As we all know, the Affordable Care Act (ACA) Individual Mandate requirements make their first appearance in annual income tax filing for an individuals tax year 2014. Most taxpayers had minimum essential coverage in 2014. For those, the process is simple: Check the box at Line 61 in the Other Taxes Section. Taxpayers who purchased coverage on the ACA Marketplace (Exchange) have received Form 1095-A. Thats easy. What if the taxpayer received a premium tax credit from the Exchange? Thats not so easy.
It is likely that every employer (large or small) has received, maybe even fielded, questions from employees about their individual taxpayer reporting obligations when filing their 2014 federal tax forms (1040, 1040A, or 1040EZ). Its worth noting that employers have no not duty to provide documentation to employees for the 2014 tax year. The purpose of this Memorandum is to provide a high-level overview of the process with references to official guidance.
- Who Must Have Health Coverage? The easy answer is: Every U.S. Citizen including senior citizens and most resident aliens (with U.S. income). Children of taxpayers also must have minimum essential coverage for the year, as well.
- What is Minimum Essential Coverage? Under ACA, minimum essential coverage is a health care plan or arrangement specifically identified in the law as minimum essential coverage, including:
- Specified government-sponsored programs (e.g. Medicare Part A, Medicare Advantage, most Medicaid programs, CHIP, most TRICARE programs, and comprehensive health care coverage of veterans).
- Employer-sponsored coverage under a group health plan (including self-insured plans).
- Individual market coverage (e.g. a qualified health plan purchased through the Marketplace of Individual health coverage purchased directly from an insurance company
- Grandfathered health plans (in general, certain plans that existed before ACA and have not changed since ACA was passed).
- Other plans or programs that the Department of Health and Human Services (HHS) recognizes as minimum essential coverage for the purposes of ACA.
IRS.gov/Affordable-Care-Act has a chart that shows these and other types of coverage that qualify as minimum essential coverage and some that do not.
3. Line 61: Whats Required? Taxpayers who have had twelve months of minimum essential coverage need only to check the box, Full-Year of Coverage
4. What if the Taxpayer Doesnt Meet the Terms of the Mandate? A taxpayer who has not met the minimum essential coverage requirements for the full twelve months of 2014 has the following choices: Either claim an exemption or pay the penalty. IRS Publication 5172 provides a complete list of exemptions. In brief, here are the most common ones:
- The taxpayers income is below the threshold for having to file a federal income tax return.
- The coverage offered by the taxpayers employer requires a contribution greater than 8% of household income for the year.
- The taxpayer is a member of certain Indian tribes or specific religious organizations.
- Hardship cases: The taxpayer is ineligible for Medicaid solely because the individuals state of residence did not buy into the ACA Medicaid expansion; or the taxpayer bought coverage through an ACA Marketplace during open enrollment and coverage was not effective until April 1, 2014.
To claim the exemption, the taxpayer must file Form 8965 and attach it to Form 1040 when filing.
5. Paying the Penalty. Form 8965 includes worksheets to assist taxpayers in determining the full amount of the penalty. Although the penalty is nominal for 2014, in later years the percentage maximum is 2% of household income to 2-1/2% of household income.
6. Taxpayers Who Receive a Premium Tax Credit Through the Marketplace. Taxpayers must attach Form 8962 with their 1040. Form 8962 is the taxpayers calculation and reconciliation report. Although the Marketplace determines the tax credit at the time coverage is purchased, Form 8962 tests circumstances that occur during the year against the final credit available. By the way, the Form 8962 instructions are 15 pages in length.
2015 Tax Year
For 2015, ACA requires insurers and plan sponsors of self-funded plans to issue Forms (1094 or 1095-B and -C) to taxpayers and to the federal government regarding individual taxpayer status for each employee. ACA Marketplaces will also provide Form 1095-A. The issuers also must file summary forms to the IRS by March 31 of the year following the tax-reporting year (e.g. March 31, 2016 for 2015 tax year). For more information on the ACA individual mandate go to IRS.gov/Affordable-Care-Act websites Q&A on the topic.