iv. taking a closer look at the federal income tax issues of the ... - nstp a closer look (aca)...

IV. Taking a Closer Look at the Federal Income Tax Issues of the Affordable Care Act (ACA): It’s Not Going Away!

Paul La Monaca, CPA, MSTNSTP Director of Education

©2016 National Society of Tax Professionals

A. Introduction to the Legislation

On March 23, 2010, President Obama signed into law H.R. 3590, The Patient Protection and

Affordable Care Act. H.R. 3590 is generally referred to as the “2010 Health Care Act.” 1

2 On March 30, 2010, the President signed an amended bill H.R. 4872, The Health Care and

Education Reconciliation Act of 2010. H.R. 4872 is generally referred to as the “2010

Reconciliation Act.”

• 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 Care Coverage Requirements

1 The legislation imposes provisions which address the following issues:

§5000A Shared Responsibility Payment (PENALTY) for individuals remaining uninsured (aka: the individual mandate)

§36B Premium Assistance Credit for low income taxpayers for participating in health exchanges (MARKETPLACE)

§4980H Employer responsibilities for worker health coverage

§4980D Dependent coverage in employer health plans

B. Tax Changes and the Universal Health Care Coverage Requirements

1 The legislation also imposes health related revenue raisers and reporting responsibilities as follows:§4980I Cadillac Plans Excise tax on high-cost employer sponsored health coverage (effective

date January 1, 2018)

§6051(a)(14) Reporting of employer sponsored health coverage on Form W-2 (Code DD)

§3101(b)(2) Additional “Hospital Insurance Tax” (HI) for high wage earners and §1401 (b)(2) self-employed individuals (Form 8959)

§1411 Surtax on unearned income; (Net investment Income Tax on Form 8960)

§220(f)(4) Increased tax on non-qualifying HSA or Archer MSA distributions (Form 5329)

§213(a) Modified threshold for claiming medical expense deductions on Schedule A of Form 1040 (Including transition rules for taxpayers age 65 and older in years 2013-2016) Industry-specific revenue raisers assessed against insurance companies, imaging companies, medical equipment devices, drug companies, etc.

C. Health Coverage Exemptions

1 For purposes of the 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, 2014. The taxpayer is now required to file 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. This rule for “minimal essential coverage” applies to all “applicable individuals” other than an individual who:2

Qualifies for a §5000A(d)(2)(A) religious conscience exemption (for more information to qualify see Form 8965 Instructions);

Is a member of a health care sharing ministry under §5000A(d)(2)(B)(ii) (Code “D”);

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

Is incarcerated, other than incarceration pending the disposition of charges (Code “F”).


3 For purposes of the requirement that after 2013 “applicable individuals” will have to maintain a minimum level of health insurance coverage (“minimum essential coverage”) the term “minimum essential coverage” will mean any of the following under §5000(A)(f)(1):

Medicare

Coverage under any of these government-sponsored programs:

Medicaid

CHIP

TRICARE Program

Peace Corps

a


b Coverage under an eligible employer-sponsored plan under the provisions of §4980H

Coverage under a health plan offered in the individual market within a state

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; andAny 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.”

cd

e


For the Tax Year 2015 the IRS will require the following to be reported:

*Note that Form 1095-B and Form 1095-C were not mandatory for tax year 2014, but are mandatory beginning 2015 with an issue date of January 31, 2016.

4Form 1095-A, “Health Insurance Marketplace Statement,” is required to be issued to individuals on or before January 31, 2016, for coverage in calendar year 2015.

Insurance Companies and self-insured health plans will provide taxpayers with 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, 2016 for the 2015 tax year.

Large employers must file 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.


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 and will be provided for:

Tax Professional Educational Fact: Individuals receiving an exemption from the individual mandate are required to file Form 8965, “Health Coverage Exemptions”. Also see the chart on page 3 of the instructions for Form 8965 for the exemptions and codes.

Individuals who cannot afford coverage (Code “A”)

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Taxpayers with income below the income tax return filing threshold

Members of Indian tribes (Code “E”)

Months during short coverage gaps (Code “B”) and

Hardships

D. §36B Premium Assistance Credit

For tax years beginning after December 31, 2013, §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.

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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 Note

§36B credit has become known as the “Premium Tax Credit” (PTC), which is also the title of Form 8962.

Tax Professional Education Fact


§36B(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 credit amount will be equal to the lesser of:

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); (Supreme Court ruling allows taxpayers the credit provided by the federal marketplace) or

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a

The excess (if any) of: i. the “adjusted monthly premium” for such month for the applicable second lowest

cost silver plan (SLCSP) 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. (Reported on Form 8962, Part I.)

b


§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 a specified income tier.

“Applicable Percentage” is defined in §36B(b)(3)(A). Applicable Second Lowest Cost Silver Plan is defined in §36B(b)(3)(B) and Adjusted Monthly Premium is defined in §36B(b)(3)(C).

Tax Professional Research Reference

§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:

3The rate of premium growth for the preceding calendar year, over

The rate of income growth for the preceding calendar year.

ab


Rev. Prov. 2014-37 reports the income tiers for 2015. These tiers are specified in the following table and shall increase on a percentage specified in such table for such income tier: 4

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% 2.01% 2.01%

133% up to 150% 3.02% 4.02%

150% up to 200% 4.02% 6.34%

200% up to 250% 6.34% 8.10%

250% up to 300% 8.10% 9.56%

300% up to 400% 9.56% 9.56%


§36B(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 (geographic location).

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.

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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 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.

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).


§36B(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.

The 2010 Health Care Act provides the refundable credit to qualifying taxpayers who purchase insurance coverage by enrolling in a “qualified health plan” (QHP).

Tax Professional Note: 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.

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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.” 8The 2010 Health Care Act requires that each state was to establish an “American Health Benefit Exchange” (“Exchange”) by January 1, 2014. 9

Many states did 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. The Supreme Court ruled that the Federal Exchange’s granting of the premium assistance credits was within the intention of the statute.



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 line 69 labeled “Net premium tax credit”. The net credit is required to be calculated on Form 8962 Premium Tax Credit (PTC). Any “excess advance premium tax credit” will be reported on line 46 of Form 1040 which is labeled “Excess advance premium tax credit repayment”.

The Health Care Law and You: Nine Facts About Letters Sent by the IRS: The IRS sent letters to taxpayers this summer who were issued a Form 1095-A, Health Insurance Marketplace Statement, showing that advance payments of the premium tax credit were paid on the taxpayer’s behalf in 2014. At the time, the IRS had no record that the taxpayer filed a 2014 tax return.

Tax Professional Alert

E. §36B Details

The §36B credit is titled “Refundable Credit for Coverage under a Qualified Health Plan.”

§36B(a) provides a general rule that there is a credit allowed.

§36B(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 dependents who are enrolled through an Exchange offered in the individual market within a state which covers the taxpayers. (Since many states did not create an Exchange the Federal Market Place qualifies). There are rules pertaining to self-only coverage and family coverage under §36B(b)(3)(B).

§36B(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.

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E. §36B Details

§36B(c) provides specific definitions as follows: 6§36B(c)(1) “Applicable Taxpayer”: 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 Federal Poverty Level (FPL) for a family of the size involved. The FPL is reported on Form 8962, Part I, Line 4. The FPL is indexed to inflation§36B(c)(1)(B) Special rule for certain individuals lawfully present in the United States: If

i. §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

ii. §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

E. §36B Details

§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.

Note: In 2014, the Form 8962 used a box labeled “Relief.” In 2015, the line indicates that if the taxpayer is eligible for the exception then they must check the box in order to claim the PTC. The instructions state that the documentation does not have to be attached to 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.

E. §36B Details

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 IRS Form 8962 Premium Tax Credit (PTC) state that the taxpayer will be required to check the box in the top right-hand corner of Form 8962.

Note: In 2014, the Form 8962 used a box labeled “Relief.” In 2015, the line indicates that if the taxpayer is eligible for the exception then they must check the box in order to claim the PTC. The instructions state that the documentation does not have to be attached to 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.


E. §36B Details

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.

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.

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 Form 8962 in order to calculate their separate household income as a percentage of the Federal poverty line.

Tax Professional AlertIndividuals cannot qualify for relief from the joint filing requirement for more than three consecutive years, during which time they must presumably obtain a divorce.


E. §36B Details

§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.

§36B(c)(2) Coverage Month: For purposes of this subsection– as of the first day of such month the taxpayer. §36B(c)(2)(A) provides a general rule that the term “coverage month” means, with respect to an “applicable taxpayer”.

§36B(c)(2)(B) Exception for minimum essential coverage:

§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).

§36B(c)(2)(B)(ii) provides that the term “minimum essential coverage” has the meaning given such term by §5000A(f).

E. §36B Details

For tax years beginning after 2014 §36B(c)(2)(C) provides a special rule for employer-sponsored minimum essential coverage: for purpose of “minimum essential coverage”.

§36B(c)(2)(C)(i) provides that the coverage must be affordable: except as provided in clause (iii) below, an employee shall not be treated as eligible for minimum essential coverage if such coverage –

consists of an eligible employer-sponsored plan (as defined in §5000A(f)(2); and

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

§36B(c)(2)(C)(ii) provides that the coverage must have minimum value

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E. §36B Details

§36B(c)(2)(C)(iii) provides that the employee or family must not be covered under an employer plan. Clauses (i) and (ii) above shall not apply if the employee (or any individual described in the last sentence or clause (i)) is covered under the eligible employer-sponsored plan or the grandfathered health plan.

The employer will provide the Form 1095-C to employee to determine the level of coverage.


§36B(c)(2)(C)(iv) provides for indexing of the applicable taxpayer’s household income: In the case of plan years beginning in any calendar year after 2014, the Secretary shall adjust the 9.5 percent under clause (i)(II) in the same manner as the percentages adjusted under subsection (b)(3)(A)(ii). For tax year 2015 this amount is 9.56%and for tax year 2016 it is 9.66%.

E. §36B Details

§36(B)(d) provides more definitions relating to the following items: 7§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. This is reported on Form 8962, Part I, Line 1.

§36B(d)(2)(A) Household Income: The term “household income” means, with respect to any taxpayer, an amount equal to the sum of “modified adjusted gross income” plus aggregate “modified adjusted gross income”.

If a taxpayer has a dependent child who has income, and the child is required to file a federal income tax return, then the child’s modified AGI is reported on Line 2b of Form 8962.


E. §36B Details

§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. §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

iii. §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.

§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. 1397j(c)(5)).

E. §36B Details

§36(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.

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§36B(e)(1) provides a general rule that if one or more individuals for whom a taxpayer is allowed a deduction under §151

§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:

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).

E. §36B Details

§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.

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§36(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. On Form 8962 the reconciliation is calculated in Part III and is titled “Repayment of Excess Advance Payment of the Premium Tax 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.

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.

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E. §36B Details

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% $2,550* $1,250

*Indexed to inflation from $2,500 in 2014

E. §36B Details

§36B(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;

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§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 was in effect.

§36B(f)(3)(B): The total premium for the coverage without regard to the credit under this section or cost-sharing reductions. The name, address, and TIN of the primary insured and any other information provided to the Exchange.

The reporting of the Information Requirements by the Exchange will be reported on Form 1095-A, “Health Insurance Marketplace Statement” which is required to be issued by January 31, 2016 for 2015 reporting purposes. The information reported on Form 1095-A provides the data needed to complete the individual taxpayer’s Form 8962, Premium Tax Credit (PTC). The result calculated on Form 8962 will carry to Form 1040, page 2, line 69, labeled as “Net premium tax credit, attach Form 8962”.

Tax Professional Educational Fact

F. 2015 Congressional Research Service Report To Congress

On March 18, 2015, the Congressional Research Service (CRS) updated and 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.

1Illustrative individual mandate penalties i. 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 2016. 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 (which is the income above the filing threshold). Individuals below the filing threshold for federal income tax will not pay a penalty.

ii. 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 and $20,600. 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 2016. The examples below use estimated filing thresholds for 2016. 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:

a) 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 of $2,448 for bronze level coverage will pay 1% of applicable income.

b) In 2015, those with income above the filing threshold of $10,300 but at or below $26,550 will pay the $325 flat amount, and those with income above $26,550 and below the cap at the national average premium of $2,484 bronze level coverage will pay 2% of applicable income.

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 2015 at a maximum of $2,484 (12 months times $207 per month) per individual annually, up to a maximum $12,420 for families of five or more. For a family of four the maximum would be $9,936 (4 x $2,484). For more details see Rev. Proc. 2015-15.

Tax Professional Educational Fact


iii. 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 2015 the flat dollar amount is limited

to three times $325 or $975. The flat dollar amount is ½ for children under age 18 so that a

married couple with two children under 18, a single parent with four children under 18, as

well as larger families, are all subject to the same maximum flat dollar amount.

Illustrative individual mandate penalties:

G. Claiming An Exemption From The Mandate

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.

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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.

Those claiming the short coverage gap, unlawfully present, filing threshold, or affordability exemptions may only do so on their federal income tax return.

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H. Household Income: 100%-400% of “Federal Poverty Level” (FPL)

In order to be eligible for premium credits, individuals must have “household income” within statutorily defined guidelines based on the federal poverty level (FPL). For purposes of premium credit eligibility, household income is measured according to the definition for “modified adjusted gross income” (MAGI). An individual with a MAGI at or above 100% FPL up to and including 400% FPL may be eligible to receive premium credits.

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Table 1 displays the income levels at 400% FPL, the amount beyond which individuals and families would not be eligible for premium credits in 2015 (using 2014 HHS poverty guidelines). # of Persons in Family 48 Contiguous States and

DCAlaska Hawaii

1 $ 46,680 $ 58,320 $ 53,6802 $ 62,920 $ 78,640 $ 72,3603 $ 79,160 $ 98,960 $ 91,0404 $ 95,400 $119,280 $109,7205 $111,640 $139,600 $128,4006 $127,880 $159,920 $147,0807 $144,120 $180,240 $165,7608 $160,360 $200,560 $184,440

I. Premium Credits In 2015

Table 2. Selected Annual Income Levels Applicable to 2015 Premium Credits Based on 2014 HHS Poverty Guidelines for the 48 contiguous states and the District of ColumbiaPercent of Federal Poverty Line (FPL) Family Size

1 Person 2 Persons 3 Persons 4 Persons

100% $11,670 $15,730 $19,790 $23,850

133% $15,521 $20,921 $26,321 $31,721

150% $17,505 $23,595 $29,685 $35,775

200% $23,340 $31,460 $39,580 $47,700

250% $29,175 $39,325 $49,475 $59,625

300% $35,010 $47,190 $59,370 $71,550

350% $40,845 $55,055 $69,265 $83,475

400% $46,680 $62,920 $79,160 $95,400


Table 3. Maximum Monthly Premium Contributions for Tax Credit Recipients Enrolled in the Second Lowest Cost Silver Plan, 2015 Based on 2014 HHS Poverty Guidelines for the 48 contiguous states and the District of ColumbiaFederal Poverty

(FPL) Maximum Premium Contribution

Based on % of IncomeMaximum Monthly Premium Contributions for Tax Credit

Recipients, by Family Size

(“Applicable Percentages”) 1 Person 2 Persons 3 Persons 4 Persons100% 2.01% $ 20 $ 26 $ 33 $ 40

132.999% 2.01% $ 26 $ 35 $ 44 $ 53133% 3.02% $ 39 $ 53 $ 66 $ 80150% 4.02% $ 59 $ 79 $ 99 $120200% 6.34% $123 $166 $209 $252250% 8.10% $197 $265 $334 $402300% 9.56% $279 $376 $473 $570350% 9.56% $325 $439 $552 $665400% 9.56% $372 $501 $631 $760

Notes: For 2015, the income levels used to calculate premium credit eligibility and amounts are based on 2014 HHS poverty guidelines. If individuals enroll in more expensive plans than the second lowest cost Silver Plan in their respective areas, then they would be responsible for the additional premium amounts. If the required premium contribution exceeds the actual premium amount, then individuals would pay the entire premium for exchange coverage. The premium amounts have been rounded up to the nearest dollar amount.

Table 3 illustrates the cliff effect that occurs at 133% FPL. For individuals with income below 133% FPL, the credits ensure that such individuals pay no more than 2.01% of their income for the second-lowest cost Silver Plan. For incomes at or above 133% FPL, individuals and families may pay up to 3.02% of their income toward premiums for their reference plan.


J. Premium Credit Examples: Self-Only And Family Coverage

The hypothetical examples use actual exchange information about premiums, enrollee contributions, and premium credit amounts.1

2

3

In order to facilitate comparisons across hypothetical individuals and families, the premium and tax credit amounts apply to the same zip code 60647 (the first state and first county in the drop-down menus in the Plan Finder tool).

The examples in Table 4 assume that the hypothetical individual (or family) is enrolled in the reference plan (second-lowest cost silver plan).

As the 2015 premium data indicate, individuals at the same income level will pay different (pre-credit) premiums based on age. This reflects the limited age rating allowed for health insurance policies, including those offered in the individual exchanges. The practical effect of ACA’s age rating requirements means that, for any given metal-tier plan in a specific geographic area, premiums vary for adults between 21 and 64+ years of age by a 3:1 ratio. (For examples that illustrate the 3:1 ratio for adults, see hypothetical persons A, B, C, and D in Table 4, and the following analysis included under “Discussion of Self-Only Coverage Examples.”) Moreover, the premium credit amounts are greater for those with lower incomes, compared with higher-income individuals of the same age, reflecting their income-based structure of the premium credits.

J. Premium Credit Examples: Self-Only And Family Coverage

Table 4. Premium Contributions and Credit Amounts for the Second-Lowest Cost Silver Plans in 2015, by Selected hCoverage Tiers Applicable to Zip Code 60647

Coverage Tier

Hypothetical Person or

Family-Letter Designation

Annual Income

Federal Poverty

Level (FPL)

Maximum Premium

Contribution as a % of

Income

Age of Adult(s)(a)

Monthly (Pre-Credit) Premium

for the Second Lowest Cost

Silver Plan(b)

Monthly Premium

Contribution from Enrollee(s)

Monthly Credit

Amount

Self-Only A $17,505 150% 4.02% 21 $ 168 $ 59 $109

B $17,505 150% 4.02% 64 $ 506 $ 59 $447

C $40,845 350% 9.56% 21 $ 168 $168 $ 0

D $40,845 350% 9.56% 64 $ 506 $325(e) $181

Family of Three(d)

E $29,685 150% 4.02% 40 $ 538 $ 99 $439

F $29,685 150% 4.02% 60 $1,022 $ 99 $923

G $69,265 350% 9.56% 40 $ 538 $538(c) $ 0

H $69,265 350% 9.56% 60 $1,022 $552 $470

M. Reconciliation Of Advanced Premium Credits on IRS Form 8962 Premium Tax Credit

Under ACA, the amount received in premium credits is based on the prior year’s income tax return. If a tax filing unit’s income decreases during the tax year, and the filer should have received a larger tax credit, then this additional credit amount will be included in the tax refund for the year. For households with incomes below 400% FPL, the law includes specific limits that apply to single and joint filers separately, these limits will be indexed by inflation in future years.

1

Table 5 - Limits on Repayment of Excess Premium Credits Earned by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayment Act of 2011 (P.L. 112-9) IF Household Income (Expressed as a percentage of the Federal Poverty Level) is:

The Applicable Dollar Limit for

Joint Filers Single Filers

Less than 200% $ 600 $ 300

At least 200% but less than 300% $1,500 $ 750

At least 300% but less than 400% $2,550* $1,250

*Indexed to inflation from $2,500 in 2014

M. Reconciliation of Advanced Premium Credits on IRS Form 8962 Premium Tax Credit

Limited Tax Relief for Certain Premium Credit Recipients On January 26, 2015, the IRS announced that premium credit recipients who owe a payment on their 2014 tax return, as a result of the tax credit reconciliation process, may receive limited tax relief (see IRS Notice 2015-9). For the 2014 tax year only, taxpayers who meet specified eligibility criteria will be given relief from penalties related to the following scenarios: (1) late payment of taxes owed (§6651(a)(2)) and (2) underpayment of taxes owed (§6654(a)).


O. §4980H Shared Responsibility for Employers Regarding Health Coverage

§4980H(a)(1) and (2) provide that if: 1Any applicable large employer (defined as 50 or more full-time equivalent employees) fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in §5000A(f)(2)) for any month, and

At least one full-time employee of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee, then there is hereby imposed on the employer an “assessable payment” equal to the product of the “applicable payment” amount which is 1/12 of $2,000 for any month (i.e. $166.77 per month) and the number of individuals employed by the employer as full-time employees during such month.


§4980H(b)(1)(A) and (B) provide a general rule that if: 2An applicable large employer offers to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) for any month, and

One or more full-time employees of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee, then there is hereby imposed on the employer an “assessable payment” equal to the product of the number of full-time employees of the applicable large employer receiving a premium tax credit or a cost sharing subsidy for the purchase of health insurance through an exchange for the month. The amount for such month is equal to 1/12 of $3,000 (i.e. $250 per month).


§4980H(b)(2) Provides that a monthly penalty is limited: The aggregate amount of tax determined under paragraph (1) with respect to all employees of an applicable large employer for any month shall not exceed the product of the applicable payment amount and the number of individuals employed by the employer as full-time employees during such month.

3

§4980H(c) Provides definitions and special rules: For purposes of this section §4980H(c)(1) “applicable payment amount”. The term “applicable payment amount” means, with respect to any month, 1/12 of $2,000 (i.e. $167.67 per month).

§4980(c)(2)(a) Provides that in general term “applicable large employer” means, with respect to a calendar year, an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.

§4980H(c)(2)(B) provides for exemptions for certain employers and §4980H(c)(2)(B)(i) provides a general rule that an employer shall not be considered to employ more than 50 full-time employees if:

a) the employer’s workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year, and

b) the employees in excess of 50 employed during such 120-day period were seasonal workers.

4

5

6


§4980H(c)(2)(B)(ii) provides a definition of seasonal workers: the term “seasonal worker” means a worker who performs labor or services on a seasonal basis as defined by the Secretary of Labor, including workers covered by section 500.20(s)(1) of title 29, code of Federal Regulations and retail workers employed exclusively during holiday seasons.

7

§4980H(c)(2)(C) defines rules for determining employer size: §4980H(c)(2)(C)(i) provides application of aggregation rule for employers. All persons treated as a single employer under subsection (b), (c), (m) or (o) of §414 of the Internal Revenue Code of 1986 shall be treated as 1 employer.§4980H(c)(2)(C)(ii) discusses issues for employers not in existence in preceding year: In the case of an employer who was not in existence throughout the preceding calendar year, the determination of whether such employer is an applicable large employer shall be based on the average number of employees that is reasonably expected such employer will employ on business days in the current calendar year.

8

9

§4980H(c)(2)(C)(iii) Predecessors: Any reference in this subsection to an employer shall include a reference to any predecessor of such employer.



§4980H(c)(2)(D) Application of employer size to assessable penalties. §4980H(c)(2)(D)(i) Provides in general that the number of individuals employed by an applicable large employer as full-time employees during any month shall be reduced by 30 solely for purposes of calculating:

10

12 §4980H(c)(2)(E) discusses the issues of full-time equivalents treated as full-time employees: a number of full-time employees determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.

§4980H(c)(2)(D)(i)(I) the assessable payment under subsection (a), or

§4980H(c)(2)(D)(i)(II) the overall limitation under subsection (b)(2).


§4980H(c)(3) addresses the issues of the applicable premium tax credit and cost-sharing reduction: The term “applicable premium tax credit and cost-sharing reduction” means –13

§4980H(c)(3)(A) any premium tax credit allowed under §36B

§4980H(c)(4) addresses the issue of a full-time employee: §4980H(c)(4)(B) Provides in general that the term “full-time employee” means, with respect to any month, an employee who is employed on average at least 30 hours of service per week.

§4980H(c)(3)(B) any cost-sharing reduction under section 1402 of the Patient Protection and Affordable Care Act, and §4980H(c)(3)(C) any advance payment of such credit or reduction under section 1412 of such Act.

14


§4980H(c)(4)(B) Hours of service: the Secretary, in consultation with the Secretary of Labor, shall prescribe such regulations, rules, and guidance as may be necessary to determine the hours of service of an employee, including rules for the application of this paragraph to employees who are not compensated on an hourly basis.



§4980H(c)(5) addresses the issue of indexing and the annual inflation adjustment: §4980H(c)(5)(A) Provides in general that in the case of any calendar year after 2014, each of the dollar amounts in subsection (b) and paragraph (1) shall be increased by an amount equal to the product of –

15

such dollar amount, and

the premium adjustment percentage (as defined in section 1302(c)(4) of the Patient Protection and Affordable Care Act) for the calendar year.

§4980H(c)(5)(B) Rounding: if the amount of any increase under subparagraph (A) is not a multiple of $10, then such increase shall be rounded to the next lowest multiple of $10.


%


The §4980H provisions were supposed to be effective beginning January 1, 2014, and were delayed until January 1, 2015. §4890H(c) provides that the employer shared responsibility payments under §4980H(a) of $2,000 annually and §4980H(b) of $3,000 annually are indexed to inflation. These were the amounts to be assessed for 2014. The IRS conducts a monthly Payroll Industry conference call and on September 9, 2015 the IRS projected the annual per employee §4980H(a) penalty to be increased from $2,000 to $2,080 for 2015 and $2,160 for 2016. It also projects that the §4980H(b) penalty to be increased from the 2014 amount of $3,000, to $3,120 for 2015, and $3,240 for 2016.



§4980H(c)(6) Other definitions: The tax code provides that any term used in this section which is also used in the Patient Protection and Affordable Care Act shall have the same meaning as when used in such Act.

16

§4980H(c)(7) Tax nondeductible: For denial of deduction for the tax imposed by this section, see section 275(a)(6) which provides that specified taxes are not deductible.

§4980H(d) Administration and procedure. §4980H(d)(1) provides a general rule that any assessable payment provided by this section shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68. §4980H(d)(3) Coordination with credits, etc.: The Secretary shall prescribe rules, regulations, or guidance for the repayment of any assessable payment (including interest) if such payment is based on the allowance or payment of an applicable premium tax credit under §36B or cost-sharing reduction with respect to an employee, such allowance or payment is subsequently disallowed, and the assessable payment would not have been required to be made but for such allowance or payment.

1718

20


Example #1 Employer Not An Applicable Large Employer (ALE) Company X has 40 full-time employees for each calendar month. Company X also has 15 part-time employees for each calendar month during the year who have 60 hours of service per month. The total number of hours of the part-time employees for a month is 900 (15x60). The 900 hours is divided by the 120 hours requirement (900/120) which equals 7.5 full-time. Equivalent employees for each month since 7.5 is not a whole number it is rounded down to 7. Therefore in the current year since each month is only 47 employees Company X is not an ALE in the next calendar year.

Example #2 Employer is an ALE Same as Example #1 above except now Company X has 20 part-time employees for each calendar month in the current year whom each work 60 hours per month. The total numbers of hours is now 1,200 (20x60). Dividing the 1,200 hours by 120 hours per month is now the equivalent of 10 full-time equivalent employees and now there are 50 employees for each month and Company X is an Applicable Large Employer for the next calendar year. For purpose of codes reported by employers for types of coverage reported on Form 1095-C. The instructions provide the Codes 1A through 1I.


Preface to Example #3: Employer Aggregation Rules: Companies with a common owner or companies that are otherwise related under certain rules of §414 are generally combined and treated as a single employer for purposes of determining ALE status. If the combined number of FTE and full-time equivalent employees for the group is large enough to meet the definition of an ALE then each employer in the group (called an ALE member) is part of an ALE and is subject to the employer shared responsibility provisions even if separately the employer would not be an ALE.

Example #3: Employers Aggregated to Determined ALE Status: 1. Corporation X owns 100% of all classes of stock of Corp.Y and Corp. Z. 2. Corporation X has no employees at any time in 2015. For every calendar month in 2015, Corp. Y

has 40 FTE and Corp. Z has 60 FTE. Neither Y nor Z has any full time equivalent employees. 3. Corps X, Y and Z are considered a controlled group of corporations. 4. Since Corps X, Y and Z have a combined total of 100 FTE for each month during 2015, they are

together an ALE for 2016. 5. Corps. Y and Z are each an ALE member for 2016. 6. Corp X is not an ALE member for 2016 because it does not have any employees during 2015.


Minimum Value and Affordability Issues of the Employer Shared Responsibility Payment

Affordability Issues: Because employers are not likely to know the household income of their employees, there are three safe harbor rules that an employer may use to determine affordability:

?Form W-2 wages,

an employee’s rate of pay, or

the federal poverty line,

In the case of persons treated as a single employer under the provision, the 30-employee reduction in full-time employees for purposes of calculating the maximum penalty is made from the total number of full-time employees employed by such persons (i.e., only one 30-person reduction is permitted per controlled group of employers) and is allocated among such persons in relation to the number of full-time employees employed by each such person.



Example:

In 2015, Employer A offers health coverage and has 100 full-time employees, 20 of whom receive a tax credit

for the year for enrolling in a State exchange offered plan. For each employee receiving a tax credit, the

employer owes $3,120, for a total penalty of $62,400.

The maximum penalty in 2015 for this employer is capped at the amount of the penalty that it would have

been assessed for a failure to provide coverage, or $145,600 ($2,080 multiplied by 70 ((100-30)). Since the

calculated penalty of $62,400 is less than the maximum amount, Employer A pays the $62,400 calculated

penalty. This penalty is assessed on a monthly basis.


Time for Payment, Deductibility of Excise Taxes, Restrictions on Assessment The excise taxes imposed under this provision are payable on an annual, monthly or other periodic basis as the Secretary of Treasury may prescribe. The excise taxes imposed under this provision for employees receiving premium tax credits are not deductible under §162 as an ordinary and necessary business expense. The restrictions on assessment under §6213 are not applicable to the excise taxes imposed under the provision.

Definition of Coverage As a general matter, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, then the individual is ineligible for a premium tax credit and cost sharing reductions for health insurance purchased through a State exchange.

Unaffordable Coverage Defined An unaffordable plan exists if an employee is offered minimum essential coverage by their employer that is either unaffordable or that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60 percent, but the employee is eligible for a premium tax credit and cost sharing reductions, and only if the employee declines to enroll in the coverage and actually purchases coverage through the exchange instead.


Unaffordable Coverage Defined An employer must be notified if one of its employees is determined to be eligible for a premium assistance credit or a cost-sharing reduction because the employer:

does not provide minimal essential coverage through an employer-sponsored plan, or

The notice must include information about the employer’s potential liability for payments under §4980H. The employer must also receive notification of the appeals process established for employers notified of potential liability for payments under §4980H. An employer is generally not entitled to information about its employees who quality for the premium assistance credit or cost-sharing reductions. However, the appeals process must provide an employer the opportunity to access the data used to make the determination of an employee’s eligibility for a premium assistance.

does offer such coverage but it is not affordable, or

the plan’s share of the total allowed cost of benefits is less than 60 percent.


The Secretary is required to prescribe rules, regulations or guidance for the repayment of any assessable payment (including interest) if the payment is based on the allowance or payment of a premium tax credit or cost-sharing reduction with respect to an employee that is subsequently disallowed and with respect to which the assessable payment would not have been required to have been made in the absence of the allowance or payment.

Effect of Medicaid Enrollment:A Medicaid-eligible individual can always choose to leave the employer’s coverage and enroll in Medicaid, and an employer is not required to pay a penalty for any employees enrolled in Medicaid.

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