By Charles E. McCabe
Richmond, VA – May 8, 2014
We’ve passed the deadline for individuals and families to obtain required health care coverage to avoid being penalized. The penalties clients must pay for not having required coverage can be substantial.
As tax preparers, we are not enforcers of the Affordable Care Act; however, we are the ones who will be on the front lines next tax season delivering the bad news to clients who failed to obtain the required health care coverage. Educating your clients now is important so they will not be surprised next tax season when they will have a penalty added to their income tax.
The first thing clients need to be educated on is the consequences of not being covered. The penalty/fee (“individual responsibility payment”) is calculated one of two ways according to healthcare.gov; however, the client will pay the greater of the two.
- 1% of your yearly household income. (Only the amount of income above the tax filing threshold, $10,150 for an individual, is used to calculate the penalty.) The maximum penalty is the national average monthly premium for a bronze plan based on individual factors.
- $95 per person for the year ($47.50 per child under 18). The maximum penalty per family using this method is $285.
The penalty increases every year. In 2015 it will be 2% of your income or $325 per person. In 2016 it will be 2.5% of your income or $695 per person and then it’s adjusted for inflation in the years to follow.
Let’s say your client missed the deadline, but obtains qualified insurance at some point during the year. The penalty is calculated as 1/12 of the yearly penalty times the number of months the person was not insured. If your client was uninsured for 3 months or less out of the year, then there is no penalty.
The second thing your clients need to know is how to obtain coverage if they don’t currently have coverage. The open enrollment period for getting insurance through the Marketplace is closed, however, people can still obtain insurance on their own through their employers or through private entities. Employer plans must offer minimum coverage for all full-time employees if the company has at least 50 employees; so directing them to their employer is one option. If that is not the case, they can shop for insurance on their own. They can also wait until the next open enrollment period and shop on the Marketplace. The next open enrollment period begins November 15, 2014. While they will have to pay a penalty for not being insured from March through October, depending on their situation, it may be best to wait.
Special Enrollment Period
Some individuals may qualify for the special enrollment period while the Marketplace is closed. This applies to people who have had a “qualifying life event” like changes to family size or a “complex situation related to applying in the Marketplace.” The Special Enrollment Period is 60 days following a “qualifying life event”. More information regarding the special enrollment period can be found on healthcare.gov.
There are people who are exempt from the individual responsibility payment. Exemptions are given for the following reasons:
- You were uninsured for less than three months
- The lowest-priced coverage available to you would cost more than 8% of your household income
- You don’t have to file a tax return because your income is too low (Learn about the filing limit.)
- You’re a member of a federally recognized tribe or eligible for services through an Indian Health Services provider
- You’re a member of a recognized health care sharing ministry
- You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare
- You’re incarcerated, and not awaiting the disposition of charges against you
- You’re not lawfully present in the U.S.
There are also several hardship exemptions for people in situations where they are unable to purchase health insurance. For example if they were homeless, recently experienced domestic abuse, and a number of other reasons. If your client qualifies for an exemption, they will need to fill out an application for exemption on healthcare.gov. Information about exemptions and how to apply can be found here.
Premium Tax Credit
Clients who have obtained healthcare coverage through the Marketplace may be eligible for a Premium Tax Credit. This tax credit is to make purchasing health insurance more affordable for people with moderate incomes. According to irs.gov, you are eligible if you:
- buy health insurance through the Marketplace
- are ineligible for coverage through an employer or government plan
- are within certain income limits
- do not file a Married Filing Separately tax return (unless you meet the criteria in Notice 2014-23, which allows certain victims of domestic abuse to claim the premium tax credit using the Married Filing Separately filing status for the 2014 calendar year); and
- cannot be claimed as a dependent by another person.
Individuals who qualify can choose to get the credit now and have it sent directly to their insurance company or claim the full amount when they file their 2014 or 2015 tax return. More information about the Premium Tax Credit can be found here.
As for tax preparers, there are a lot of questions yet to be answered. For example, what forms are needed, how do you verify compliance and are there penalties for tax preparers that are not compliant with the ACA procedures? The IRS will not release that information until the summer, however here are some resources that may help.
- Affordable Care Act Tax Provisions
- Form W-2 Reporting of Employer-Sponsored Health Coverage
- The Affordable Care Act: What You Should Know as a Taxpayer
- Kaiser Foundation Subsidy Calculator
- Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Miscellaneous Minimum Essential Coverage Provisions
Stay tuned to the IRS.gov and Healthcare.gov websites for further information this summer. Tax preparers should look into attending one of the IRS Tax Forums in July and August to gain additional insights from the IRS on the role of tax preparers in helping their clients. Additionally, The Income Tax School will be adding a CE seminar on the ACA role of tax preparers this Labor Day. Be sure to follow them on Facebook and Twitter (@TaxSchool) as well as their Tax Talk Blog for updates on the Affordable Care Act.