Earlier this month, the Obama Administration—in a 600-plus page regulation—announced that for 2014, Obamacare insurance subsidies will essentially operate on the “honor system.” This will create incentives for fraud, as some applicants may report an income that is actually lower than their true income in order to qualify for the taxpayer-funded subsidy.

In most cases, the IRS will not attempt to verify an individual’s income when he or she is applying for subsidies. Supporters of the law claim that the changes will not encourage fraud, because “applicants who receive [subsidies] for which they are ineligible will have to pay them back when they file their taxes.” Unfortunately, that claim isn’t entirely accurate. Some individuals will only face a maximum $2,500 in repayment, while receiving far more in benefits.

Before explaining the loophole, some background about the subsidies. Obamacare provides exchange insurance subsidies for Americans who do not have access to “affordable” employer-sponsored health coverage. The subsidies are provided on a sliding scale based on income.

Americans with incomes between 138 percent and 400 percent of the federal poverty level (FPL)—between about $31,800 and $94,200 for a family of four—qualify for premium subsidies, and applicants with incomes under 250 percent of the FPL—about $59,000 for a family of four—will also receive additional subsidies to reduce or cover cost-sharing requirements (e.g., deductibles and co-payments).

Subsidies will be based on an applicant’s self-reported income at the time of application, meaning that subsidies for 2014 will be calculated based on income reported by applicants in fall 2013. However, the income reported on applications in fall 2013 could vary significantly from income reported on 2014 tax returns, filed with the IRS in spring 2015—either because of a change in life circumstances (e.g., divorce, birth, death, change in job, etc.), or because an individual misrepresented income on his application.

If an individual receives subsidies in error, he will have to pay the subsidies back—but there are limits on the amount individuals will have to repay. Those who should never have received an income-based subsidy—because their income exceeds 400 percent FPL—will have to repay the full amount of the subsidy they received. However, those with incomes under 400 percent FPL—who qualify for some level of subsidy, just not as much as they actually received—will only have to pay back up to $2,500 of the difference between the subsidies they actually received and the subsidies they should have received.

It’s this loophole that will encourage fraud—because individuals can gain more in benefits than they will have to repay, by understating their income. Take an example of an honest family of four—two adults, both aged 40, and two children—with income of $90,000 (just under 400 percent FPL). According to the Kaiser Family Foundation’s subsidy calculator, this family would receive a subsidy of $2,997 to help them pay for insurance. That insurance would carry with it maximum out-of-pocket expenses of $12,700, meaning that the family’s health care costs could not exceed $12,700 for the year.

Compare that scenario to what happens if the same family were to be dishonest and report income of only $35,000—or just above 138 percent FPL—on their application. According to the Kaiser calculator, the family would receive a subsidy of $10,175 to pay for insurance. That’s $7,178 in taxpayer-funded insurance subsidies over the $2,997 they should have received if they were honest.

In addition, the family would also qualify for reduced cost-sharing limits within their insurance plan—their out-of-pocket expenses could total no more than $4,500 per year, because additional federal subsidies would reduce their cost-sharing limits. That’s an additional $8,200 in cost-sharing assistance from federal taxpayers ($12,700 minus $4,500), depending on their annual medical expenses. Yet under current law, the family would only have to repay a maximum of $2,500 of these improperly obtained premium and cost-sharing subsidies—meaning they would benefit by thousands of dollars, and potentially more than $10,000, by mis-stating their income on their exchange application.

To sum up: Individuals with incomes below 400 percent FPL will not have to pay back the entire amount of any subsidies received improperly. In many of these cases, individuals will receive more in benefits than they will have to repay the federal government. Therefore, as long as they will qualify for some subsidy, dishonest individuals have incentive to fudge their income so they receive the maximum subsidy—in order to maximize the benefits they receive.

Supporters of the law claim this scenario will not happen, due to the penalties associated with misrepresenting information on application forms and tax documents. But with government auditors noting the exchanges have missed critical deadlines, and Obamacare anti-fraud investigations being cancelled, will the federal government really have the resources necessary to enforce the law, much less ensure taxpayer funds are not being abused?

These warped incentives, combined with massive bureaucracy where the right hand doesn’t know what the left hand is doing, are simply more reasons why Congress should refuse to spend a single dime funding Obamacare.

UPDATE: Americans in states that choose to expand Medicaid with incomes under 138 percent of poverty, and Americans in states that do not choose to expand Medicaid with incomes under 100 percent of poverty, will qualify for premium subsidies.