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

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.

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