Taxes have always been complicated and over the last few years things have not become any easier that’s for sure. The Affordable Care Act, which officially became law a few years ago, has had some positive effects such as making healthcare insurance coverage more affordable for people with pre-existing conditions. However, from a tax standpoint it has not made things any easier for CPAs or individuals.
The legislation mandates everyone must purchase health insurance coverage that meets minimum guidelines set by the ACA. If not, then individuals must pay a tax penalty which escalates each passing year. However, there are also provisions within the regulations that allow some individuals an exemption from paying penalty, if they qualify under certain conditions.
If you do not have health insurance coverage then it is very important to know the exact details of the penalty and if you are required to pay it. Of course, you will also want to know if you can claim an exemption and avoid paying the penalty.
If you do have health insurance coverage, then there are also specific provisions that apply. The ACA sets forth certain regulations that require minimum levels of coverage as well as certain types of health coverage. If your policy does not meet the standards then it is the same as not being covered.
The Individual Shared Responsibility Provision contains the specific provisions within the ACA that describe the health insurance coverage requirements for individuals. You are required to keep coverage in force throughout the entire year or pay the penalty if you are not exempt. Your coverage and the penalty are actually calculated on a monthly basis. Therefore, if you did not have coverage for only part of the year, then you will still be subject to paying a partial penalty.
You must purchase health insurance coverage during the open enrollment period and any plans that are purchased outside of the open enrollment period, likely do not meet the minimum requirements of coverage. For tax purposes, plans that do not qualify under the ACA rules are treated the same as you not having any coverage at all.
Two exceptions to this are qualifying for a special enrollment period or if you have other qualifying coverage such as CHIP or coverage under Medicaid.
The regulations require your health insurance policy to meet certain requirements in order for it to qualify as coverage and to keep you from having to pay the penalty. To begin with, your health insurance policy must be in effect for all 12 months of the year or you face a pro-rated penalty payment.
Temporary and short-term health plans do not qualify under the ACA rules. Additionally, fixed benefit plans and Medicare supplement coverage including Medigap as well as Part D do not qualify. Basically, any plan that is very limited in scope or provides only partial coverage will not on its own meet the standards of the ACA regulations. There are a number of stipulations as to the amount and types of coverage that your policy includes in order to meet the provisions in the ACA.
Most of the policies listed below will meet the requirements of the ACA as they are not legally allowed to be sold or offered unless they do.
Foreign Health Coverage
Some Business Owner Health Plans
TRICARE
Employer-Sponsored Coverage
Medicare Part A
Medicare Advantage
Medicaid Plans
Catastrophic Coverage
Student Plans
It is important to check with your health insurance agent or investigate the details of required coverage on your own. Paying for a health plan all year only to realize it does not qualify as coverage and will result in a tax penalty is never a good experience.
There are specific stipulations for the types of policies listed above as well, such as being over 30 years of age and having a catastrophic coverage plan will most likely not qualify as coverage. The ACA requires those over 30 to have coverage that is more comprehensive unless you qualify under financial hardship rules.
If you believe your coverage may be in question, then it is a good idea to look at the IRS website to find the details of what is required for your specific type of plan.
At the end of the year, you will also need to get form 1095 A, B or C from your health insurance provider. You will use this form to file your taxes and it gives you the months and type of coverage that you maintained throughout the year. It is a good idea to keep this form on file for several years in case the IRS asks for supporting documentation or you are audited.
To find out if you qualify for exempt status, you will need to enroll for a marketplace account on www.healthcare.gov. The system will automatically walk you through the process of finding out if you qualify for an exemption from the penalty. Additionally, the system will tell you if you qualify for subsidized health insurance coverage which results in lower monthly premiums.
Another possible solution is qualifying for a catastrophic coverage only plan, which is allowed if you have Hardship Exemption status.
Many exemptions do not actually require that you apply online to receive approval for qualification as they are listed on the Exemptions form 8965, which is also used to file your tax return. However, it is always a very good idea to check the website as you may qualify for options that you did not know were available.
It is always best to investigate your exemption status ahead of time as some of the exemptions do have a waiting period involved to find out if you are awarded exempt status and they may ask for supporting documentation as well.
There are many different types of exemptions and most of them vary in terms of length, if you must apply for qualification and if they require supporting documentation. There are actually some exemptions available that only last a few months and those that cover the entire year as well. The regulations for exempt status from the penalty are very specific and detailed, but many people do qualify for exemptions.
In fact, the Congressional Budget Office estimated that over 26 million people will qualify for exempt status and avoid paying the ACA tax penalty. If you are interested in seeing complete details about all of exemption options available, you can see them on at www.irs.gov.
Reporting an exemption on your taxes is done by using the Coverage Exemption-Form 8965. This form should be included with the rest of your tax file when you file your completed taxes for 2015. Keep in mind some exemptions do require that you report the ECN you received with your approval, if you had to apply for the exemption. Therefore, if you applied for an exemption and received a confirmation number, then you will want to make sure the number is available when doing your taxes.
The penalty began in 2014 and escalates each year going forward. In 2014, it was $95 for each adult that did not have coverage for the year and $47.50 for children. The penalty maximum for an entire family was $285 or 1% of total household income, the greater of the two options.
For 2015, the penalty will increase to $325 for each adult that does not have coverage and $162.50 for children. The maximum amount is raised as well up to $975 or 2% of total household income, the greater of the two options.
If you had health insurance coverage for all or part of the year, you will need to obtain form 1095A, B or C from your health insurance company. This form will detail what months you had coverage in place and the qualifying or non-qualifying coverage.
The penalty continues to increase over the next few years after 2015, so it is a good idea to get a handle on what you do or do not qualify for now. If you do not qualify for an exemption and you still choose to not purchase coverage, then the penalty amount will be added to the total amount of taxes owed and become part of your payment to the IRS.
They cannot put you in jail or put a lien on property only to collect the penalty that is specific to the ACA health coverage requirements. However, the IRS can hold any future tax refunds and apply it towards the penalty payment owed. Additionally, you never know how the law will change, so while they might have limited powers to collect today, next year might be different.
It is always best to stay in compliance and make sure you follow the provisions set forth in the regulations. With each passing year, the penalties get larger and more severe.
While it is a good idea to use www.healthcare.gov if you need to find out if you qualify for exempt status for not having health coverage, it is also a good idea to use an automated tax filing service. The small details involved with the ACA and your taxes are very complicated and confusing. A small error can mean you end up paying a big tax bill, perhaps a bill that is not necessary.
We can all appreciate doing things the good ole fashioned way and doing your taxes by hand. However, based on today’s tax code, it is just too complicated for most people to complete their annual taxes in an accurate manner without the help of an easy to use automated tax filing system.
