Are You Exempt From The Obamacare Insurance Penalty?

Are You Exempt From The Obamacare Insurance Penalty?
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When you sit down to file your 2014 tax return on Form 1040, for the very first time you will be required to pay a penalty to the IRS if you failed to carry “minimum essential heath insurance coverage” throughout the tax year. Last month, the Treasury Department estimated that some three to six million people will be subject to the penalty. But will you be one of them?

As a (very) general rule, if you didn’t carry insurance for any month in 2014, you are subject to the penalty. As the ensuring discussion will reveal, however, there are a host of exclusions from the penalty for people who didn’t have health insurance for part or all of 2014. While some of the exclusions are straightforward, others require in-depth computations; in either case, it’s up to you to understand whether you hold any of these get-out-jail-free-cards, and if so, how to alert the IRS that you’re not required to pay the penalty with your return. It’s my hope that by the end of this column, you’ll be able to do those things with confidence.

But before we get to the exclusions, let’s establish a bit of helpful background.

General Rule

Beginning in 2014, unless otherwise exempted from the law, all U.S. citizens or residents must carry minimum essential health insurance coverage or be required to pay a penalty for each month they fail to do so. A taxpayer is responsible for themselves and any taxpayer in their household who they claim as a dependent. As a result, all children must have minimum essential coverage (unless they also qualify for an exemption) for each month of the year as well, or else the child’s parent or parents will be subject to the penalty, even if the parent has the appropriate coverage.

Senior citizens must also have minimum essential coverage. Fortunately, both Medicare Part A and Part C (also known as Medicare Advantage) satisfy the requirements for qualifying coverage.

What is Minimum Essential Health Insurance Coverage

Minimum essential health insurance coverage is a health plan specifically identified in the law as meeting the standards of Obamacare, including:

Specified government-sponsored programs (e.g., Medicare Part A, Part C, 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 coverage purchased on an exchange established by the taxpayer’s state or the federal government. It is important to note, this is the only type of insurance coverage that will potentially qualify the taxpayer for a premium tax credit. For more on the PTC, read here.
Individual health coverage purchased directly from an insurance company.
Grandfathered health plans (certain plans that existed before Obamacare that have not changed since Obamacare was passed).

There is a helpful chart published by the IRS that can be found here that specifies what qualifies as minimum essential health care coverage. I encourage you to check it out.

If you had the required minimum essential coverage for all of 2014 for yourself and any dependents, you will notify the IRS by simply checking the box on Line 61 of Page 2 of the Form 1040.

Computing the Penalty

If you don’t have minimum essential coverage during any month in 2014 — and aren’t otherwise exempt from the requirement to do so – you will compute the penalty on an annual basis and pay 1/12 of the annual penalty for each month you didn’t carry the appropriate coverage. Note, however, that if you had minimum essential coverage for even one day during a month, you are treated as being covered for the entire month and thus are not subject to the penalty for that month. For example, if you start a new job on June 26 and are covered under your employer’s plan starting on that day, you are treated as having coverage for the entire month of June.

Computing the penalty itself shouldn’t be particularly problematic. From a mathematical perspective, it’s going to be pretty simple:

Step 1: Take the lesser of:

$95 per adult that’s uncovered, and $47.50 for each child under 18, or
$285
Step 2: Take the greater of
the amount from Step 1, or
Household income (adjusted gross income + tax-exempt interest + foreign earned income excluded under Section 911) – the filing threshold under Section 6012(a) ($10,150 for single, $20,300 for married filing jointly) * 1%. You must total the household income of each member of your household, including you, your spouse, and any one else you can claim as a dependent and that is required to file a tax return. See here for filing requirement thresholds for dependents.
Step 3: the amount owed can’t exceed the “national average bronze level premium,” which for 2014 is $2,448 per individual, or $12,240 for a family of five.

Example: H&W are married and have three children under the age of 18. During 2014, neither H, W, nor any of the three children carry minimum essential health insurance coverage, and they were not otherwise exempted from the requirement to carry coverage. Their household income is $40,300, and thus exceeds their Section 6012(a) filing threshold by $20,000. H&W will pay a penalty on their 2014 Form 1040 computed as follows:

Step 1: Take the lesser of:

$325 ($95 * 2 adults + $47.50 * 3 children under 18)
$285
Step 2: Take the greater of

the amount from Step 1, or $285
$200 (($40,300 – $20,300) * 1%)
Step 3: the amount owed can’t exceed the “national average bronze level premium,” which for 2014 is $12,240 for a family of five. .

Because H&W’s annual penalty of $200 is less than the national average bronze level premium for a family of five of $12,240, H&W will pay a penalty of $200 with their 2014 tax return.

Now that we understand how the penalty works, let’s get to what we came here for: is it possible that you are exempt from the penalty even though you didn’t have minimum essential health insurance coverage for the entire year?

You are not subject to the penalty for 2014 if you qualify for any of the following exemptions:

You are not required to file a tax return because your household income is below your applicable filing threshold ($10,150 for single, $20,300 for married filing jointly).
You went without minimum essential coverage for less than three consecutive months during the year. Example: Fred has minimum essential coverage for the entire year except for the period April 5 through July 25. An individual is treated as having coverage for any month in which he or she has coverage for at least 1 day of the month. As a result, Fred has minimum essential coverage in April and July and is eligible for the short coverage gap exemption for May and June.

You purchased your coverage on a state or federally-established exchange during the initial open enrollment period of 2014, but the coverage was not effective until April 1 or later.
You are a foreign national who lives in the U.S. during 2014 for less than 183 days. This exemption applies even if you are required to file a U.S. tax return.

You are a bona-fide resident of a U.S. territory
You are a member of a health care sharing ministry, which is a tax-exempt organization whose members share a common set of ethical or religious beliefs and have shared medical expenses in accordance with those beliefs continuously since at least December 31, 1999.

You are a member of a federally-recognized Indian tribe.
You are in prison, although I would argue that if this exemption applies, you’ve got bigger concerns than the Obamacare penalty.
You are a member of a religious sect that has been in existence since December 31, 1950 and is recognized by the Social Security Administration as conscientiously opposed to accepting any insurance benefits.

You are ineligible for Medicaid solely because the state in which you reside does not participate in the Medicaid expansion under the Affordable Care Act.

You are enrolled in certain types of Medicaid and TRICARE programs that are not minimum essential coverage (available only in 2014).

You were eligible, but did not purchase, coverage under an employer plan with a plan year that started in 2013 and ended in 2014 (available only in 2014).

You were notified that your health insurance policy was not renewable and you consider the other plans available unaffordable.
You experienced circumstances that prevented you from obtaining coverage under a qualified health plan, including, but not limited to, homelessness, eviction, foreclosure, domestic violence, death of a close family member, and unpaid medical bills.

8% of Household Income Exemption

While most of the exemptions are simply definitional, there is another possibility for taxpayers who don’t meet any of the above tests to avoid the penalty. You are not subject to the penalty for 2014 if your “required contribution” exceeds 8% of your household income (as defined above).

Your required contribution is intended to represent the cost of your insurance. The rules vary, however, depending on whether you receive insurance through an employer or purchase individual insurance coverage on a state or federally-established exchange.

Employees eligible for self only coverage from employer. If you are eligible for self-only coverage from your employer, your required contribution is the amount you would pay for the lowest cost self-only coverage.

Ex: A is unmarried with no dependents. Her household income is $60,000. During 2014, A could purchase self-only coverage through her employer for $5,000. As a result, A is not subject to the penalty, because her required contribution ($5,000) exceeds $4,800 ($60,000 * .08).

Other family members eligible for employer coverage. If a member of your household is not eligible for coverage through their own employer, but are eligible for family coverage under you or your spouse’s plan (ex: a child eligible for family coverage under your employer), the required contribution for the child is the amount the employee would pay for the lowest cost family coverage. The required contribution for the employee remains the amount they would pay for the lowest self-only coverage.

Ex: A and B are married and file jointly for 2014. They have two children whom they claim as dependents. During 2014, A can obtain self-only coverage through her employer for $4,000. A can also purchase family coverage for $12,000. Household income is $90,000. Neither A, B, nor the kids obtain insurance for 2014.

A’s required contribution is the cost of self-only coverage, or $4,000. A is not exempt from the penalty, because $4,000 does not exceed $7,200 ($90,000 *.08). For B and the children, their required contribution is $12,000, the cost of family coverage the employee — A — can purchase. Because $12,000 exceeds $7,200, B and the kids are not subject to the penalty.

Required contribution when you are not eligible for employer coverage. If you or another member of your household are not eligible to purchase coverage under an employer plan, and you instead would be required to purchase insurance on a state or federal exchange, your required contribution is based on the premium for the lowest cost bronze plan available on the exchange minus the premium tax credit you could have claimed had you enrolled in this plan.
For this purpose, use the lowest cost bronze plan available through the Marketplace that covers everyone in your tax household: for whom a personal exemption deduction is claimed on your tax return, who is not eligible for employer coverage, and who does not qualify for another coverage exemption.

To determine your hypothetical premiums for the lowest cost bronze plan, you will have to do a little digging by either visiting healthcare.gov or contacting the exchange that serves your area. To determine your hypothetical premium tax credit, you might want to start by reading this.

Ex: A is unmarried and has no dependents. His household income is $40,000. He is ineligible for employer coverage. The annual premium for the lowest cost bronze self-only plan available on the state exchange is $5,000 and his maximum premium tax credit is $1,700. Thus, his required contribution is $3,300. As a result, A is exempt from the penalty because $3,300 exceeds $3,200 ($40,000*.08).

How do you tell the IRS you are Exempt from the Penalty?

If you qualify for one of these exemptions, you are going to need to fill out Form 8965, Health Coverage Exemptions. You will find, however, that certain exemptions — such as the general hardship exemption for homelessness, foreclosure, eviction, etc…– require you to first obtain proof of the exemption from the marketplace on which you would have acquired insurance. (For a full listing of the exemptions that require exchange approval, see this IRS table). You will want to reach out to the exchange immediately to receive the approval; if you don’t obtain approval by the time you file your return, however, you can fill out Part 1 of Form 8965 and note that exchange approval is “pending.”

All other exemptions can be claimed directly on the Form 8965 without prior exchange approval. Use Part II if your household income is below the filing threshold. Use Part III for all other exemptions.

The new penalty for failure to carry insurance in 2014 is sure to create a lot of confusion as the tax filing season rolls on, but hopefully this column is a big step in the right direction towards identifying who is — and is not — subject to the penalty.