By Wolters Kluwer Contributing Editor
Individuals without minimum essential health coverage in 2015 may be liable for an individual shared responsibility payment unless they qualify for an exemption. Most taxpayers will merely have to check a box on their return indicating that they had minimum essential coverage (MEC). Taxpayers who have an exemption granted by the ACA marketplace or who are seeking an exemption from the IRS use Form 8965, Health Coverage Exemptions, and file it with 2015 Form 1040, Form 1040A, or Form 1040EZ. This Strategic Perspective highlights two exemptions: the hardship exemption and the short coverage gap exemption, along with some new developments since the last filing season.
Coverage and payments. The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) requires individuals to have qualifying health coverage (minimum essential health coverage), qualify for an exemption, or make a shared responsibility payment with their federal income tax return for the months the individual did not have MEC or an exemption. For 2015, the percentage amount is two percent of income above filing threshold (that is, the minimum amount of gross income an individual of the individual’s age and with the individual’s filing status (for example, single, married filing jointly, head of household) must make to be required to file a tax return). For 2015, the flat dollar amount is $325 per adult, $162.50 per child (family maximum: $975).
A payment amount is capped at the cost of the national average premium for a bronze level health plan available through the ACA marketplace. For 2015, the annual national average premium for a bronze level health plan available through the marketplace is $2,484 per year ($207 per month) for an individual and $12,240 per year ($1,020 per month) for a family with five or more members.
Comment: If an individual has coverage or an exemption for only part of the year, he or she will prorate the payment for an amount less than the annual payment, the IRS has instructed.
Many types of health insurance coverage qualify as MEC. For wage earners, employer-sponsored coverage is generally MEC. Grandfathered health plans are treated as MEC. Grandfathered plans are defined as those individual and group plans that an individual or family was enrolled in on the date of enactment of the ACA (March 23, 2010). Coverage purchased in the individual market, including a qualified health plan offered by the ACA marketplace, is MEC. Medicare, Medicaid, TRICARE, and the Children’s Health Insurance Program (CHIP) provide MEC (subject to some very limited exceptions).
Coverage that provides only limited benefits is not MEC. This includes coverage consisting solely of excepted benefits, such as stand-alone vision care or dental care; workers’ compensation; and accident or disability coverage. Also among the types of coverage treated as not providing MEC are Medicaid providing only family planning services; Medicaid providing only coverage limited to treatment of emergency medical conditions; Medicaid coverage for the medically needy; and certain line of duty TRICARE coverage.
Exemptions. The ACA created statutory exemptions from the requirement to carry minimum essential health coverage. The statutory exemptions are:
- religious conscience;
- health sharing ministry;
- Native American tribes;
- income below the income tax return filing requirement;
- short coverage gap;
- incarceration; and
- not lawfully present in U.S.
Comment: In 2014 an exemption was available for individuals who were eligible for non-calendar year employer-sponsored insurance plans in 2013. This exemption is not available for 2015.
Some exemptions are granted by the ACA marketplace. Other exemptions are granted by the IRS. In some cases, both the IRS and the ACA marketplace may grant an exemption. Individuals who qualify for a marketplace-determined exemption receive an Exemption Certificate Number (ECN). Individuals will use the ECN when filing their federal income tax return. Individuals who qualify for an IRS-determined exemption do not receive an ECN.
Comment: The marketplace has an appeal process for individuals who are denied an exemption by the marketplace. Individuals can also appeal whether they eligible to buy a marketplace plan; whether they can enroll in a marketplace plan outside the regular open enrollment period; and other determinations by the marketplace.
2014 returns. Approximately 76 percent of filers reported they had MEC in 2014, the Treasury Department has reported. Approximately 10 percent of filers claimed an exemption and approximately six percent of filers made a shared responsibility payment for 2014. According to Treasury, the six percent level was higher than projected because some 300,000 individuals made a shared responsibility payment for 2014 not realizing that they qualified for an exemption.
The National Taxpayer Advocate, in a separate analysis, discovered that some 6.6 million returns reported liability for an individual shared responsibility payment for 2014. Approximately 4.3 million of these returns were submitted on returns prepared by a paid or volunteer preparer and about 2.3 million returns were deemed self-prepared. Taxpayers also filed approximately 11 million returns claiming an exemption from the individual shared responsibility payment on Form 8965. Of those, about 53 percent were prepared by a paid or volunteer preparer and about 47 percent were deemed self-prepared, the National Taxpayer Advocate reported. The National Taxpayer Advocate also found that more than 50,000 taxpayers overpaid their individual shared responsibility payment for 2014 because of miscalculations.
Comment: During the 2014 filing season, a preliminary study by the National Taxpayer Advocate determined that approximately 50 percent of all returns with a miscalculated individual shared responsibility payment were self-prepared.
Hardship exemption. The hardship exemption encompasses a great variety of situations. HHS has explained some of the situations on HealthCare.gov. An individual may qualify for a hardship exemption if her or she:
- was homeless;
- was evicted in the past six months or was facing eviction or foreclosure;
- received a shut-off notice from a utility company;
- recently experienced domestic violence;
- recently experienced the death of a close family member;
- experienced a fire, flood, or other natural or human-caused disaster that caused substantial damage;
- filed for bankruptcy in the last six months;
- had medical expenses that could not be paid in the last 24 months;
- experienced unexpected increases in necessary expenses due to caring for an ill, disabled, or aging family member;
- expect to claim a child as a tax dependent who has been denied coverage in Medicaid and CHIP and another person is required by court order to give medical support to the child;
- received a notice saying that current health insurance plan purchased on the individual market (non-group coverage) is being cancelled, and the taxpayer considers the other plans available unaffordable; or
- experienced a hardship not listed above that kept the taxpayer from getting health insurance.
HHS has explained that an individual may apply for more than one hardship type if the hardship events were at different times of the year. Individuals must submit documentation for each category of hardship for which they are applying, HHS instructed.
Comment: HHS requires various types of documentation. For example, an individual claiming a hardship exemption based on the recent death of a close family member must submit a death certificate, coroner’s report, military notification of death, or other documentation. An individual seeking a hardship exemption based on bankruptcy must provide copies of his or her bankruptcy documents.
The IRS may grant a hardship exemption based on certain circumstances. These include where:
- a taxpayer’s gross income falls below the applicable return filing threshold;
- two or more members of a family whose combined cost of employer-sponsored coverage is considered unaffordable;
- the coverage is considered unaffordable, due to the minimum premium exceeding the required contribution percentage of household income;
- the individual was eligible for services through an Indian Health Care provider;
- the individual resides in a state that did not expand Medicaid eligibility under ACA (see below); or
- short coverage gap
If an individual experiences a gap in MEC that is less than three months, he or she may qualify for an exemption. If an individual experiences a gap in MEC for three months or longer consecutively, none of the months in that period qualify for the short coverage gap exemption. The exemption for a short gap in coverage is claimed on the individual’s federal income tax return.
An individual is treated as having MEC for a month if he or she has MEC for at least one day during that month. For example, if an individual lacked MEC from March 2, 2015 until June 15, 2015 but had coverage directly before and after those dates, the individual is considered covered for March and June, and had a coverage gap of two months (the months of April and May 2015).
Medicaid. If an individual is a resident of a state that did not expand Medicaid and his or her household income is below 138 percent of the federal poverty line for respective family size, the individual may qualify for an exemption. Similarly, if the individual was determined to be ineligible for Medicaid because the taxpayer’s state did not expand eligibility under the ACA, the individual may qualify for an exemption.
The following states did not expand Medicaid for all of 2015: Alabama, Alaska, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Maine, Mississippi, Missouri, Montana, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, and Wyoming.
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