Update and Review of the Federal Income Tax Issues of the 2010 Patient Protection and Affordable Care Act (ACA)

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1 Update and Review of the Federal Income Tax Issues of the 2010 Patient Protection and Affordable Care Act (ACA)

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3 Update and Review of the Federal Income Tax Issues of the 2010 Patient Protection and Affordable Care Act (ACA) A. Introduction to the Legislation 1. On March 23, 2010 President Obama signed into law H.R. 3590, The Patient Protection and Affordable Care Act. 2. On March 30, 2010, the President signed an amended bill H.R. 4872, The Health Care and Education Reconciliation Act of H.R is generally referred to as the 2010 Health Care Act. 4. H.R is generally referred to as the 2010 Reconciliation Act. 5. These two pieces of legislation have come to be known and referred to as the Affordable Care Act (ACA). B. Tax Changes and the Universal Health Coverage Requirements 1. The legislation imposes and provides the following provisions: a. penalties (shared responsibility payment) for individuals remaining uninsured (individual mandate), b. low income tax credits for participating in health exchanges ( 36B Premium Assistance Credit), c. employer responsibilities for worker health coverage, d. dependent coverage in employer health plans. 2. The legislation also imposes health related revenue raisers and reporting responsibilities as follows: a. excise tax on high-cost employer sponsored health coverage, b. reporting of employer sponsored health coverage on IRS Form W-2, c. additional Hospital Insurance Tax (HI) for high wage earners and selfemployed individuals, d. surtax on unearned income, e. increased tax on nonqualifying HSA or Archer MSA distributions, f. modified threshold for claiming medical expense deductions on Schedule A of IRS Form 1040, and 1

4 g. industry-specific revenue raisers. 3. For purposes of B.1.a. above (penalties for individuals remaining uninsured) the law provides that all applicable individuals will have to ensure that they are covered under a health insurance policy that provides minimum essential coverage beginning January 1, The taxpayer will be required to file new IRS Form 8965 Health Coverage Exemptions which will require the type of coverage exemption indicated by a Code to be reported in Part III, column C. The Code for Exemption ranges from A H (see page 2 of Form 8965 Instructions). This rule applies to all applicable individuals other than an individual who: a. qualifies for a religious conscience exemption under 5000A(d)(2)(A) (for more information to qualify see Form 8965 Instructions, page 7, Part 1), b. is a member of a health care sharing ministry under 5000A(d)(2)(B)(ii) (Code D ), c. for the month in question is not a U.S. Citizen or U.S. National or an alien lawfully present in the U.S. (Code C ), or d. incarcerated, other than incarceration pending the disposition of charges (Code F ). 4. For purposes of the requirement that applicable individuals will have to maintain a minimum level of health insurance coverage ( minimum essential coverage ) after 2013, the term minimum essential coverage will mean any of the following under 5000(A)(f)(1): a. Coverage under any of these government-sponsored programs: i. the Medicare program under part A of title XVIII of the Social Security Act (Code H ), ii. iii. iv. the Medicaid program under title XIX of the Social Security Act (Code H ), the CHIP (Children s Health Insurance Program) program under Title XXI of the Social Security Act (Code G ), the TRICARE for Life program (TRICARE is the health care program serving active duty service members, National Guard and Reserve members, retirees, their families, survivors and certain former spouses; TRICARE for Life is TRICARE s Medicare-wraparound coverage available to all Medicare-eligible TRICARE beneficiaries) (Code H ), 2

5 v. a health care program under Chapter 17 or 18 of title 38, United States Code, as determined by the Secretary of Veterans Affairs, in coordination with the Secretary of Health and Human Services and IRS, or vi. a health plan under 2504(e) of Title 22 of the United States Code (relating to Peace Corps volunteers). b. Coverage under an eligible employer-sponsored plan, c. Coverage under a health plan offered in the individual market within a state, d. Coverage under a grandfathered health plan. The term grandfathered health plan is any group health plan or health insurance coverage to which 1251 of the Patient Protection and Affordable Care Act (relating to the preservation of an individual s right to maintain existing coverage) applies, and e. Any other health benefits coverage, such as a state health benefits risk pool, which the Secretary of Health and Human Services, in coordination with IRS, recognizes for purposes of the definition of minimum essential coverage. Tax Professional Education Fact: The new IRS Form 1095-A Health Insurance Marketplace Statement is required to be issued to individuals on or before January 31, 2015, for coverage in calendar year Insurance companies and self-insured health plans will provide taxpayers newly created IRS Form 1095-B, Health Coverage, to each enrollee and member and will also file a copy along with a transmittal Form 1094-B, Transmittal of Health Coverage Information Returns to the IRS. Taxpayers will begin receiving Form 1095-B by January 31, 2015 for the 2014 tax year. Large employers must file newly created IRS Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to each employee and transmit them together with transmittal Form 1095-B to the IRS. Note that Form 1095-B and Form 1095-C are not mandatory until tax years beginning 2015 with an issue date of January 31, There are exemptions from the requirement for individuals to maintain health insurance coverage. 5000A(e) provides exemptions from the requirement that applicable individuals will have to maintain a minimum level of health insurance coverage ( minimum essential coverage ) after 2013 will be provided for: a. individuals who cannot afford coverage (Code A ), b. taxpayers with income below the income tax return filing threshold, 3

6 c. members of Indian tribes (Code E ), d. months during short coverage gaps (Code B ), and e. hardships (Code G ). Tax Professional Educational Fact: Individuals receiving an exemption from the individual mandate will file newly created IRS Form 8965, Health Coverage Exemptions. C. 36B Premium Assistance Credit 1. For tax years beginning after December 31, 2013, new 36B(a) provides a general rule that in the case of an applicable taxpayer, there shall be allowed a credit against the tax imposed by this subtitle, for any taxable year, an amount equal to the premium assistance credit (PAC) amount of the taxpayer for the taxable year. Tax Professional Note: For information purposes this subtitle means that it is the income tax and employment tax of a self-employed person which means that the credit will be a refundable credit. Tax Professional Education Fact: The 36B credit has become known as the Premium Tax Credit (PTC), which is also the title on the newly created IRS Form B(b)(1) provides a general rule that the term premium assistance credit amount will be provided for all coverage months of the taxpayer during the taxable year. 36B(b)(2)provides that the premium assistance amount will be equal to the lesser of : a. the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which covers the taxpayer, the taxpayer s spouse, or any dependent (as defined in 152) of the taxpayer and which were enrolled in through an Exchange established by the State under Section 1311 of the Patient Protection and Affordable Care Act (ACA), or b. the excess (if any) of: i. the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over ii. an amount equal to 1/12 of the product of the applicable percentage and the taxpayer s household income for the taxable year. 4

7 Tax Professional Research Reference: Applicable Percentage is defined in 36B(b)(3)(A). Applicable second lowest Silver Plan is defined in 36B(b)(3)(B) and Adjusted Monthly Premium is defined in 36B(b)(3)(C). 36B(b)(3)(A) provides a general rule that applicable percentage for any taxable year shall be the percentage such that the applicable percentage for any taxpayer whose household income is within an income tier specified in the following table shall increase, on a percentage specified in such table for such income tier: In the case of household income (expressed as a percent of poverty line) within the following income tier: Initial premium percentage Final premium percentage Up to 133% 2.0% 2.0% 133% up to 150% 3.0% 4.0% 150% up to 200% 4.0% 6.3% 200% up to 250% 6.3% 8.05% 250% up to 300% 8.05% 9.5% 300% up to 400% 9.5% 9.5% 3. 36B(b)(3)(A)(ii) provides a general rule that in the case of taxable years beginning in any calendar year after 2014, the initial and final percentages shall be adjusted to reflect the excess of: a. the rate of premium growth for the preceding calendar year, over b. the rate of income growth for the preceding calendar year. Tax Professional Note: The IRS provided guidance on these items on July 24, 2014 in IRS Rev. Proc B(b)(3)(B) provides that the applicable second lowest cost silver plan (SLCSP) with respect to any applicable taxpayer is the second lowest cost silver plan of the individual market in the rating area in which the taxpayer resides. a. Enrollment premiums. The enrollment premiums are the total amount of the premiums for the month for one or more qualified health plans in which any individual in the tax family is enrolled. Form 1095-A, Part III, Column A, reports the enrollment premiums. The taxpayer is not allowed a monthly credit for the month if the portion of the enrollment premium for which the taxpayer is responsible for that month has not been paid by the due date of 5

8 the tax return (not including extensions). Premiums that another person pays on behalf of the taxpayer are treated as paid by the taxpayer. b. Premium for the applicable SLCSP. The premium for the applicable SLCSP is the second lowest cost silver plan premium (based on age) offered through the Marketplace where the taxpayer resides that applies to the taxpayer s coverage family (described below). The premium for the applicable SLCSP is not the same as the enrollment premium, unless the taxpayer enrolls in the applicable SLCSP. Form 1095-A, Part III, Column B, reports the premium for the applicable SLCSP. c. Monthly contribution amount. The taxpayer s monthly contribution amount is the amount the taxpayer would be required to pay as the share of premiums each month if enrolled in the applicable SLCSP in the Marketplace. The monthly contribution amount is not related to the amount of premiums paid out of pocket. Compute the monthly contribution amount in Part 1 of Form d. Coverage family. A coverage family includes all individuals in the tax family who are enrolled in a qualified health plan and are not eligible for minimum essential coverage (other than coverage in the individual market). The individuals included in the coverage family may change from month to month. If individuals in the tax family are not enrolled in a qualified health plan, or are enrolled in a qualified health plan but are eligible for minimum essential coverage (other than coverage in the individual market), then generally they are not part of the coverage family. The applicable SLCSP is the SLCSP that applies to the coverage family. The PTC is only available to help pay for the coverage of the individuals included in the coverage family B(b)(3)(C) provides that the adjusted monthly premium for an applicable second lowest cost silver plan is the monthly premium which would have been charged (for the rating area with respect to which the premiums under paragraph (2)(A) were determined) for the plan if each individual covered under a qualified health plan taken into account under paragraph (2)(A) were covered by such silver plan and the premium was adjusted only for the age of each such individual in the manner allowed under section 2791 of the Public Health Service Act. In the case of a State participating in the wellness discount demonstration project under section 2705(d) of the Public Health Service Act, the adjusted monthly premium shall be determined without regard to any premium discount or rebate under such project. 6. The 2010 Health Care Act provides a new refundable credit to qualifying taxpayers who purchase insurance coverage by enrolling in a qualified health plan (QHP). For purposes of the Premium Tax Credit, a qualified health plan is a health plan or policy purchased through a Marketplace at the Bronze, Silver, Gold or 6

9 Platinum level. Plans sold as catastrophic coverage and plans sold through the Small Business Health Option Program (SHOP) do not qualify a taxpayer to take the Premium Tax Credit. 7. For some taxpayers the 36B credit will be available and payable in advance, directly to the insurer and will therefore subsidize the purchase of certain health insurance plans through an Exchange. 8. The 2010 Health Care Act requires that each state must establish an American Health Benefit Exchange ( Exchange ) by January 1, Tax Professional Note: Many states have stated that they will not establish the mandated Exchange and as a result there has been an Exchange established by the federal government for those seeking insurance and living in one of those states. 9. The Act requires insurers to provide QHPs to be sold on the Exchanges. The law states that the Exchanges are not the insurers but are to provide access to insurers QHPs. Tax Professional Note: According to the legislation, individuals will be able to obtain affordable, quality health insurance by enrolling in a QHP through an Exchange. 10. The 36B credit applies to QHPs purchased on the Exchange. The purpose is to allow the qualifying individual to use the credit to reduce the health insurance premium cost if they acquire the coverage through enrollment in a QHP. Tax Professional Note: The 36B credit is being referred to in some written materials as an exchange subsidy B(f) provides for a reconciliation of the credit allowable and any advance credit received. This will have to be calculated on a federal income tax return on Form 8962, Premium Tax Credit (PTC).. 36B(f)(3) provides that the Exchange will be required to issue an information return to the Secretary and the taxpayer providing: a. the level of coverage that was in effect, b. total premium for the coverage, c. aggregate amount of any advance payment, d. name, address and TIN of the primary insured and the name and TIN of each individual obtaining coverage under the policy, e. any information provided by the Exchange, including any change of circumstances necessary to determine the eligibility for, and the amount of 7

10 such credit, and f. information necessary to determine whether a taxpayer received excess advanced payments. 12. Individual taxpayers will also be permitted to pay the entire premium during the year directly and claim the credit on their Form 1040 on the new line 69 labeled Net premium tax credit. The net credit will be calculated on newly created IRS Form 8962 Premium Tax Credit (PTC). Any excess advance premium tax credit will be reported on the new line 46 of Form 1040 which is labeled Excess advance premium tax credit repayment. D. 36B Details 1. The 36B credit is titled Refundable Credit for Coverage under a Qualified Health Plan B(a) provides a general rule that there is a credit allowed B(b)(1) provides that the term premium assistance amount means with respect to any taxable year, the sum of the premium assistance amounts for, all coverage months for the taxpayer, taxpayer s spouse or any dependent who are enrolled through an Exchange offered in the individual market within a state which covers the taxpayers. 4. There are rules pertaining to self-only coverage and family coverage under 36B(3)(B) B(b)(3)(E) provides special rules for pediatric dental coverage. For purposes of determining the amount of any monthly premium, if an individual enrolls in both a qualified health plan and a plan described in section 1311(d)(2)(B)(ii)(I) of the Patient Protection and Affordable Care Act for any plan year, then the portion of the premium for the plan described in such section that (under regulations prescribed by the Secretary) is properly allocable to pediatric dental benefits which are included in the essential health benefits required to be provided by a qualified health plan shall be treated as a premium payable for a qualified health plan B(c) provides specific definitions as follows: a. 36B(c)(1) Applicable Taxpayer : i. 36B(c)(1)(A) provides a general rule that the term applicable taxpayer means, with respect to any taxable year, a taxpayer whose household income for the taxable year equals or exceeds 100 percent but does not exceed 400 percent of an amount equal to the poverty 8

11 line for a family of the size involved. ii. 36B(c)(1)(B) Special rule for certain individuals lawfully present in the United States: If a) 36B(c)(1)(B)(i) a taxpayer has a household income which is not greater than 100 percent of an amount equal to the poverty line for a family of the size involved, and b) 36B(c)(1)(B)(ii) the taxpayer is an alien lawfully present in the United States, but is not eligible for the Medicaid program under title XIX of the Social Security Act by reason of such alien status, then, the taxpayer shall, for purpose of the credit under this section, be treated as an applicable taxpayer with a household income which is equal to 100 percent of the poverty line for a family of the size involved. iii. 36B(c)(1)(C) provides a general rule that married couples must file a joint return. The law specifies that if the taxpayer is married (within the meaning of 7703) at the close of the taxable year, then the taxpayer shall be treated as an applicable taxpayer only if the taxpayer and the taxpayer s spouse file a joint return for the taxable year. TAX PROFESSIONAL ALERT: Reg. 1.36B-2T allows an exception for the filing of a joint return and specifically states an exception for victims of domestic abuse and abandonment, and states that except as provided in paragraph (b)(2)(v) of this section, a married taxpayer satisfies the joint filing requirement of paragraph (b)(2)(i) of this section if the taxpayer files a tax return using a filing status of married filing separately and the taxpayer: Is living apart from the taxpayer s spouse at the time the taxpayer files the tax return, Is unable to file a joint return because the taxpayer is a victim of domestic abuse or spousal abandonment, and Certifies on the return, in accordance with the relevant instructions, that the taxpayer meets the criteria of being a victim of domestic abuse or abandonment. The instructions on new IRS Form 8962 Premium Tax Credit (PTC) state that the taxpayer will be required to check the Relief box in the top right-hand corner of Form The instructions state that the documentation does not have to be attached to 9

12 the return and that the taxpayer should keep the documentation with their tax records. IRS Publication 974 Premium Tax Credit (PTC) provides examples of what documentation to keep. Reg. 1.36B-2T(iii) defines domestic abuse to include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim s ability to reason independently. All the facts and circumstances are considered in determining whether an individual is abused, including the effects of alcohol or drug abuse by the victim s spouse. Depending on the facts and circumstances, abuse of the victim s child or another family member living in the household may constitute abuse of the victim. Reg. 1.36B-2T(iv) defines abandonment to be included as an exception. A taxpayer is a victim of spousal abandonment for a taxable year if, taking into account all facts and circumstances, the taxpayer is unable to locate his or her spouse after reasonable diligence. Reg. 1.36B-2T(v) states a three-year rule. The exception for victims of domestic abuse and abandonment does not apply if the taxpayer met the requirements of paragraph (b)(2)(ii) of this section for each of the three preceding taxable years. Tax Professional Note: Individuals cannot qualify from the joint filing requirement for more than three consecutive years, during which time they must presumably obtain a divorce. TAX PROFESSIONAL ALERT: Taxpayers who do not qualify for relief from filing a joint return cannot take the PTC on a married filing separate return and must complete lines 1-5 on IRS Form 8962 in order to calculate their separate household income as a percentage of the Federal poverty line. iv. 36B(c)(1)(D) Denial of credit to dependents: No credit shall be allowed to any individual with respect to whom a deduction under 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual s taxable year begins. b. 36B(c)(2) Coverage month: For purposes of this subsection i. 36B(c)(2)(A) provides a general rule that the term coverage month means, with respect to an applicable taxpayer, any month if: a) 36B(c)(2)(A)(i) as of the first day of such month the taxpayer, the taxpayer s spouse, or any dependent of the taxpayer is covered by a qualified health plan described in subsection 10

13 (b)(2)(a) that was enrolled through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act, and b) 36B(c)(2)(A)(ii) the premium for coverage under such plan for such month is paid by the taxpayer (or through advance payment of the credit under subsection (a) under section 1412 of the Patient Protection and Affordable Care Act). ii. 36B(c)(2)(B) Exception for minimum essential coverage: a) 36B(c)(2)(B)(i) provides that in general the term coverage month shall not include any month with respect to an individual if for such month the individual is eligible for minimum essential coverage other than eligibility for coverage described in 5000A(f)(1)(C) (relating to coverage in the individual market). b) 36B(c)(2)(B)(ii) provides that the term minimum essential coverage has the meaning given such term by 5000A(f). iii. For tax years beginning after B(c)(2)(C) provides a special rule for employer-sponsored minimum essential coverage: For purpose of subparagraph (B) a) 36B(c)(2)(C)(i) Coverage Must Be Affordable: Except as provided in clause (iii), an employee shall not be treated as eligible for minimum essential coverage if such coverage 1) 36B(c)(2)(C)(i)(I) consists of an eligible employersponsored plan (as defined in 5000A(f)(2), and 2) 36B(c)(2)(C)(i)(II) the employee s required contribution within the meaning of 5000A(e)(1)(B) with respect to the plan exceeds 9.5 percent of the applicable taxpayer s household income. This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee. b) 36B(c)(2)(C)(ii) Coverage Must Provide Minimum Value: Except as provided in clause (iii), an employee shall not be treated as eligible for minimum essential coverage if such coverage consists of an eligible employer-sponsored plan (as 11

14 defined in 5000A(f)(2)) and the plan s share of the total allowed cost of benefits provided under the plan is less than 60 percent of such costs. c) 36B(c)(2)(C)(iii) Employee or Family Must Not Be Covered under an Employer Plan. Clauses (i) and (ii) shall not apply if the employee (or any individual described in the last sentence or clause (i)) is covered under the eligible employersponsored plan or the grandfathered health plan. d) 36B(c)(2)(C)(iv) Indexing: In the case of plan years beginning in any calendar year after 2014, the Secretary shall adjust the 9.5 percent. c. 36B(c)(3)(A) provides that the term qualified health plan has the meaning given such term by section 1301(a) of the Patient Protection and Affordable Care Act, except that such term shall not include a qualified health plan which is a catastrophic plan described in section 1302(e) of such Act. d. 36B(c)(3)(B) provides that the term grandfathered health plan has the meaning given such term by section 1251 of the Patient Protection and Affordable Care Act (B)(d) provides more definitions relating to the following items: a. 36B(d)(1) Family Size: The family size involved with respect to any taxpayer shall be equal to the number of individuals for whom the taxpayer is allowed a deduction under 151 (relating to allowance of deduction for personal exemptions) for the taxable year. b. 36B(d)(2)(A) Household Income: The term household income means, with respect to any taxpayer, an amount equal to the sum of: i. 36B(d)(2)(A)(i) the modified adjusted gross income of the taxpayer, plus ii. 36B(d)(2)(A)(ii) the aggregate modified adjusted gross income of all other individuals who a) 36B(d)(2)(A)(ii)(I) were taken into account in determining the taxpayer s family size under paragraph (1), and b) 36B(d)(2)(A)(ii)(II) were required to file a return of tax imposed by 1 for the taxable year. 12

15 Tax Professional Note: If a taxpayer has a dependent child who has income then the child would be required to file a federal income tax return once the child s income is in excess of the standard deduction amount in the current tax year. As an example, for 2014 the standard deduction is $6,200. Therefore the amount in excess of $6,200 would be included in the taxpayer s household income. c. 36B(d)(2)(B) provides that the term modified adjusted gross income means adjusted gross income increased by: i. 36B(d)(2)(B)(i) any amount excluded from gross income under 911 (Foreign Earned Income Exclusion reported on IRS Form 2555), ii. iii. 36B(d)(2)(B)(ii) any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and 36B(d)(2)(B)(iii) an amount equal to the portion of the taxpayer s social security benefits (as defined in 86(d)) which is excluded from gross income under 86(d)for the taxable year. d. 36B(d)(3)(A) provides a general rule that the term poverty line has the meaning given that term in section 2110(c)(5) of the Social Security Act (45 U.S.C. 1397jj(c)(5)). i. 36B(d)(3)(B) Poverty line used: In the case of any qualified health plan offered through an Exchange for coverage during a taxable year beginning in a calendar year, the poverty line used shall be the most recently published poverty line as of the 1 st day of the regular enrollment period for coverage during such calendar year (B)(e) provides rules for individuals not lawfully present and Secretarial Authority to prescribe rules to ensure that the least burden is placed on individuals enrolling in qualified health plans through an Exchange. i. 36B(e)(1) provides a general rule that if one or more individuals for whom a taxpayer is allowed a deduction under 151 (relating to allowance of deduction for personal exemptions) for the taxable year (including the taxpayer or his spouse) are individuals who are not lawfully present then i. 36B(e)(1)(A) provides that the aggregate amount of premiums otherwise taken into account under clauses (i) and (ii) of subsection (b)(2)(a) shall be reduced by the portion (if any) of such premiums which is attributable to such individuals, and 13

16 j. 36B(e)(1)(B) provides that for purposes of applying this section, the determination as to what percentage a taxpayer s household income bears to the poverty level for a family of the size involved shall be made under one of the following methods: i. 36B(e)(1)(B)(i) A method under which: a) 36B(e)(1)(B)(i)(I) the taxpayer s family size is determined by not taking such individuals into account, and b) 36B(e)(1)(B)(i)(II) the taxpayer s household income is equal to the product of the taxpayer s household income (determined without regard to this subsection) and a fraction 1) 36B(e)(1)(B)(i)(11)(aa) the numerator of which is the poverty line for the taxpayer s family size determined after application of subclauses (I), and 2) 36B(e)(1)(B)(i)(II)(bb) the denominator of which is the poverty line for the taxpayer s family size determined without regard to subclause (I). ii. 36B(e)(1)(B)(ii) A comparable method reaching the same result as the method under clause (i) 9. 36(B)(3)(2) defines the term Lawfully Present and for purposes of this section, an individual shall be treated as lawfully present only if the individual is, and is reasonably expected to be for the entire period of enrollment for which the credit under this section is being claimed, a citizen of the United States or an alien lawfully present in the United States B(e)(3) Secretarial Authority: The Secretary of Health and Human Services, in consultation with the Secretary, shall prescribe rules setting forth the methods by which calculations of family size and household income are made for purposes of this subsection. Such rules shall be designed to ensure that the least burden is placed on individuals enrolling in qualified health plans through an Exchange and taxpayers eligible for the credit allowable under this section (B)(f) provides for the reconciliation of the allowed credit and the advanced credit and the need to impose a tax on the excess advance credit. a. 36B(f)(1) provides a general rule that the amount of the credit allowed for any taxable year shall be reduced (but not below zero) by the amount of any advance payment of such credit. 14

17 b. 36B(f)(2)(A) provides a general rule that if the advance payments to a taxpayer for a taxable year exceed the credit allowed by this section (determined without regard to paragraph (1)), then the tax for the taxable year shall be increased by the amount of such excess. c. 36B(f)(2)(B) Limitation on increase. 36B(f)(2)(B)(i) provides a general rule that if a taxpayer has household income that is less than 400 percent of the poverty line for the size of the family involved for the taxable year, then the amount of the increase under subparagraph (A) shall in no event exceed the applicable dollar amount determined in accordance with the following table (one-half of such amount in the case of a taxpayer whose tax is determined under section 1(c) for the taxable year): If the household income (expressed as a percent of poverty line) is: Then the applicable dollar amount is: Joint Single Less than 200% $600 $300 At least 200% but less than 300% $1,500 $750 At least 300% but less than 400% $2,500 $1,250 d. 36B(f)(2)(B)(ii) Indexing of amount: In the case of any calendar year beginning after 2014, each of the dollar amounts in the table above shall be increased by an amount equal to i. 36B(f)(2)(B)(ii)(I) such dollar amount, multiplied by ii. 36B(f)(2)(B)(ii)(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting calendar year 2013 for calendar year 1992 in subparagraph (B) thereof. If the amount of any increase under clause (i) is not a multiple of $50, then such increase shall be rounded to the next lowest multiple of $ B(f)(3) Information Requirement: Each Exchange (or any person carrying out 1 or more responsibilities of an Exchange) shall provide the following information to the Secretary and to the taxpayer with respect to any health plan provided through the Exchange; a. 36B(f)(3)(A): The level of coverage described in section 1302(d) of the Patient Protection and Affordable Care Act and the period such coverage 15

18 was in effect. b. 36B(f)(3)(B): The total premium for the coverage without regard to the credit under this section or cost-sharing reductions. c. 36B(f)(3)(C): The aggregate amount of any advance payment of such credit or reductions. d. 36B(f)(3)(D): The name, address, and TIN of the primary insured and the name and TIN of each other individual obtaining coverage under the policy. e. 36B(f)(3)(E): Any other information provided to the Exchange, including any change of circumstances, necessary to determine eligibility for, and the amount of, such credit. f. 36B(f)(3)(F): Information necessary to determine whether a taxpayer has received excess advance payments. Tax Professional Educational Fact: The reporting of the Information Requirements by the Exchange will be reported on newly created IRS Form A, Health Insurance Marketplace Statement which is required to be issued by January 31, 2015 for 2014 reporting purposes. The information reported on Form 1095-A provides the data needed to complete the individual taxpayer s newly created Form 8962, Premium Tax Credit (PTC). The result calculated on Form 8962 will carry to IRS Form 1040, page 2, on new line 69, labeled as Net premium tax credit, attach Form B(g) provides that the Secretary of the Treasury shall prescribe such regulations as may be necessary to carry out the provisions of the law including regulations which provide for: i. the coordination of the credit allowed under the advance payment credit, and j. the application of the reconciliation where filing status for a taxable year is different from such status for determining the advance payment of the credit. E. Congressional Research Service Report to Congress 1. On April 29, 2014 the Congressional Research Service issued a report to Congress on the individual mandate under the Affordable Care Act (ACA) and provided information and examples of the types of challenges and issues that we as tax professionals will be addressing. Illustrative Individual Mandate Penalties 16

19 1) The following examples illustrate the penalty issues for a taxpayer who is a single individual and for a taxpayer with a family of four. The penalty amounts are shown below for 2014, 2015 and For those individuals whose household income is above the threshold amount for filing a federal income tax return, the penalty is the greater of a flat dollar amount or a percentage of applicable income (income above the filing threshold). Individuals below the filing threshold for federal income tax will not pay a penalty. 2) In the 2014 examples, the 2014 filing threshold is used, which is $10,150 for a single individual under age 65 with no dependents with a single filing status and $20,300 for a married couple filing jointly. The filing threshold for 2015 is $10,300. For 2016 the amount has not yet been determined, but because it is linked to an inflation adjustment based on the CPI-U, they will likely be higher when implemented in The examples below use estimated filing thresholds for As a result, the numbers for 2016 are meant for illustrative purposes only. These examples are best used to show the relative scope of the penalties and the relationship between the various components of the formulas for calculating the penalty. Example #1 illustrates the individual mandate penalties for a single individual with no dependents: In 2014, those with income above the filing threshold of $10,150 but at or below $19,650 will pay the $95 flat amount. Those with income above $19,650 and below the cap at the national average premium for bronze-level coverage will pay 1% of applicable income; Tax Professional Educational Fact: Health and Human Services (HHS) has determined and the IRS has set the amount of the average cost of a bronze level plan for an applicable family size for 2014 is $2,448 (12 months times $204 per month) per individual annually, up to $12,240 for families of five or more. For a family of four the maximum would be $9,792 (4 x $2,448). For more details see Rev. Proc In 2015, those with income above the filing threshold of $10,300 but at or below an estimated $26,550 will pay the $325 flat amount, and those with income above an estimated $26,550 and below the cap at the national average premium for bronze-level coverage will pay 2% of applicable income; 17

20 In 2016, those with income above the filing threshold (estimated to be $10,450 in 2016) but at or below an estimated $38,250 will pay the $695 flat amount, and those with income above an estimated $38,250 and below the cap at the national average premium for bronze-level coverage will pay 2.5% of applicable income. 3) In calculating the penalty for a family, each of the components of the formula increases for a family, including the filing threshold, flat dollar amount, and the cost of a bronze-level plan. However, the flat dollar amount for a family cannot be greater than three times the amount for an individual. For example, in 2014 the flat dollar amount is limited to three times $95 or $285. The flat dollar amount is ½ for children under age 18 so that a married couple with 2 children under 18, a single parent with 4 children under 18 as well as larger families are all subject to the same maximum flat dollar amount. Example #2 illustrates the individual mandate penalties for a family of four (married couple with two children under age 18): In 2014, those with income above the filing threshold ($20,300 in 2014) but at or below $48,800 will pay the $285 flat dollar amount, those with income above $48,800 and below the cap at the national average premium for bronzelevel family coverage will pay 1% of applicable income; In 2015, those with income above the filing threshold of $20,600 but at or below an estimated $69,350 will pay the $975 flat dollar amount, those with income above an estimated $69,350 and below the cap at the national average premium for bronze-level family coverage will pay 2% of applicable income; In 2016 those with income above the filing threshold (estimated to be $20,900 in 2016) but at or below an estimated $104,300 will pay the $2,085 flat dollar amount, those with income above an estimated $104,300 and below the cap at the national average premium for bronze-level family coverage will pay 2.5% of applicable income. 18

21 Example #3 Single Taxpayer: The following illustrates the maximum penalty calculations based on different levels of income imposing the greater of the flat dollar and applicable percentage penalty amounts. Income Level $14,650 $19,650 $24,650 $264,650 Filing Threshold (10,150) (10,150) (10,150) (10,150) Excess $ 4,500 $ 9,500 $14,500 $254,500 Applicable Percentage x 1% x 1% x 1% x 1% Penalty Amount $ 45 $ 95 $ 145 $ 2,545 Maximum Penalty $95 $95 $145 $2,448* *Maximum for average cost of Bronze Plan in 2014 Example #4 Family of Four: The following illustrates the maximum penalty calculations based on different levels of income imposing the greater of the flat dollar and applicable percentage penalty amounts. Income Level $29,300 $48,800 $49,300 $1,000,000 Filing Threshold (20,300) (20,300) (20,300) (20,300) Excess $ 9,000 $28,500 $29,000 $ 979,700 Applicable Percentage x 1% x 1% x 1% x 1% Penalty Amount $ 90 $ 285 $ 290 $ 9,797 Maximum Penalty $285 $285 $290 $9,792* *Maximum for average cost of Bronze Plan in 2014 Tax Professional Note: The penalty is assessed on a monthly basis. F. Claiming an Exemption from the Mandate 1. Individuals can be exempt from the mandate and the penalty based on an individual s characteristics, financial status, or affiliations (e.g. religious affiliations). Some individuals who are exempt will not be expected to take any actions to claim the exemption; others will have to either obtain a certification of exemption from a health insurance exchange or claim the exemption through the tax filing process. 2. Individuals who live abroad for more than 330 days in a 12-month period and those who are bona fide residents of a U.S. possession do not have to take any action to claim the exemption. 3. Those claiming the short coverage gap, unlawfully present, filing threshold, or affordability exemptions may only do so on their federal income tax return. 19

22 4. In order to claim a religious exemption an individual must obtain an exemption certificate issued by the exchange serving the area in which the individual resides. 5. Some types of hardship exemptions can be claimed by receiving a certificate from an exchange, while other types can only be claimed through the tax filing process. 6. All other exemptions may be certified by an exchange or may be claimed on the filer s federal income tax return. 7. Regulations provide that most exemptions are applicable retrospectively (with an exception for a specific hardship definition) and be recertified annually. Only the religious and Indian tribe exemptions are eligible for prospective or retrospective applicability and continuous certification. Table 1 outlines the basic features of the nine exemption categories. Table 1. Individual Mandate Exemptions under ACA Exemption Eligibility Certification Applicability Recertification Religious conscience Exchange only Prospective or Retrospective Continuous a Hardship Exchange or tax filing Retrospective Annual Health care sharing ministry membership Exchange or tax filing Retrospective Annual Indian tribe membership Exchange or tax filing Prospective or Retrospective Continuous a Incarceration Exchange or tax filing Retrospective Annual Affordability Tax filing only Retrospective Annual Unlawful resident Tax filing only Retrospective Annual Coverage Gap Tax filing only Retrospective Annual Filing Threshold Not applicable Retrospective Annual Sources: 45 CFR Part 155 and 26 CFR Part 1. Note: The exemptions for qualifying individuals who live abroad for at least 330 days within a 12 month period and bona fide residents of any possession of the United States are not included in this table because individuals who meet one of these criteria do not need to take any action to comply with the individual mandate. a Reapplication for the exemption is required when an individual reaches age 21. See 45 CFR (c). 20

23 Appendix A. Health Insurance Coverage and the Individual Mandate Table A-1. Types of Health Insurance Coverages as they Relate to the Definition of Minimum Essential Coverage and the Individual Mandate Penalty in 2014 As Identified in Statute, Regulations and Guidance Type of Coverage Is it considered minimum essential coverage in 2014? If it is an individual s only source of coverage in 2014, is the individual liable for the individual mandate penalty? Medicare Part A Yes No Medicare Advantage Yes No Medicaid full benefit coverage Yes No Medicaid limited benefit coverage Optional coverage of family planning services a No No Optional coverage of tuberculosisrelated services b No No Coverage of pregnancyrelated services c No No Coverage limited to treatment of emergency medical conditions d No No Coverage authorized According to a proposed under 115(a)(2) rule issued by the IRS, of the Social Security this coverage is not Act considered minimum (SSA) e essential coverage No Medicaid coverage According to a proposed for the medically rule issued by the IRS, this needy coverage is not considered minimum essential coverage f No State Children s Health Insurance Program (CHIP) g Yes No 21

24 Type of Coverage TRICARE Limited benefit TRICARE programs h Is it considered minimum essential coverage in 2014? According to a proposed rule issued by the IRS, this coverage is not considered minimum essential coverage f If it is an individual s only source of coverage in 2014, is the individual liable for the individual mandate penalty? No Other coverage offered Yes No Under TRICARE VA Health Care Programs i Medical benefits package authorized for eligible veterans under 38 U.S.C and 38 U.S.C Yes No Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA) authorized under 38 U.S.C j Yes No Comprehensive health care program authorized under 38 U.S.C and 38 U.S.C for certain children of Vietnam Veterans and Veterans of covered service in Korea who are suffering from Spina Bifida Yes No 22

25 Type of Coverage Is it considered minimum essential coverage in 2014? If it is an individual s only source of coverage in 2014, is the individual liable for the individual mandate penalty? Peace Corps Program Yes No Nonappropriated Fund Health Benefits Program of the Department of Defense Yes No Employer-sponsored health insurance Yes No Individual market health insurance Yes No Qualified health plans (QHP) offered inside and outside exchanges Yes No Grandfathered health plans k Yes No Self-funded student health plans l Yes No Refugee Medical Assistance supported by the Administration for Children and Families Yes No State high risk pools m Yes No Group health plan provided through insurance regulated by a foreign government Yes No Source: CRS analysis of ACA statute, 26 CFR Part 1, and its implementing regulations and guidance. Notes: ACA allows the Secretary of HHS, in coordination with the Secretary of the Treasury, to recognize arrangements other than those identified in statute as minimum essential coverage. HHS has outlined a procedure by which a sponsor of coverage or a government agency may apply to HHS to have its coverage certified as minimum essential coverage. The process is outlined in 45 CFR and in guidance issued by HHS, CCHO Sub-Regulatory Guidance: Process for Obtaining Recognition as Minimum Essential Coverage, on October 31, a. As defined in 42 U.S.C. 1396a(a)(10)(A)(ii)(XI). b. As defined I 42 U.S.C. 1396a(a)(10)(A)(ii)(XII). c. As defined in 42 U.S.C. 1396a(a)(10)(A)(i)(V) and 1396a(1)(10)(A)(ii)(IX). 23

26 d. As authorized by 42 U.S.C. 1396b(v). e. In general, 1115 of the Social Security Act (SSA) gives the Secretary of HHS authority to approve experimental, pilot, or demonstration projects that promote the objectives of the Medicaid and CHIP programs. Section 1115(a)(2) of the SSA allows a state to extend benefits to additional populations (expansion populations) that would not otherwise be eligible for Medicaid. The coverage a state extends to expansion populations is not required to be comprehensive and may be limited. f. While generally not considered minimum essential coverage, to the extent such coverage is comprehensive coverage, the Secretaries of HHS and the Treasury may recognize such coverage as minimum essential coverage. See the proposed rule for more details (78 Federal Register 4302, January 27, 2014). g. As defined in 42 U.S.C. 1396a(a)(10)(C) and 42 CFR and following (subpart D). h. Specifically, the program providing care limited to the space available in a facility for the uniformed services for individuals excluded from TRICARE coverage under sections 1079(a), 1086(c)(1), or 1086(d)(1) of Title 10, U.S.C., and the program for individuals not on active duty for an injury, illness or disease, incurred or aggravated i n the line of duty under sections 1074a and 1074b of Title 10, U.S.C. i. P.L amended ACA to clarify that the Secretary of Veterans Affairs, in coordination with the Secretary of HHS and the Secretary of the Treasury, would determine which VA health care programs would be considered minimum essential coverage. The programs outlined in the table are the VA programs the Secretaries have identified as minimum essential coverage; it would seem that coverage under any VA programs other than those specified in the table is not considered minimum essential coverage. For more information on VA health care under ACA, see CRS Report R41198, TRICARE and VA Health Care: Impact of the Patient Protection and Affordable Care Act (ACA) by Sidath Viranga Panangala and Don J. Jansen. j. For more information on the Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA), see CRS Report RS22483, Health Care for Dependents and Survivors of Veterans, by Sidath Viranga Panangala. k. Grandfathered plans are defined as those individual and group plans that an individual or family was enrolled in on the date of enactment (March 23, 2010). For additional information about grandfathered plans, see CRS Report R41166 Grandfathered Health Plans under the Patient Protection and Affordable Care Act (ACA) by Bernadette Fernandez. l. Self-funded student health plans are designated minimum essential coverage for 24

27 plan or policy years beginning on or before December 31, 2014; for coverage beginning after December 31, 2014, sponsors of such plans have to apply to the Secretary of HHS to be recognized as minimum essential coverage via the process outlined in 45 CFR m. State high risk pools are designated as minimum essential coverage for plan or policy years beginning on or before December 31, 2014 for coverage beginning after December 31, 2014, sponsors of high risk pool coverage have to apply to the Secretary of HHS to be recognized as minimum essential coverage via the process outlined in 45 CFR n. According to guidance from HHS, an individual who has coverage under a group health plan provided through insurance regulated by a foreign government has minimum essential coverage if the individual is physically absent from the United States... and if the individual is physically present in the United States... while the individual is on expatriate status. For more information see CCIIO Sub-Regulatory Guidance: Process for Obtaining Recognition as Minimum Essential Coverage, issued October 31, G. 36B Premium Credit Eligibility 1. ACA specifies that the Premium Tax Credit will be available to applicable taxpayers in a coverage month beginning in An applicable taxpayer is an individual who: a. is part of a tax-filing unit ; b. is enrolled in a plan through an individual exchange ; and c. has household income at or above 100% of the federal poverty level (FPL), but not more than 400% of the FPL. 3. A coverage month refers to a month in which the applicable taxpayer paid for coverage offered through an exchange, not including any month in which the taxpayer was eligible for minimum essential coverage with exceptions. These eligibility criteria are discussed in greater detail below. H. Part of a Tax-Filing Unit Defined 1. Given that the premium assistance is provided in the form of tax credits, they are administered through the tax system (although advance payments go directly to insurers). The credits can only be obtained by qualifying individuals who file federal tax returns. 25