Affordable Care Act

<div class="Section1">Household income is a taxpayer’s modified adjusted gross income (MAGI, <em><em>see</em></em> below) plus the aggregate modified adjusted gross income of any other individual who was both (1) taken into account in determining the taxpayer’s family size for purposes of determining qualification for the credit and (2) required to file a federal tax return for the tax year in question.<a href="#_ftn1" name="_ftnref1">¹</a> Because the taxpayer’s family size is determined by counting any individual whom the taxpayer was entitled to claim as a dependent for the tax year,<a href="#_ftn2" name="_ftnref2">²</a> it is essentially the case that any income of the taxpayer’s dependents who are required to file a return for the year is included in calculating the taxpayer’s MAGI.</div><br /> <div class="Section1"><br /> <br /> A taxpayer’s MAGI is the adjusted gross income shown on the taxpayer’s federal income tax return for the year plus any excluded foreign income, nontaxable Social Security benefits and tax-exempt interest accrued or received during the tax year.<a href="#_ftn3" name="_ftnref3">³</a> Supplemental Social Security income is not included in a taxpayer’s MAGI.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 36B(d)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 36B(d)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 36B(d)(2)(B).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRS Questions and Answers on the Premium Tax Credit, available at: http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Questions-and-Answers-on-the-Premium-Tax-Credit (last accessed September 28, 2024).<br /> <br /> </div>

<div class="Section1">When a taxpayer applies for health coverage through an exchange, the exchange itself estimates the amount of credit that the taxpayer may be eligible to claim.&nbsp;The taxpayer then determines whether to apply the credit in advance (meaning that it is sent directly to the insurance company in order to offset premium payments) or retroactively (meaning that the taxpayer claims the premium credit on the federal tax return for the year).<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> A taxpayer who receives a premium tax credit is required to file a federal tax return for the year in order to claim the credit.&nbsp;This is true even if the taxpayer would not otherwise be required to file a return because income does not exceed the applicable filing threshold (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8501">8501</a>) for the tax year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> On this return, the taxpayer must report the amount of premiums paid and any advance premium tax credit payments that have been forwarded to the insurance company on the taxpayer&rsquo;s behalf. If the taxpayer enrolls in a health insurance plan through the exchanges, the exchange will send the taxpayer a document that shows the amount of the taxpayer&rsquo;s annual premiums and any advance credit payments by January&nbsp;31 of the year following the year of coverage.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; <em><em>See</em></em> IRS Questions and Answers on the Premium&nbsp;Tax Credit, available at: http://irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit (last accessed September 28, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRS Pub. 5120 (rev. 2/2018).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em><em>See</em></em> IRS Questions and Answers on the Premium&nbsp;Tax Credit, available at: http://irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit (last accessed September 28, 2024).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The ACA individual mandate was repealed for tax years beginning after 2018. However, certain taxpayers may now be impacted by state-level mandates that mirror the ACA mandate.<div class="Section1"><br /> <br /> A taxpayer is treated as having minimum essential health coverage for the month if covered for at least one day during that month.&nbsp;Therefore, if the coverage gap is less than one month, the taxpayer will not be treated as having a gap in coverage and will not be subject to the shared responsibility penalty.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Further, an individual will not be subject to the shared responsibility penalty if the gap in coverage lasts for less than three months (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8847">8847</a>). However, this exemption applies only to the first three-month gap in the tax year. If the taxpayer has more than one three-month coverage gap in the same tax year, he or she will be subject to the shared responsibility penalty with respect to the second coverage gap.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; <em><em>See</em></em> IRS Questions and Answers on the Individual Shared Responsibility Provision, available at: https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-individual-shared-responsibility-provision (last accessed September 28, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;5000A(e)(4).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The ACA individual mandate was repealed for tax years beginning after 2018. However, certain taxpayers may now be impacted by state-level mandates that mirror the ACA mandate.<div class="Section1"><br /> <br /> In general, yes. However, a taxpayer may be exempt if he or she qualifies for the foreign earned income exclusion under IRC Section&nbsp;911.&nbsp;Therefore, if a U.S. citizen who is living abroad has not been physically present in the U.S. for at least 330 full days within a twelve-month period, the individual will be treated as having obtained minimum essential coverage for that twelve month period. Further, U.S. citizens who are bona fide residents of foreign countries for an entire tax year will be treated as having obtained minimum essential coverage for the year.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> U.S. citizens who do not meet the tests outlined above are required to maintain minimum essential health coverage (which can include group health coverage provided by a foreign employer), qualify for an otherwise applicable exemption (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8847">8847</a>) or make the shared responsibility payment.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;911(d),&nbsp;TD 9632.<br /> <br /> </div></div><br />

<div class="Section1">The ACA covers insured and self-funded comprehensive medical health plans. In effect, the ACA governs major medical insurance and self-insured major medical plans.</div><br /> <div class="Section1"><br /> <br /> Certain excepted benefits, which include standalone vision, standalone dental, cancer, long-term care insurance, Medigap insurance, certain flexible spending accounts (“FSAs”), and accident and disability insurance that make payments directly to individuals, are generally not regulated under the ACA.<br /> <br /> Similarly, plans that only impact retirees (“retiree-only plans”) are not impacted by the ACA. Although the ACA removed the exemption for retiree-only plans and excepted benefit plans from the PHS Act, it left those exemptions in the IRC and ERISA. The preamble and footnote 2 of interim final grandfathered plan regulations explain that the exemption for retiree-only plans and excepted benefit plans still applies for those plans subject to the IRC and ERISA.<br /> <br /> Federal regulators have determined that, with respect to retiree-only and excepted benefit plans, even though those provisions were removed by the ACA, they will read the PHS Act as if an exemption for retiree-only and excepted benefit plans were still in effect. Federal regulators have encouraged state insurance regulators to do the same, although in any given state it is possible, although unlikely, that regulators will decide to enforce the ACA mandates on all fully insured plans.<br /> <br /> </div>

<div class="Section1">The health insurance tax credit<a href="#_ftn1" name="_ftnref1">¹</a> is designed to help approximately four million small for-profit businesses and tax-exempt organizations that primarily employ low and moderate-income workers. The credit is available to employers that both:<br /> <blockquote>(1)  have 25 or fewer eligible full time equivalent (FTE) employees, and<br /> <br /> (2)  pay wages averaging under $50,000 (this amount is indexed for inflation) per employee per year.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> IRC Section 45R provides a tax credit beginning in 2010 for a business with 25 or fewer eligible FTEs. Eligible employees do not include seasonal workers who work for an employer 120 days a year or fewer, owners, and owners’ family members, where average compensation for the eligible employees is less than $50,000 and where the business pays 50 percent or more of employee-only (single person) health insurance costs. As a result, the compensation of owners and family members is not counted in determining average compensation, and the health insurance cost for these people is not eligible for the health insurance tax credit.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The credit is largest if there are 10 or fewer employees and average wages do not exceed $25,000. The amount of the credit phases out for businesses with more than 10 eligible employees or average compensation of more than $25,000 and under $50,000. The amount of an employer’s premium payments that counts for purposes of the credit is capped by the average premium for the small group market in the employer’s geographic location, as determined by the Department of Health and Human Services.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <blockquote><em>Example</em>: In 2025, a qualified employer has nine FTEs (excluding owners, owners’ family members, and seasonal employees) with average annual wages of $24,000 per FTE. The employer pays $75,000 in health care premiums for these employees, which does not exceed the average premium for the small group market in the employer’s state, and otherwise meets the requirements for the credit. The credit for 2025 equals $37,500 (50 percent x $75,000).<a href="#_ftn5" name="_ftnref5">⁵</a></blockquote><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 45R.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  http://www.irs.gov/Affordable-Care-Act/Employers/Understanding-the-Small-Business-Health-Care-Tax-Credit (last accessed September 28, 2024).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace (last accessed September 28, 2024).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace (last accessed September 28, 2024).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  Additional examples can be found online at <a href="http://www.irs.gov/pub/irs-utl/small_business_health_care_tax_credit_scenarios.pdf">http://www.irs.gov/pub/irs-utl/small_business_health_care_tax_credit_scenarios.pdf</a> (last accessed September 28, 2024).<br /> <br /> </div>

<div class="Section1">The health insurance nondiscrimination rules (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8795">8795</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8797">8797</a>), the effective date of which has been delayed until regulations have been released and a new effective date has been announced by the IRS, have different sanctions than those applicable to self-insured plans that fall under IRC Section&nbsp;105(h).<div class="Section1"><br /> <br /> For discriminatory self-insured plans, highly compensated employees have taxable income based on the benefits paid by their employer. By contrast, with respect to the new health insurance nondiscrimination requirements, the sanction under IRC Section&nbsp;4980D is a $100 per day excise tax on affected employees.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The IRS request for comments indicates that the term &ldquo;affected employees&rdquo; means those who are not highly compensated.&nbsp;Thus, if an employer has an insured health plan that is not grandfathered and that violates these new nondiscrimination rules for a plan year beginning on or after September&nbsp;23, 2010, and if that employer has 20 non-highly compensated employees, the penalty will be $2,000 per day as a result of having a discriminatory non-grandfathered health insurance plan.<br /> <br /> IRC Section 4980(D)(d)(1) contains an exception to the excise tax for small employers, but the language is somewhat ambiguous. It states, &ldquo;In the case of a group health plan of a small employer which provides health insurance coverage solely through a contract with a health insurance issuer, no tax shall be imposed by this section on the employer on any failure (other than a failure attributable to section 9811) which is solely because of the health insurance coverage offered by such issuer.&rdquo; It is not clear whether this exception applies to the new nondiscrimination rules or simply to a health insurance policy that does not meet federal requirements. For the purpose of this exception, a small employer is defined as two to 50 employees.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> There also is a 10&nbsp;percent cap on the excise tax, that is, 10&nbsp;percent of aggregate premiums paid by an employer, for inadvertent violations of the nondiscrimination rules.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4980D.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;4980D(d)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;4980D(c)(3).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December&nbsp;31, 2018.&nbsp;The employer mandate and reporting requirements were not repealed. Late in 2019, the 5th Circuit Court of Appeals held that the individual mandate was unconstitutional.&nbsp;The rest of the ACA survived the latest Supreme Court constitutional challenge in 2021 and continues to be effective.<div class="Section1"><br /> <br /> Health care reform required that most Americans have health insurance beginning in 2014, or a monetary penalty is imposed.<br /> <br /> Unless exempt, individuals must have major medical health coverage provided by their employer or that they purchase themselves, or, for tax years prior to 2019, they were required to pay a fine that was the greater of a flat amount, or a&nbsp;percentage of income (above the tax filing threshold).&nbsp;The amounts were as follows:<br /> <blockquote>(1)&nbsp; $95 or 1&nbsp;percent of income in 2014;<br /> <br /> (2)&nbsp; $325 or 2&nbsp;percent of income in 2015; and<br /> <br /> (3)&nbsp; $695 or 2.5&nbsp;percent of income in 2016-2018.<a href="#_ftn1" name="_ftnref1">¹</a></blockquote><br /> Families were to pay half the penalty amount for children under 18, up to a cap of $2,085 per family. After 2016, penalties were indexed to the Consumer Price Index.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Despite the repeal of the federal individual mandate, several states have already enacted their own state-level versions of the mandate. For example, New Jersey adopted its own state-level individual mandate for failure to purchase qualifying health insurance.&nbsp;The New Jersey law references the federal law.&nbsp;Like the federal rule, individuals may be exempt from the penalty if they fail to obtain coverage for religious reasons or if they are incarcerated.&nbsp;The penalty is equal to the amount that would have been owed had the federal mandate not been repealed: the greater of $695 for adults or 2.5&nbsp;percent of income.&nbsp;The penalty is capped at the average premium cost of a bronze level policy in the state.<br /> <br /> <hr><br /> <br /> Exemptions from the individual penalty were granted for financial hardship, religious objections, American Indians, those without coverage for fewer than three months, undocumented immigrants, incarcerated individuals, those for whom the lowest cost plan option exceeds 8&nbsp;percent of an individual&rsquo;s income, and those with incomes below the tax filing threshold.<a href="#_ftn2" name="_ftnref2">²</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8847">8847</a> for a detailed discussion of these exemptions.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;5000A(c), Rev. Proc. 2016-55; Rev. Proc. 2017-58.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;5000A(d), (e).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor’s Note: </em>The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed.</div><br /> <div class="Section1"><br /> <br /> An individual who may have been exempt from the ACA individual penalty provisions could often obtain a certificate of exemption from the health insurance exchanges. With respect to the religious and hardship exemptions, this was the only method of claiming the exemption. Individuals claiming the exemption based upon membership in an Indian tribe or incarceration could either obtain a certificate of exemption from the exchanges or claim the exemption on the federal tax return when the return was filed in the subsequent tax year. Exemptions for lack of affordable coverage, a short coverage gap, and certain hardships were required to be claimed on the taxpayer’s federal income tax return.<br /> <br /> Individuals who were exempt from the shared responsibility provision because their income for the year fell below the filing threshold, so that they were not required to file a federal tax return for the year, did not need to take any action in order to obtain the exemption.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The IRS has also provided a list of the hardship exemptions that a taxpayer was entitled to claim without first obtaining a hardship exemption certification from the health insurance exchanges.<a href="#_ftn2" name="_ftnref2">²</a> The hardship exemptions outlined in this notice were available if two or more members of a family had a combined cost of employer-provided health coverage that was deemed unaffordable, a taxpayer’s gross income was below the applicable threshold for filing a tax return, or a taxpayer applied for minimum essential health coverage during the periods described in the notice, or applied for coverage and could not complete the process.<br /> <br /> Further, the taxpayer was not required to obtain prior certification if (1) the taxpayer applied for coverage under the Children’s Health Insurance Program and was found eligible, but had a gap in coverage before the program’s effective date, (2) the taxpayer was eligible for services through an Indian healthcare provider or (3) the taxpayer resided in a state that did not expand Medicaid coverage and that taxpayer’s household income was below 138 percent of the applicable poverty line. Taxpayers seeking to claim a hardship exemption that was not outlined by the IRS in Notice 2014-76 were still permitted to apply for an exemption through the health insurance marketplace.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The IRS announced that all taxpayers who qualify for a hardship exemption under 45 CFR 155.605(d)(1) may claim the exemption without first obtaining a hardship exemption certification from the health insurance marketplace. These hardship exemptions include (1) financial or domestic circumstances, including unexpected natural or human-caused events, that cause an unexpected and significant increase in essential expenses that prevented the individual from obtaining qualifying health insurance, (2) situations where the cost of qualifying health insurance would cause the individual to experience a serious deprivation of food, shelter, clothing or other necessities, and (3) other circumstances that prevent an individual from obtaining coverage under a qualified health plan. This expansion is designed to provide added flexibility from the individual health insurance mandate for the 2018 tax year.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRS Q&amp;A on the Individual Shared Responsibility Provision, available at: http://www.irs.gov/uac/Questions-and-Answers-on-the-Individual-Shared-Responsibility-Provision (last accessed September 28, 2024).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Notice 2014-76, 2014-50 IRB 946.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Notice 2019-05.<br /> <br /> </div>

<div class="Section1"><em>Editor&rsquo;s Note:&nbsp;</em>The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December&nbsp;31, 2018.&nbsp;The employer mandate and reporting requirements were not repealed.<div class="Section1"><br /> <br /> Yes, in some instances. Whether a taxpayer who was otherwise exempt from the shared responsibility penalty remained eligible to claim the premium assistance tax credit depended upon the type of exemption that applied. According to IRS guidance, taxpayers who were exempt because they are incarcerated or not lawfully present in the U.S. are not eligible to claim the premium tax credit.&nbsp;This is the case, however, because these exempt individuals are not permitted to enroll in a health plan through the health insurance exchanges. Individuals who were exempt for other reasons, such as because a religious exemption or affordability exemption applied, would remain eligible to claim the premium tax credit if they otherwise met the requirements for eligibility.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8847">8847</a> for a detailed discussion of the various exemptions. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8849">8849</a> for a discussion of the qualification requirements for determining whether a taxpayer is generally eligible to claim the premium tax credit.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; <em><em>See</em></em> IRS Questions and Answers on the Individual Shared Responsibility Provision, available at: http://www.irs.gov/uac/Questions-and-Answers-on-the-Individual-Shared-Responsibility-Provision (last accessed September 28, 2024).<br /> <br /> </div></div><br />