Client Letter: PPACA - Individual Mandate (Personal Responsibility Requirement)

Dear [client name]:

The cornerstone of the Patient Protection and Affordable Care Act is the individual mandate. There have been a lot of questions and some misinformation about this provision. To help you better understand how this provision may affect you, I'm providing a plain-English explanation of what the individual mandate entails.

Beginning January, 2014, non-exempt U.S. citizens and legal residents are required to have health insurance. Under the law, they must maintain minimum essential coverage. Individuals are exempt from the requirement for months they are incarcerated, not legally present in the United States, or maintain religious exemptions. Those who are exempt from the requirement due to religious reasons must be members of a recognized religious sect exempting them from self employment taxes and adhere to tenets of the sect. Individuals living outside of the United States are deemed to maintain minimum essential coverage. If an individual is a dependent of another taxpayer, the other taxpayer is liable for any penalty payment with respect to the individual.

Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans, and other coverage as recognized by the Secretary of HHS in coordination with the Secretary of the Treasury. Government-sponsored programs include Medicare, Medicaid, Children's Health Insurance Program, coverage for members of the U.S. military, veterans health care, and health care for Peace Corps volunteers. Eligible employer-sponsored plans include governmental plans, church plans, grandfathered plans, and other group health plans offered in the small or large group market within a state (e.g., a health insurance exchange).

Minimum essential coverage does not include coverage that consists of certain HIPAA excepted benefits. Thus, if your only coverage is a supplement to liability insurance or is workers' compensation or other similar insurance, you are not considered to have minimum essential coverage. Other HIPAA excepted benefits that do not constitute minimum essential coverage if offered under a separate policy, certificate or contract of insurance include long term care, limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity or other fixed indemnity insurance, or Medicare supplemental health insurance.

If you fail to maintain minimum essential coverage, you are subject to a penalty. The amount of the penalty is phased in from 2014 thru 2016. In 2016, when fully phased in, the penalty is equal to the greater of: (1) 2.5 percent of your household income in excess of an amount equal to your household income for the tax year over the threshold amount of income required for filing an income tax return (for example, in 2011, this amount was $19,000 for under 65 and married filing jointly), or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 is one-half of the adult fee. The total household penalty may not exceed 300 percent of the per-adult penalty ($2,085). The total annual household payment may not exceed the national average annual premium for a bronze level health plan offered through a health insurance exchange that year for the household size.

As part of the phase in, the per-adult annual penalty is $95 for 2014 and $325 for 2015. The percentage of income is 1 percent for 2014 and 2 percent in 2015. If you file a joint return, you and your spouse are jointly liable for any penalty payment.

The penalty applies to any period minimum essential coverage is not maintained and is determined monthly. The penalty is an excise tax and is assessable and collectible under the Internal Revenue Code and is reported on an individual's income tax return. However, IRS collection procedures (e.g., liens, levies, etc.) do not apply to this excise tax. In addition, there are no criminal penalties for non-compliance with the requirement to maintain minimum essential coverage. However, the authority to offset refunds or credits is not limited by this provision.

Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost bronze plan in the local health exchange exceeds 8 percent of household income for the year are exempt from the penalty. In years after 2014, the 8 percent exemption is increased by the amount by which premium growth exceeds income growth.

For employees, and individuals who are eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination of whether coverage is affordable to the employee and any such individual is made by looking at the required contribution of the employee for self-only coverage. Individuals are liable for penalties imposed with respect to their dependents and their spouse, if filing a joint return.

Taxpayers with income below the income tax filing threshold, as well as members of Indian tribes, are exempt from the penalty for failure to maintain minimum essential coverage.

No penalty is assessed on 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 tax 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. Individuals may also apply for a hardship exemption. Residents of U.S. possessions are treated as being covered by acceptable coverage. Family size is equal to the number of individuals for whom the taxpayer is allowed a personal exemption. Household income is the sum of the modified adjusted gross incomes of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified adjusted gross income means adjusted gross income increased by all tax-exempt interest and foreign earned income.

I know this is a lot of information to absorb, so if you have any questions please feel free to contact me so we can review your individual situation and how this individual mandate may affect you.

Sincerely,

[Your Name, Your Firm]

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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