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The Patient Protection & Affordable Care Act (aka ACA or Obamacare)

The individual mandate portion of the Patient Protection and Affordable Care Act (known primarily as the ACA or Obamacare) took effect as of January 2014.  As a result there have been some significant changes to many taxpayer’s income tax returns, perhaps yours.

The cornerstone of the ACA is the individual mandate.  There have been a myriad of questions and a tremendous amount of misinformation surrounding the individual mandate.  In an effort to help you better understand your responsibilities, we will attempt to explain the individual mandate and provide links to informative handouts prepared by Intuit.

Let us begin with what is needed to prepare your income tax returns this year and for the future.  Depending on the type of insurance coverage you may receive one or more of the following forms this January:

• 1095-A Health Insurance Marketplace Statement – If you purchased insurance from an exchange during the year this form will be sent to you by January 31.
• 1095-B Health Coverage – This form will be issued by many employer provided health insurance plans and government sponsored plans.  They are NOT required for calendar year 2014 but are for subsequent years.  The forms are optional for 2014.
• 1095-C Employer-Provided Health Insurance Offer and Coverage – Employers (including government employers) subject to the employer shared responsibility provisions of the ACA sponsoring self-insured group health plans will report information about the coverage on Form 1095-C.  Again, these forms are optional for 2014 but are required for subsequent years.

It is imperative that you provide to us any of these forms that you may receive.  These forms will contain information necessary to properly reflect your insurance coverage status on this year’s return.

The individual mandate requires every non-exempt U.S. citizen and legal resident to maintain minimum essential health insurance coverage for themselves and any dependents claimed on their income tax return unless one of many exemptions applies.  Beginning January 1, 2014, a penalty is due for any month that an applicable individual did not have minimum coverage nor qualified for an exemption.  The 1095 forms described above are necessary for us to reconcile and track your coverage for the year to determine whether or not you are subject to a penalty.

Some of the exemptions to the ACA must be certified by the Marketplace Exchange.  If you believe one of the exemptions listed below apply to your situation, please contact the Exchange as soon as possible to obtain the appropriate exemption certification.

• Member of a health care sharing ministry.
• Member of a federally-recognized Indian tribe.
• Incarceration – You are in jail, prison, or similar penal institution or correctional facility after the disposition of charges.
• Member of a recognized religious sect.
• You are an American Indian, Alaska native or a spouse of descendent of either who is eligible for services through an Indian health care provider.
• You are experiencing circumstances that prevent you from obtaining coverage under a qualified health plan.
• You do not have access to affordable coverage based on you projected household income.
• You are ineligible for Medicaid solely because the state in which you live does not participate in the Medicaid expansion under the Affordable Care Act.
• You have been notified that your health insurance policy will not be renewed and you consider the other plans available unaffordable.

If any of the above apply to you, a certification from the Marketplace Exchange is necessary.  We will not be able to claim any of these exemptions without the proper certification.

Certain other exemptions to the coverage requirement are computed at the time of tax preparation.  Exemptions related to income, living abroad, grandfathered/grandmothered employer plans, coverage gaps of 3 months or less and certain other exemptions fall into this category, If you had a period without health insurance during 2014 please discuss this with your tax preparer to see if any of these other exemptions apply.  Additionally, if there are any dependents claimed on your return we will need information for all income of these dependents (either their income tax returns or income forms (i.e. W-2’s, 1099s, etc.)).  This information is necessary for the computation of applicable income based exemptions and possible penalties.

Software maker Intuit prepared two excellent handouts covering the ACA’s impact on your tax returns.  Please use these two handouts while compiling your tax information this year:

How the Affordable Care Act Impacts Your Taxes - This is a very good summary of what to expect and what to provide us based upon your specific situation (i.e. whether you have insurance and from where).

Affordable Care Act Client Checklist - This provides a form to list all members of your household and which months they had insurance.  It also lists many of the exemptions to the individual mandate.

Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans, and other coverage as recognized by the Secretary of HHS in coordination with the Secretary of the Treasury.  Government-sponsored programs include Medicare, Medicaid, Children's Health Insurance Program, coverage for members of the U.S. military, veterans health care, and health care for Peace Corps volunteers.  Eligible employer-sponsored plans include governmental plans, church plans, grandfathered plans, and other group health plans offered in the small or large group market within a state (e.g., a health insurance exchange).

Minimum essential coverage does not include coverage that consists of certain HIPAA excepted benefits.  Thus, if your only coverage is a supplement to liability insurance or is workers' compensation or other similar insurance, you are not considered to have minimum essential coverage.  Other HIPAA excepted benefits that do not constitute minimum essential coverage if offered under a separate policy, certificate or contract of insurance include long term care, limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity or other fixed indemnity insurance, or Medicare supplemental health insurance.

If you fail to maintain minimum essential coverage, you are subject to a penalty.  The amount of the penalty is phased in from 2014 thru 2016.  In 2016, when fully phased in, the penalty is equal to the greater of: (1) 2.5 percent of your household income in excess of an amount equal to your household income for the tax year over the threshold amount of income required for filing an income tax return (for example, in 2011, this amount was $19,000 for under 65 and married filing jointly), or (2) $695 per uninsured adult in the household.  The fee for an uninsured individual under age 18 is one-half of the adult fee.  The total household penalty may not exceed 300 percent of the per-adult penalty ($2,085).  The total annual household payment may not exceed the national average annual premium for a bronze level health plan offered through a health insurance exchange that year for the household size.

As part of the phase in, the per-adult annual penalty is $95 for 2014 and $325 for 2015.  The percentage of income is 1 percent for 2014 and 2 percent in 2015.  If you file a joint return, you and your spouse are jointly liable for any penalty payment.

The penalty applies to any period minimum essential coverage is not maintained and is determined monthly.  The penalty is an excise tax and is assessable and collectible under the Internal Revenue Code and is reported on an individual's income tax return.  However, IRS collection procedures (e.g., liens, levies, etc.) do not apply to this excise tax.  In addition, there are no criminal penalties for non-compliance with the requirement to maintain minimum essential coverage.  However, the authority to offset refunds or credits is not limited by this provision.

Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost bronze plan in the local health exchange exceeds 8 percent of household income for the year are exempt from the penalty.  In years after 2014, the 8 percent exemption is increased by the amount by which premium growth exceeds income growth.

For employees, and individuals who are eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination of whether coverage is affordable to the employee and any such individual is made by looking at the required contribution of the employee for self-only coverage.  Individuals are liable for penalties imposed with respect to their dependents and their spouse, if filing a joint return.

Taxpayers with income below the income tax filing threshold, as well as members of Indian tribes, are exempt from the penalty for failure to maintain minimum essential coverage.

No penalty is assessed on individuals who do not maintain health insurance for a period of three months or less during the tax year.  If an individual exceeds the three-month maximum during the tax year, the penalty for the full duration of the gap during the year is applied.  If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage.  Individuals may also apply for a hardship exemption.  Residents of U.S. possessions are treated as being covered by acceptable coverage.  Family size is equal to the number of individuals for whom the taxpayer is allowed a personal exemption.  Household income is the sum of the modified adjusted gross incomes of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year.  Modified adjusted gross income means adjusted gross income increased by all tax-exempt interest and foreign earned income.

We know this is a lot of information to absorb, so if you have any questions please feel free to contact us so we can review your individual situation and how the individual mandate may affect you.