Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, which includes:
- Government-sponsored programs (e.g., Medicare, Medicaid, Children’s Health Insurance Program),
- Eligible employer-sponsored plans,
- Plans in the individual market, and
- Certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS.
The penalty will be phased in beginning in 2014 and fully implemented in 2016.
Penalty – The penalty for noncompliance is the greater of:
(A) The sum of the monthly penalty amounts for months in the taxable year during which 1 or more such failures occurred, or
(B) An amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.
Monthly Penalty Amounts – The monthly penalty amount is an amount equal to 1/12 of the greater of the following amounts:
(A) Flat dollar amount – (See computation of the flat dollar amount below)
(B) Percentage of income – An amount equal to the applicable percentage for the year (see table below) multiplied by the amount the taxpayer’s household income for the year exceeds the taxpayer’s income tax filing threshold.
|Flat Dollar Amounts (Annual)|
|Individual Under 18||$47.50||$162.50||$347.50|
|Percentage of Income Rates:||1.0%||2.0%||2.5%|
Flat Dollar Amount – The flat dollar amount is the lesser of:
1. The sum of the applicable dollar amounts (see table below) for all individuals who were not covered for the month or
2. 300% of the per adult penalty (maximum $2,085 in 2016).
Example – Unmarried taxpayer without minimum essential coverage – In 2016, Gil is an unmarried individual with no dependents who doesn’t have minimum essential coverage for any month in 2016. Gil’s household income is $120,000 and his applicable filing threshold is $12,000*. The annual national average bronze plan premium for Gil is $5,000*. For each month in 2016, from the table, Gil’s applicable dollar amount is $695.
- Gil’s flat dollar amount is $695 (the lesser of $695 and $2,085 ($695 x 3)).
- Gil’s percentage of excess household income amount is $2,700 (($120,000-$12,000) x 0.025).
- The monthly penalty is 1/12 of the greater of foregoing amounts. Therefore, the monthly penalty amount is $225 ($2,700/12)). Of course the sum of the monthly penalty amounts is $2,700, unless Gil qualifies for the short coverage gap grace period (explained later in this chapter).
- The penalty is the lesser of the sum of the monthly penalty amounts ($2,700) and the cost of the bronze coverage ($5,000). Thus the penalty is $2,700.
*These amounts are estimates for purposes of the example.
|Why Are Monthly Amounts & Annual Amounts Determined?
As you went through the example above you probably asked yourself, why do I compute an annual amount and then divide it by 12 and then turn around and multiply it by 12 again to get the annual amount? There is a logical reason. Even though the percentage of income calculation is based upon annual household income less the filing threshold amount times a fixed percentage, the flat dollar amount could change during the year due to marriage, death, children, etc. Thus if the dollar amount turns out to be the greater amount, the sum of those dollar amounts will be used and each month may be different.
If an applicable individual has not attained the age of 18 as of the beginning of a month, the “applicable dollar amount” for the month will be equal to one-half of the amount shown in the table.
Definition of a Month for Coverage – For any calendar month, an individual is treated as having minimum essential coverage if the individual is enrolled in and entitled to receive benefits under a qualifying program or plan for at least one day. (Reg. § 1.5000A-1(b))
Liability for Dependent Coverage – Under Code Sec 5000A, nonexempt individuals are subject to the penalty for any dependent that may be claimed on their tax return not just those that they actually claim. The penalty applies regardless if they claim them (Reg Sec 1.5000A-1(c)).
This will prove to be a problem in divorce situations where one parent has custody of a child and claims the child as a dependent, but the noncustodial parent is required by the divorce decree to pay for medical insurance, and has not done so or has purchased coverage that does not meet the minimum essential coverage requirement. The final IRS regulations make no exception for these circumstances and the custodial parent is liable for the penalty. However, Health and Human Services (HHS) has addressed this situation in guidance that permits Exchanges to grant a hardship exemption under 45 CFR 155.605(g)(1) to the custodial parent for a child in this situation if the child is ineligible for coverage under Medicaid or the Children’s Health Insurance Program (CHIP). See HHS Center for Consumer Information & Insurance Oversight, Guidance on Hardship Exemption Criteria and Special Enrollment Periods (June 26, 2013). (T.D. 9632, Summary of Comments and Explanation of Revisions)
If an individual may be claimed as a dependent by more than one taxpayer in the same year, the taxpayer who properly claims the individual as a dependent is liable for the shared responsibility payment attributable to the individual. If more than one taxpayer may claim an individual as a dependent in the same year but no one claims the individual as a dependent, the taxpayer with priority under the dependency tie-breaker rules to claim the individual as a dependent is liable for the individual’s shared responsibility payment. (Reg 1.5000A-1(c)(2))
Family Size – For computing a taxpayer’s shared responsibility payment with respect to any nonexempt individual included in the taxpayer’s shared responsibility family, the final regs clarify that the applicable family size involved for purposes of identifying the appropriate bronze level plan includes only the nonexempt members of the taxpayer’s shared responsibility family who do not have minimum essential coverage. (Reg. § 1.5000A-4)
Household Income – Household income is the sum of the modified adjusted gross incomes (MAGIs) of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified AGI means AGI increased by all tax-exempt interest and foreign earned income.
Penalty Enforcement – For a joint return, the individual and spouse are jointly liable for any penalty payment. The penalty is not subject to the enforcement provisions of subtitle F of the Code and the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Noncompliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner. Therefore, enforcement is generally limited to seizing a refund.
Three-Month Grace Period – No penalty is assessed for 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 taxable 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. IRS is to provide rules when a coverage gap includes months in multiple calendar years.
Taxpayers Exempt from the Penalty –The coverage requirement does not apply to:
- Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income for the year. After 2014, the 8% exemption is increased by the amount by which premium growth exceeds income growth. If self-only coverage is affordable to an employee, but family coverage is unaffordable, the employee is subject to the penalty if he does not maintain minimum essential coverage. However, any individual eligible for employer coverage due to a relationship with an employee (e.g. spouse or child of employee) is exempt from the penalty if that individual does not maintain minimum essential coverage because family coverage is not affordable (i.e., exceeds 8% of household income).
- Taxpayers with income below the income tax filing threshold (which for 2013 generally is $10,000 for a single person or a married person filing separately and is $20,000 for married filing jointly).
- Those exempted for religious reasons (who must be members of a recognized religious sect exempting them from self-employment taxes).
- Individuals residing outside of the U.S. (who are deemed to maintain minimum essential coverage).
- Individuals who are incarcerated or are not legally present in the U.S.
- All members of Indian tribes.