How much money will you make next year?
Yeah, I wouldn’t know the answer to that, either.
Projecting your income for the coming year has become a confounding but critical exercise in determining your eligibility for tax credits from Covered California, the state’s health insurance exchange. It’s doubly hard for self-employed individuals and freelancers whose incomes fluctuate not only from year to year, but week to week.
If you get your estimate wrong, Covered California asks you to report income changes within 30 days because that could affect the amount of tax credits you are entitled to receive.
Good luck with that.
Question: I’m a freelancer, so my income varies. Last year was a bad year financially, so when I applied for health insurance I qualified for significant tax credits. I’m now doing better, so I thought I was doing the right thing by updating my income on the Covered California website with the help of a customer service rep. ... I found out that Covered California instead told Anthem Blue Cross to CANCEL my current coverage when my income was updated. Do you have any advice for me?
Answer: Maryann Hammers, 59, of Westlake Village, is not alone. I have heard from several other Covered California customers and the insurance agents who work with them who have struggled with plan cancellations after reporting income changes.
It took Hammers more than three months to get insured again and sort the matter out. All of this shortly after she underwent surgery and chemotherapy.
“One thing you don’t want to have when you’re recovering from cancer is stress,” she says. “I would say this has caused me more stress than just about anything else, trying to make sure I had insurance when I know I’d done everything right and honestly.”
Theoretically, it makes sense to report income changes. The tax credits you receive are based on your income. The more money you make — up to 400% of the federal poverty level — the less tax credits you receive, and the higher your monthly premium.
If your actual income varies from your estimate, either you’ll owe, or be owed, money at tax time. (There is a maximum amount you’d have to pay back, which varies with your income.)
“If you don’t report a change, you may miss out on saving money and obtaining better benefits,” says James Scullary of Covered California. “Or you may end up paying more in taxes than you expected.”
You’d think you could call Covered California or go to its website, report the income change and have your tax credits and premiums updated and applied to your current plan.
But when someone reports an income change, “the person is terminated from the current health plan they’re in and they’re re-enrolled in the same health plan with the new income information,” says Jen Flory, senior attorney for the Western Center on Law & Poverty.
Why does this happen? Because Covered California’s nearly half-a-billion-dollar computer system apparently can’t handle that kind of complexity.
“They didn’t build the system in a way that allowed for such changes,” Flory says.
Covered California says it “can, and regularly does, complete income changes for customers, while keeping the consumers in their same plan.”
That certainly wasn’t Hammers’ experience, nor that of other consumers who contacted me with similar problems.
“When she (the Covered California phone rep) told me they were going to cancel my policy and put me in a new one, I was horrified,” she recalls. “She assured me there would be no lapse in coverage.”
I can’t advise you not to report an income change because state and federal law requires it, even though there are no penalties for failing to do so. But I do have a few practical suggestions:
Most people receive their tax credits in advance, which the federal government pays directly to health insurers. But if your income fluctuates dramatically, consider taking just some — or even none — of your tax credits up front.
If you don’t take any tax credits up front, you’d have to pay the full cost of your premium each month, which I realize is not realistic for many people. But if you can afford it, you wouldn’t have to report income changes. And your annual income tax bill would be reduced by the credit you’re due (assuming your income actually ends up below 400% of the federal poverty level).
If you’re worried that you may make more money than you projected but aren’t sure whether to report an income change, consider increasing the amount of taxes withheld from your paycheck, suggests Lindsey Buchholz, a principal tax analyst for the Tax Institute at H&R Block.
Alternately, if you are self-employed, you could increase your quarterly estimated tax payments, she says.
If you do report a change, get your doctor visits and medical procedures out of the way first in case there’s a lapse in coverage, Flory suggests.
And keep your fingers crossed. “I can see this situation happening again in 2015 and I’m very afraid,” Hammers says. “I do not want to go through that again.”