10:30 a.m.-11:15 p.m.

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1 Premium Tax Credit 10:30 a.m.-11:15 p.m. Presented by Tamara Borland Iowa Legal Aid Low Income Taxpayer Clinic Project Manager st Avenue, Ste. 10 Iowa City, Iowa Phone: Thursday, December 4, 2014

2 Affordable Care Act A review of Premium Tax Credits, Shared Responsibility Payments Tamara Borland Iowa Legal Aid 1700 S. 1st Avenue, Suite 10 Iowa City IA (319) ext tborland@iowalaw.org 1

3 I. New Premium Tax Credit (PTC)- 26 USC 36B A. Who is eligible? Households with Modified Adjusted Gross Income of up to 400% of Poverty who are not: 1. Eligible for affordable workplace coverage that provides minimum essential coverage and provides minimum value, or 2. Government coverage such as a) Medicaid or Iowa Health and Wellness b) CHIP/HAWK-I, c) Medicare, or d) Tricare 3. Immigrants without documentation or authorization a) Families with mixed immigration statuses may apply for insurance and receive the premium tax credit for family members who are legally present and eligible for insurance. b) The premium tax credit is based upon the eligible members of the household and proportionate share of income. 4. Incarcerated persons (after final disposition) 5. Married persons using Married Filing Separately status a) Exceptions See, Notice , I.R.B Temporary Regulation 1.36B-2T,2(a)-(b)1. b) A victim of domestic abuse who is separated at the time the return is filed and because of the domestic abuse is unable to file a joint return may use married filing separately status and claim the premium tax credit. Abuse includes physical and psychological abuse such as attempts to control, isolate, humiliate, and intimidate, or to undermine the victim s ability to reason independently. The IRS is supposed to consider all facts and circumstances in determining whether the individual is abused. c) Abandoned spouse is one who has used reasonable diligence to locate the other spouse and has been unable to do so at the time the tax return is filed. d) Relief is available for no more than three consecutive years. e) Taxpayers who qualify to use Head of Household filing status should use that status in lieu of Married Filing Separately. 2

4 B. How is Household Income Calculated? 1. Household =tax filer plus dependents 2. Household Income is Modified Adjusted Gross Income for taxpayer plus MAGI of a dependent(s), who has a filing obligation pursuant to IRC 1. a) NOTE: Filing obligation does not include tax dependents who file solely to get back withholdings or those that need to file to report and pay selfemployment tax but otherwise are under the filing threshold. 3. MAGI includes: a) US 1040 Line 37 plus b) Any Social Security not included on Line 20b c) Foreign Income d) Tax-Exempt Interest C. How Much is the Premium Tax Credit 1. The Marketplace identifies the second lowest cost Silver plan that will cover the entire household. We will call this the SLCSP. 2. A family is expected to pay a set amount in premiums based upon the family s percentage of poverty. This is called the expected contribution. 3. The Maximum Premium Tax Credit= SLCSP-Expected Contribution. 4. The family selects a Platinum, Gold, Silver or Bronze Plan. There are two possible outcomes: a) If the plan s total cost is less than the maximum premium tax credit, then the plan cost is the cap on the credit. b) If the plan cost is higher than the maximum premium tax credit, the maximum premium tax credit is the amount used. c) Example: (1) Family Robinson has an expected contribution of $3,000. (2) The Second Lowest Cost Silver Plan (SLCSP) is $5,500. (3) The maximum premium tax credit is $5,500-$3,000=$2,500. (4) The family chooses a Silver plan that costs $4,500. Their Premium Tax Credit is $2,500. The Robinson s actual out of pocket expense for premiums per month after the premium tax credit would be 4,500-2,500=$2,000/12 or $

5 (5) If the family chooses a Silver Plan that costs $6,000, the premium tax credit would still be $2,500, and the actual out of pocket monthly expense for premiums would be $6,000-2,500=$3,500/12 or $ (6) If the family chooses a Bronze Plan that costs $2,200, their premium tax credit is $2,200 and they would have no out of pocket expense for their insurance premiums, however, they would have higher deductibles and co-pays. (7) For people with income up to 250% of poverty who use medical services with some regularity a silver plan is probably the best bet as you pay less for out of pocket expenses than those who have income above 250% of poverty. This extra assistance is only available for silver level plans. (8) (9) If the SLCSP available on the marketplace that covers your household, costs less than your expected annual contribution then there is no premium tax credit available. (10) The SLCSP does not take into consideration whether members of the household are smokers. A smoker can pay a substantially higher premium and therefore insurance may be harder to afford for this population. D. Example 1. Debbie, Joe and Jeff a) Debbie and Joe are a married couple with one son. b) Debbie has Schedule C income of $34,000 c) Joe has Social Security Disability income of $11,500 d) The only adjustment to income is $2,400 in self-employment tax e) They have a son who is 21 years old and a junior in college as of January 1, f) Husband has Medicare. g) Wife has diabetes and has been unable to find insurance that would cover her pre-existing condition. NOTE: Insurance through employers or through the exchange must cover preexisting conditions. h) Son has no known health problems. 2. Calculating the Premium Tax Credit 4

6 3. Total Household Income is $43, MAGI includes Social Security Income 5. % of Poverty= 220% 6. Expected premium contribution: Approx. 7.0% or $3, Premium for Second Lowest Cost Plan for wife and child: Approx. $5, Total Premium Tax Credit: $2,945 E. Applying for the Advanced Premium Tax Credit 1. Taxpayers applying for insurance through the exchange will estimate income for Based upon this estimate, the exchange will calculate maximum allowable advance premium tax credit, if eligible 3. Taxpayer can take all of it, a portion or none in advance 4. Advance Premium Tax Credit is payable directly to the insurance company F. Avoiding repaying the APTC 1. Taxpayers need to update the exchange regarding: a) Changes in income b) Changes in household composition (1) Marriages, Divorces, (2) Deaths, Births and Adoptions 2. If taxpayer receives too much APTC, the taxpayer will have to repay at least a portion -26 CFR 1.36B Cap on repayment for taxpayers below 400% of poverty. a) Example: A couple filing jointly at 221% of poverty will be limited to a repayment of $1,500. II. Shared Responsibility Payments A. Play or Pay- 1. Individuals IRC 5000A and Regulations at 26 CFR A Employers- Shared Responsibility for Employers Regarding Health Coverage I.R.C. 4980H(a)and(b). (Regulations to be found at 26 C.F.R. pt. 54) 5

7 B. Imposition of the penalty 1. Individuals- January 1, 2014 a) For individuals that had a pending application before the exchange, who were not able to finalize coverage prior to the close of the open enrollment on March 31, 2014, the penalty will not be imposed for prior months that exceed the 2 month short coverage gap according to an FAQ released by HHS. See, October 28, 2013 Letter, CMS, Shared Responsibility Question and Answer. b) Paid with 2014 Tax Return in 2015 c) Determined on a month by month basis 2. Large Businesses a) 100 or more employees and 70% or more do not receive an offer of minimum essential coverage. Penalty assessable January 1, 2015 b) Between 50 and 99 employees and 95% or more do not receive an offer of coverage. Effective: January 1, 2016 unless the employer failed to maintain workforce, aggregate hours or level of present insurance coverage from February 9, 2014 through December 31, If the employer does not meet requirements for transitional relief, then the penalty is assessable to that employer starting January 1, C. Individual Shared Responsibility payment 1. A non-exempt individual must: a) Have minimum essential coverage or b) Pay an Individual Shared Responsibility payment (tax penalty) 2. Exempt Individuals A-3 a) Recognized member of certain religious sects b) Members of a health care sharing ministry meeting very specific criteria c) Members of certain recognized Indian Tribes d) Hardship e) Taxpayers who are incarcerated after final disposition f) Immigrants without authorization g) Individuals with no affordable coverage h) Household income below filing threshold 6

8 i) Short coverage gap* See, CMS letter of October 28, j) NOTE: Exempt individuals may still have a requirement to provide MEC or pay the individual shared responsibility payment for someone they can claim as a dependent who is considered non-exempt 3. Minimum Essential Coverage (MEC) -26 CFR A-2 a) Certain Government Sponsored Coverage b) Eligible Employer Sponsored Plan c) A plan purchased in the individual marketplace d) A grandfathered in Health Plan e) Coverage: One day of one month=coverage for the whole month 4. Non-Exempt Dependents Defined-26 CFR A-1(c)(2) a) Taxpayer is entitled to claim under IRC 152 (1) Qualifying Child or (2) Qualifying Relative b) Whether you claim the dependent or not 5. Monthly Penalty Amounts-26 CFR A-4 (a-c) a) 1/12 multiplied by the greater of (1) Flat Dollar amount or (2) Excess Income Amount b) Flat Dollar Amount is the lesser of (1) The sum of the applicable dollar amounts for all members of the individuals shared responsibility payment, or (2) 300 percent of the Applicable Dollar Amount c) Applicable Dollar Amount (1) 2014: $95 (2) 2015: $325 (3) 2016:$695 (4) After 2016 this amount is indexed. (5) Applicable Dollar Amounts for persons who have not attained 18 before the first day of the month is one-half the amount listed above. 7

9 d) Excess Income Amount (1) Household Income (which is the MAGI for the taxpayer and aggregated MAGI of the other household members who have a filing obligation) minus the Applicable Filing Threshold for the taxpayer multiplied by the Income Percentage (2) Income Percentage (a) Taxable years beginning 2013: 1% (b) 2014: 1% (c) 2015: 2 % (d) Years after 2015: 2.5% (e) NOTE: This penalty is a flat amount. The number of uncovered household members does not matter. 6. EXAMPLE: Non-Exempt Taxpayer and Dependent-Debbie, Joe and Jeff revisited. a) Joe is the only one in the family with health insurance during 2014 b) MAGI for purposes of the Individual Shared Responsibility Payment does not include Line 20b non-taxable social security but does include amounts normally excluded pursuant to 911 and tax exempt interest. c) Client s Individual Shared Responsibility Payment (1) Lesser of (a) The sum of monthly penalty amounts for each individual in the shared responsibility family; or (b) The sum of the monthly average bronze plan premiums for the shared responsibility family (2) Calculating Shared Responsibility Payment for Debbie and Jeff: (a) We Need to Know (i) (ii) (iii) (iv) (v) Monthly Penalty amount Number of months without MEC Client s Household Income Filing Threshold Age of Taxpayer and Dependents 8

10 (vi) Average National Bronze Premium for year. See Rev-Proc , 3.01 &.02 (a) $ 204 per individual per month (b) $1,020 per month for families with 5 or more shared responsibility payments. (3) Flat Dollar Amount (a) Debbie: 1/12 of $95 (Applicable Dollar amount See, 5.c.1) x12=$95 (b) Jeff: 1/12 of (1/2 of Applicable Dollar Amount) x 7(27.70) + 1/12 of 95x 5 (39.58) = $67.28 (c) $95+$67.28= (d) 300% of $95=$285 (e) is lesser of (c) and (d) (4) Excess Income (a) Anticipated Filing Threshold 2014 $20,300 (b) $31,600-$20,300= $11,300 X.01 or $ (c) 113/12=$9.41 x12=$113 (5) Average National Bronze Premium Calculation: 204 x 2 (Debbie and Jeff per month) x 12=$4,896 (6) The greater of (3) e and (4)c is compared with the Average National Bronze Premium of $4,896. d) The penalty is the lesser of the two or $ Collection-26 CFR A-5 (b)(2) a) Shared Responsibility payment can only be collected through certain administrative offsets and procedures. 26 CFR A-5 (b)(2) (1) No liens (2) No levies b) Advanced Premium Tax Credit Recapture is subject to all regular collection procedures. D. Employer Shared Responsibility Payment- I.R.C. 4980H(a) and (b). See, Shared Responsibility for Employers Regarding Health Coverage, 79 Fed. Reg. 8,544, 8,576 (Feb. 12, 2014). 9

11 1. Payments under 4980H(a) apply where: a) Employer has 50 or more full-time employees or 50 full-time equivalents, and b) Fails to offer at least 95% of full-time employees minimum essential coverage, and an employee (dependent) applies for and receives the premium tax credit 2. Payments under 4980H(b) a) Employer offered coverage is not affordable or does not offer minimum value; and b) One employee (dependent) obtains the premium tax credit through the health care exchange c) Affordable means that self-only premiums cannot cost more than 9.5% of employee s household income. d) Minimum Value means that the plan s share of costs is at least 60% of the total cost of covered benefits. e) Shared responsibility payment is calculated on a month by month basis f) Affordability Safe Harbors under 4980H(b) (1) W-2 Safe Harbor is based upon individual W-2 wages and can be used where the employer requires a consistent contribution for the employee s share. (2) Rate of Pay safe harbor is based upon multiplying 130 hours by the employee s lowest hourly rate if the employee s contribution for the lowest cost self-only coverage providing minimum value is 9.5% or less of this amount then this safe harbor is met. (3) Poverty-line safe harbor is met where the employee s required monthly contribution does not exceed 9.5% of the federal poverty line for a single individual. 3. Who is an employee? The common law definition is used. a) Employee v. Independent Contractor b) Definition of an employee (1) Performs services for the employer (2) The employee is subject to the employer s control regarding (a) (b) What will be done, and How it will be done. 10

12 (3) Definition of an independent contractor An independent contractor (a) Performs work for the business, (b) The business can only control the result, not how the work is performed. c) Determining worker status (1) The three factor test is: (a) (b) (c) Behavioral Control Financial Control Relationship of the Parties d) See, Wortham v. American Family Ins. Group, 385 F.3d 1139 (8 th Cir., 2004). e) Consequences of Misclassification (1) Employers who misclassify workers may run afoul of numerous laws and regulations including the requirement to: (a) (b) (c) Withhold federal taxes Withhold and pay FICA Withhold and pay FUTA (2) Mischaracterization can result in further consequences under the Affordable Care Act (a) Shared Responsibility payments- 4980H a and b (b) Possible Anti-Abuse provisions to prevent schemes that are fashioned for the sole purpose of avoiding providing insurance or paying a penalty. 4. Who is a dependent? Note this definition is different for that used for the individual provisions of the law. a) Your biological child or adopted child b) Employer does not have to cover step-child or foster child c) A spouse is not a dependent either. E. Transitional Relief for Employers- 11

13 a) 4980H(a)and 4980H(b)- will not apply to employers with between 50 and 99 employees so long as the employer maintained workforce, aggregate hours of service, and existing insurance coverage from February 9, 2014 through December 31, b) For employers with 100 or more employees, 4980H(a) will only apply if the employer fails to offer 70% or fewer of its employees coverage and one employee (dependent) receives the premium tax credit for H(b) penalties may still be assessable even if 4980H(a) is not. c) For applicable large employers, a shared responsibility payment will not be assessed for a non-covered dependent who receives the premium tax credit so long as the employer did not reduce dependent coverage during either plan year 2013 or 2014 and during made progress in expanding coverage to employee s dependents. d) For 2015 the number of employees the penalty is applicable to has been dramatically reduced. 2. Example: Company A (1) Has 100 full-time employees and (2) 10 additional workers are classified as independent contractors who have virtually the same contract with the employer. (3) Assume all employees were with the employer for the entire year (4) 70 full-time employees are offered affordable insurance plans. (5) One worker of the 10 files an SS-8 claim and gets a determination that the worker is in fact an employee (6) The IRS completes an audit and determines that the worker is misclassified b) Potential Impact of Misclassification: If one employee goes to the Marketplace and receives the premium tax credit: (1) 110 full-time workers (2) < 70% were offered minimum essential coverage. 12

14 (3) (reduction)=30 x $2,000=$60,000 (This example assumes that the employer owed a penalty for each of the 12 months during the year for all 30 employees for the year.) The total penalty amount $2,000 is divided by 12 and multiplied by the number of full-time employees for that month. So 2000/12= x 30 employees=$5,000 x 12 months=$60,000 c) What if the employer offered greater than 70% insurance but the insurance did not offer minimum value or was not affordable and 30 employees went onto the Marketplace and got the premium tax credit? (1) 3,000/12(monthly applicable amount) X 30 (employees) X12(months)=90.000, but it cannot be higher than any potential 4980H(a) penalty therefore the maximum penalty is $60,000. (This example also assumes that the PTC is received for all of the tax year by all of the 30 employees. ) d) Employers should keep in mind (1) Premiums paid on behalf of employees are deductible (2) Penalty is not 1 The penalty is substantially decreased in The original calculation disregarded only 30 workers in the calculation the new calculation disregards 80 workers. The amount is expected to return to 30 disregarded workers when full implementation is achieved. 13