Starting Jan. 1, 2014, the Affordable Care Act (ACA) requires most people to have a certain level of health care coverage or else pay a tax penalty (known as a “shared responsibility payment”). Recently, the IRS finalized regulations that provide guidance on the individual mandate and outline nine classes of people who are exempt from the penalty.
In 2014, the penalty is up to 1% of taxable income (but not less than $95). By 2016, the penalty will grow to a maximum of 2.5% of taxable income (but not less than $695).
Don’t rely on the fact that you’re covered by your employer’s health plan. You’ll still owe a penalty if the plan fails to provide a basic level of health insurance, known as “minimum essential coverage.”
Unless you’re exempt (see below), you must purchase or receive minimum essential coverage or pay a penalty. The insurance must cover you as well as any nonexempt dependents you claim on your tax return.
Minimum essential coverage means coverage under a government-sponsored plan (such as Medicare or Medicaid), an eligible employer-sponsored plan, a plan in the individual market (generally purchased through one of the newly established Health Insurance Marketplaces) or a plan that has been grandfathered under federal law.
Most employer-sponsored plans meet this standard, so long as they cover basic preventive services and have no annual or lifetime dollar limits on benefits. But a plan that provides only dental or vision benefits, or coverage only for a specified disease or illness, is not sufficient.
The final regulations clarify that eligible employer-sponsored plans include self-insured plans as well as plans offered by an organization acting on an employer’s behalf.
The final regulations exempt the following nine classes of individuals from penalties:
- Members of a recognized religious sect or division who are eligible for a religious conscience exemption,
- Members of health care sharing ministries,
- Exempt noncitizens (nonresident aliens or noncitizens unlawfully present in the United States),
- Incarcerated individuals,
- Individuals who can’t afford coverage — that is, for whom the cost of minimum essential coverage exceeds 8% of household income,
- Individuals whose household income is below the tax return filing threshold,
- Members of Indian tribes,
- Individuals with short gaps in coverage (generally less than three consecutive months), and
- Individuals who qualify for a hardship exemption.
Under the final regulations, religious conscience and hardship exemptions are available only by applying for an exemption certification through a Health Insurance Marketplace.
What constitutes hardship?
Hardship is determined on a case-by-case basis for those who face unexpected personal or financial circumstances that prevent them from obtaining coverage.
The final regulations list certain situations that will always be treated as a hardship, including 1) when a Health Insurance Marketplace projects that an individual won’t be able to obtain affordable coverage, and 2) when an individual would be eligible for Medicaid but for his or her state’s decision not to expand Medicaid eligibility.
Keep an eye on regulatory developments in the coming months. The IRS may provide additional guidance on the individual mandate, including whether certain employer-provided programs — such as health reimbursement arrangements and wellness programs — qualify as minimum essential coverage.
If you have any questions regarding this article, please contact Friedman LLP at firstname.lastname@example.org or 877-538-1670.