Proposed Regs Address Individual Health Insurance Mandate
(Parker's Federal Tax Bulletin: February 25, 2013)

Proposed regulations provide details on rules relating to the requirement to maintain minimum essential health care coverage. REG-148500-12 (2/1/13).

The Patient Protection and Affordable Care Act of 2010 enacted Code Sec. 5000A. Code Sec. 5000A(a) and Code Sec. 5000A(b) provide that nonexempt individuals must have minimum essential coverage for each month beginning after December 31, 2013, or make an additional payment (the shared-responsibility payment) with their federal income tax return for the tax year that includes that month. A taxpayer is liable for the shared-responsibility payment if any nonexempt individual who may be claimed by the taxpayer as a dependent for a tax year does not have minimum essential coverage in a month included in that tax year. Married taxpayers filing a joint return for any tax year are jointly liable for any shared-responsibility payment imposed for the year.

Compliance Tip: An individual liable for the shared-responsibility payment under Code Sec. 5000A must report the payment on the individual's federal income tax return for the tax year including the month or months for which the payment is owed.

Many individuals are exempt from the shared-responsibility payment, including some whose religious beliefs conflict with acceptance of the benefits of private or public insurance and those who do not have an affordable health insurance coverage option available. The Affordable Care Act directs health care exchanges to issue to qualified individuals certificates of exemption from the requirement to maintain minimum essential coverage or the shared-responsibility payment. Exempt individuals are eligible for health care through state or federal health care exchanges.

The IRS has now issued proposed regulations under Code Sec. 5000A. The proposed regulations provide that, for a month, a nonexempt individual must either have minimum essential coverage or pay the shared-responsibility payment. An individual is treated as having minimum essential coverage if the individual is enrolled in and entitled to receive benefits under a program or plan that is minimum essential coverage for at least one day during the month. Under Code Sec. 5000A(b)(3)(A), if an individual with respect to whom the shared responsibility payment is imposed for a month is another individual's dependent for the tax year including that month, the other individual is liable for the shared-responsibility payment for the dependent. The proposed regulations clarify that a taxpayer is liable for the shared-responsibility payment imposed with respect to any individual for a month in a tax year for which the taxpayer may claim a personal exemption deduction for the individual (that is, the dependent) for that tax year. Whether the taxpayer actually claims the individual as a dependent for the tax year does not affect the taxpayer's liability for the shared-responsibility payment for the individual.

Code Sec. 5000A(b)(3)(B) provides that, if an individual for whom the shared-responsibility payment is imposed for a month files a joint return for the tax year including that month, the individual and the individual's spouse are jointly liable for the shared-responsibility payment. The proposed regulations clarify that whether one spouse is an exempt individual does not affect the joint liability of the two spouses for the shared-responsibility payment.

OBSERVATION: The penalty for failure to maintain minimum coverage will be phased in between 2014 and 2016. For a discussion of the penalty for failing to maintain minimum essential health coverage, see Parker Tax ¶190,100.

An individual is exempt from the shared-responsibility payment for a month for which the individual does not have access to affordable minimum essential coverage. An individual is considered as not having access to affordable coverage for a month if the individual's required contribution (determined on an annual basis) for coverage for the month exceeds 8 percent of the taxpayer's household income for the tax year. For any plan year beginning after 2014, the 8 percent figure will be updated to reflect the excess of the rate of premium growth between the preceding calendar year and 2013 over the rate of income growth for the same period.

For purposes of determining affordability of coverage, the proposed regulations require that the taxpayer's household income be increased by the portion of the required contribution made through a salary-reduction arrangement and excluded from gross income.

If an individual is eligible for coverage under an eligible employer-sponsored plan, whether as an employee or as an individual related to an employee, the individual's qualification for the lack of affordable coverage exemption is determined solely by reference to the cost of coverage under the eligible employer-sponsored plan. The proposed regulations clarify that an employee or related individual is treated as eligible for coverage under an eligible employer-sponsored plan for each month included in the plan year if the employee or related individual could have enrolled in the plan for that month during an open or special enrollment period.

Example: Ellen is single with no dependents. In November 2015, Ellen is eligible to enroll in self-only coverage under a plan offered by her employer for calendar year 2016. If Ellen enrolls in the coverage, she is required to pay $5,000 of the total annual premium. In 2016, Ellen's household income is $60,000. Her required contribution is $5,000, the portion of the annual premium she pays for self-only coverage. In this case, Ellen lacks affordable coverage for 2016 because her required contribution ($5,000) is greater than 8 percent of her household income ($4,800).

Example: Bob and Carol are married and file a joint return for 2016. They have two children. In November 2015, Bob is eligible to enroll in self-only coverage under a plan offered by Bob's employer for calendar year 2016 at a cost of $5,000 to Bob. Carol and the children are eligible to enroll in family coverage under the same plan for 2016 at a cost of $20,000 to Bob. The family's household income is $90,000. Bob's required contribution is his share of the cost for self-only coverage, $5,000. Thus, Bob has affordable coverage for 2016 because his required contribution ($5,000) does not exceed 8 percent of his household income ($7,200). The required contribution for Carol and the children is Bob's share of the cost for family coverage, $20,000. As a result, Carol and the children lack affordable coverage for 2016 because their required contribution ($20,000) exceeds 8 percent of their household income ($90,000 x 8% = $7,200).

Example: Chris is single with no dependents. In June 2015, Chris is eligible to enroll in self-only coverage under a plan offered by his employer for the period July 2015 through June 2016 at a cost to Chris of $4,750. In June 2016, Chris is eligible to enroll in self-only coverage under a plan offered by his employer for the period July 2016 through June 2017 at a cost of $5,000. In 2016, Chris's household income is $60,000. Chris's annualized required contribution for the period January 2016 through June 2016 is $4,750 ($2,375 paid for premiums in 2016 x 12/6). Thus, Chris has affordable coverage for January 2016 through June 2016 because his annualized required contribution ($4,750) does not exceed 8 percent of his household income ($4,800). Chris's annualized required contribution for the period July 2016 to December 2016 is $5,000 ($2,500 paid for premiums in 2016 x 12/6). As a result, Chris lacks affordable coverage for July 2016 through December 2016 because his annualized required contribution ($5,000) exceeds 8 percent of his household income ($60,000 x 8% = $4,800).

For a discussion of requirement to maintain minimum essential health care coverage, see Parker Tax ¶190,100

(Staff Editors at Parker Tax Publishing)

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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