioner inquiries reminded me that this is very much a live issue that needs to be identified as soon as possible when a taxpayer seeks assistance. Time is of the essence; the exchange regulations guarantee taxpayers only a short window to request retroactive changes.
The CMS and Health and Human Services (HHS) exchange regulations at 45 C.F.R. § 155.430(b)(1)(iv) allow enrollees to retroactively cancel coverage when
(A) The enrollee demonstrates to the Exchange that he or she attempted to terminate his or her coverage or enrollment in a QHP and experienced a technical error that did not allow the enrollee to terminate his or her coverage or enrollment through the Exchange, and requests retroactive termination within 60 days after he or she discovered the technical error.
(B) The enrollee demonstrates to the Exchange that his or her enrollment in a QHP through the Exchange was unintentional, inadvertent, or erroneous and was the result of the error or misconduct of an officer, employee, or agent of the Exchange or HHS, its instrumentalities, or a non-Exchange entity providing enrollment assistance or conducting enrollment activities. Such enrollee must request cancellation within 60 days of discovering the unintentional, inadvertent, or erroneous enrollment. For purposes of this paragraph (b)(1)(iv)(B), misconduct includes the failure to comply with applicable standards under this part, part 156 of this subchapter, or other applicable Federal or State requirements as determined by the Exchange.
(C) The enrollee demonstrates to the Exchange that he or she was enrolled in a QHP without his or her knowledge or consent by any third party, including third parties who have no connection with the Exchange, and requests cancellation within 60 days of discovering of the enrollment.
This right to retroactive cancelation was added to the regulations in the Notice of Benefit and Payment Parameters for 2017, effective May 9, 2016. Note that there is no provision for erroneous APTC: if a taxpayer knowingly enrolled in coverage but received too much APTC, the exchange regulations do not offer a remedy.
Insurance broker fraud is of particular concern and is a major reason that exchanges grant retroactive cancellations. One of the earliest reported examples came out of North Carolina in 2015. An insurance broker collected names and SSNs at homeless shelters, and ultimately enrolled 600 people. This earned him $9,000 per month in commissions, until the insurance company terminated the relationship. Some of the people enrolled were told they were getting “free insurance”, but others said they did not know they were signing up for insurance at all. The applications conveniently inflated the taxpayers’ income to exactly 100% of the federal poverty level, where they would not owe a monthly premium. While the broker collected his commissions, the enrollees were stuck with insurance that they could not use (for lack of funds to meet the deductible or cost-sharing) or did not know about. Just having “free” insurance caused hardships for those who relied on programs for the uninsured to receive prescriptions and medical care.
Reports of broker fraud continued in 2016 and 2017, leading CMS to hold a webinar and issue specific instructions to issuers on July 31, 2017, allowing enrollees meeting certain criteria to fast-track their cancellations. In the webinar slide deck, CMS notes:
Many of the complainants only learned that they had been enrolled in QHPs when notified by the IRS that their tax refunds would not be processed until they submitted Form 8962 to reconcile their Premium Tax Credit. …Because contact information for consumers may not be correct, the 1095-As did not reach many of the enrollees.
Also, many of the complaining consumers had other health insurance coverage.
CMS also issued Examples for Issuers of QHPs in the Exchanges of Elements Demonstrating an Appropriate Rescission, which allows insurance companies to rescind coverage if they suspect fraud and the enrollee either confirms it or cannot be contacted. Finally, CMS’s instructions for broker fraud cases were reiterated on November 20, 2017. Fast-track cancelation is authorized for cases meeting five criteria:
1. The consumer stated directly to CMS through the FFE Call Center that he/she did not enroll in the Exchange, did not give authorization or consent to an enrollment, and did not want the coverage;
2. The enrollment was completed by an agent or broker or an individual acting under the agent or broker’s direction or control;
3. The consumer is receiving 100% APTC or, if not 100%, the portion of the premium that is the responsibility of the enrollee was not made in whole or in part resulting in the termination of the policy;
4. The issuer has had no contact from the enrollees such as calls to customer service, emails, letters or any other direct contact, with the exception of communications from the enrollee stating that they did not know about or consent to the enrollment;
5. No claims have been filed for any of the enrollees on each policy.
The regulation permitting cancelation can encompass a broader range of circumstances, but taxpayer representatives should check to see if their client meets the criteria for faster resolution of their dispute.
One note on timing. While the regulation grants a 60-day dispute window, I would encourage advocates to try for cancelation in compelling situations even if the taxpayer discovered the fraudulent enrollment over 60 days ago. The regulation sets minimum requirements for exchanges to allow cancelations; it does not prevent an exchange from allowing a longer window or from making exceptions to the time limit under a reasoned, consistently applied policy. An exchange’s approach to cases beyond the 60-day window may vary also depending on whether the insurance company consents to the cancelation.
If a taxpayer misses the 60-day dispute window, and the exchange refuses to cancel the coverage, is there any remedy in the Tax Court? As set out above, the taxpayer will likely not prevail by relying on equitable claims or principles. However, a legal argument based on analysis of the Code may have a chance of success. The case of Roberts v. Commissioner, 141 T.C. 569 (2013) (blogged by Scott Schumacher here) may provide some small hope by analogy. In his blog post, Scott explains the legal issue in Roberts:
Roberts owned several IRA accounts, and during the year at issue, someone withdrew substantial amounts from those accounts. Roberts said his now ex-wife forged his signature and took the money, while the ex-wife said that she had nothing to do with it. The IRS took the position that even if she took the money, Roberts as the owner of the retirement accounts, was still taxable on the withdrawals.
Thanks to the efforts of the University of Washington LITC, the taxpayer prevailed. Scott writes:
Judge Marvel found that Roberts’ wife had in fact withdrawn the funds from his IRA accounts. The Court went on to hold that because Roberts did not request, receive, or benefit from the IRA distributions, he was not a payee or distributee within the meaning of section 408(d)(1).
Could a similar legal argument be made in the case of fraudulent exchange enrollment? If a taxpayer had no idea they were signed up for insurance and they meet all five criteria set out by CMS for expedited cancelation, were there actually “advance payments to [the] taxpayer” made within the meaning of section 36B(f)(2)? This may be ultimately a losing argument, but it could be one worth trying. It seems wisest to continue advocacy with the exchange, issuer and CMS, even if the taxpayer is pursuing an administrative or Tax Court appeal.