Think your coverage is unaffordable? Watch out for this Obamacare pitfall

Americans don’t know much about their health benefits. That was made clear by a survey earlier this year in which half of Americans couldn't explain the difference between premiums, deductibles and co-pays.

But the Obamacare exchanges–assuming they actually start working soon–will require working Americans to grasp minute details of their employers’ health plans in order to avoid a nasty surprise from the Internal Revenue Service.

Obamacare, formally known as the Patient Protection and Affordable Care Act, requires all employers with 50 or more workers to provide adequate and affordable health insurance for their workers—or pay a fine.

The law also provides sizable tax subsidies to help individuals buy insurance on newly created online exchanges. But for workers, these tax subsidies are only available if their employer has failed to offer adequate and affordable health insurance.

How do workers know if they are eligible for a subsidy? Well, for 2014, they’re pretty much on their own. And if they make a mistake, it could cost them thousands of dollars.

Let me explain how:

The Affordable Care Act has very specific definitions for the terms “adequate” and “affordable.”

Adequate coverage means the employer offers at least one plan—regardless of whether an employee is in that plan or not—that has an actuarial value of 60 percent. In English, that means the health plan would pay for 60 percent of the medical bills that actuaries predict would be incurred in one year. The insured cutomers would be on the hook for the other 40 percent of the bills.

Affordable coverage means that an employer offers a health plan for single-only coverage that does not exceed 9.5 percent of a worker’s household income. Employers do not have to offer a family health plan that meets this standard.

Of course, there are immediate problems with these definitions.

First of all, employers have been given a one-year reprieve on these requirements, and so many have not hired actuaries to render a determination on whether or not their plans meet the 60 percent threshold. Even if they have, the IRS could ultimately determine otherwise.

Second, employers have no way of knowing what their workers’ household incomes are. That would require them to know not only the wages the employer pays, but also any other jobs or income the person has, as well as any income the worker’s spouse has. In short, an employer would have to have each of its worker’s individual income tax returns—which they don’t, and have no right to have.

So employers, fundamentally, cannot tell their workers if the company health plan is adequate and affordable or not.

Yet the Obamacare application form tells applicants to ask their employer for information on whether the company health plan meets Obamacare’s “minimum value standard” and whether the employer provides at least one plan that would be affordable to the employee.

The form also instructs applicants to ask their employer for the amount of premiums it requires employees to pay for the lowest-cost plan it offers for single (non-family) coverage that meets the minimum value standard.

Jessica Waltman, a D.C.-based lobbyist for the National Association of Health Underwriters, told me that most employers–the clients of her association's members–are simply saying, “We don’t know," when their workers ask these questions.

If that’s true, then it leaves quite a few workers on their own to determine whether or not they qualify for a tax subsidy. I’m a bit concerned that could lead some well-meaning folks to claim tax subsidies that they later have to pay back to the IRS.

Here’s how that could happen. If I try to sign up for coverage through Obamacare, and I don’t get the information I need from my employer, I could innocently conclude that my health coverage is, indeed, unaffordable.

I could make this mistake if I am enrolled in family coverage that costs more than 9.5 percent of my household income, but I fail to see that my employer offers single coverage that does fall under that threshold.

Or I could make that mistake if I conclude, correctly, that the type of plan I’m in—a PPO plan, for example—has a single-coverage option with premiums that are more than 9.5 percent of my income; but I forget that my company offers another kind of plan—a high-deductible health plan—that would be under the 9.5 percent income threshold.

If I claim a tax subsidy and go ahead and buy insurance on the Obamacare exchange from, say, Anthem Blue Cross and Blue Shield, the federal government will send thousands of dollars to Anthem to reduce my premiums on that insurance policy. I will never see the money.

But the IRS will, at some point, contact my employer to tell it that it owes a penalty because I received a tax credit in the exchange due to the company’s inadequate and unaffordable coverage.

At that point, my employer will likely do everything it can to show that, in fact, it did offer adequate and affordable coverage to me—I just didn’t enroll in the plan that met those standards.

And then the IRS, especially once it receives my 2014 tax return in 2015, can tell me that I underpaid my taxes because I incorrectly claimed a huge tax subsidy to which I had no right.

Who will this affect the most? Perhaps not people with the lowest incomes, who may not even be required to file income tax returns. But for households with two low-level incomes, this could bite.

For example, according to Anthem’s published rates, a family in Indianapolis made up of two 30-year-old adults, both non-smokers, with two kids, and with family income of $50,000, would receive a subsidy of $5,600. That’s a lot of money for a family of that means to give back.

I have no idea how common this will end up being. Let’s hope not very. And since the Obama administration has shown itself willing to delay enforcement of parts of the Affordable Care Act, perhaps it will excuse these mistakes during this first year.

Still, if I were trying to enroll in exchange coverage, I wouldn’t bet on such leniency. I’d be exceedingly careful to avoid this kind of mistake in the first place.