Obama’s Health Plan: How will it affect your credit?

Individuals and small business owners should be aware of the possible credit score implications in Obama’s Health Plan (the ‘Plan’).

This is the health insurance reform bill passed by both the U.S. Senate and House of Representatives combined with the House passed reconciliation bill, known as H.R. 4872.  We are assuming the Senate will pass the reconciliation bill as is and President Obama signs it.

We will not be discussing the merits of the Plan, just the possible effect on your credit score.

Your credit score will be safe and unaffected as long as you or your employer is paying for your minimum health insurance as required by the Plan.  If you are self-employed and paying the minimum insurance required, your credit score will be unchanged.  Even if you are unemployed, but have the minimum insurance required, your score will be unchanged as well.

However, unless you are fully compliant with the Plan your credit score may be negatively affected.  Being compliant with the Plan will not show on your credit report, nor will it increase your credit score.

According to the Plan, individuals are personally subject to a civil penalty for non-compliance.  Meaning you must buy, your employer must buy for you, or you must get a government subsidy to get the minimum required health insurance.  In many cases, the subsidy will be partial.

A civil penalty for non-compliance is enforceable, collectible and reported to your credit report.  Just like any other collection method for civil penalties you may have liens and seizures of your wages, bank account, tax return refund, or other asset including your home and car.

The process for the federal government to grant you a subsidy for minimum required health insurance could actually cause your credit score a problem.  If you quit your job or were fired for cause, you may be denied unemployment benefits (as many States allow) along with your health insurance subsidy.  Being denied a subsidy will not relieve your obligation to have minimum individual health insurance.  Nor will it waive a civil penalty.  Imagine if your former boss has a grudge against you.  False reporting as to why an employee quits or was fired happens all the time.

There are no government subsidies for small businesses.  If a small business fails to comply with the Plan and is the subject to a civil penalty, the owners or officer’s personal credit scores may suffer.  It will work the same way it does for unpaid payroll taxes and even if there is a payment plan.

Any civil penalty left unpaid for a short period of time will appear on your personal credit report.  It will negatively affect your credit score, and in some cases dramatically.  You will see it as a collection account or lien by the enforcement arm of the Plan.

Guess who is the enforcer of the Plan?  The Internal Revenue Service ( ‘I.R.S.’ ).  In fact, the Plan calls for hiring 16,000 new I.R.S. agents to enforce the Plan.  Massive new computers will be installed to govern the Plan.  These computers will crunch compliance from every citizen, apply civil penalties,  and look for ways to collect and post negative ratings, all of which affect your credit score.

What about a lien on your credit report meant for another person?  What about errors?  What about updating your credit report to reflect paying the civil penalty?  Unfortunately, it appears this will be handled the same old way: where very little gets fixed.

Right now the IRS ignores many requests to remove an improper lien, fix an error or apply an update to properly report one’s credit.  It could be very difficult to get these credit report problems resolved.  Your credit score could be affected for a long time and possibly at no fault of your own.

Doing an analysis of the Obama Health Plan is difficult.  It is massive.  The Health and Human Services Department of the Federal Government will have to write the final rules.

Given that, we are pretty confident the Plan’s impact on credit scores can happen no other way than how we describe it here.

Our recommendation is to make every attempt to stay compliant with the Plan.  Some may not like it,  having your credit score go down will be likely more unpleasant than complying with it.

In the future, use SmartCredit.com and it’s action buttons to communicate directly with the I.R.S. to resolve problems that may affect your credit score as this article points out.

David B. Coulter – founder and CEO of Smart Credit