ACA Health Insurance Mandate
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IRS Issues Final Regs on Health Insurance Mandate Penalty Effective in 2014
(Parker's Federal Tax Bulletin: September 11, 2013)

Under the Patient Protection and Affordable Health Care Act (PPACA), beginning after 2013, nonexempt U.S. citizens and legal residents of the United States must maintain minimum essential healthcare coverage. This is referred to as the "individual mandate." A penalty, referred to as a "shared-responsibility payment," is imposed upon individuals who do not have such healthcare coverage. The penalty is imposed under Code Sec. 5000A.

The constitutionality of this individual mandate was challenged in court. On June 28, 2012, the Supreme Court, in National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, 2012 PTC 167 (S. Ct. 2012)), concluded that the penalty imposed by PPACA on individuals who do not buy health insurance functions more like a tax than a penalty. Thus, because Congress has the authority to tax, the Court held the law is constitutional.

On February 1, 2013, the IRS issued proposed regulations on the shared responsibility payment. It received many suggested changes from practitioners. The IRS has now finalized those regulations in T.D. 9632 (8/30/13)).

According to the IRS, the principle in implementing the individual shared responsibility provision is that the shared responsibility payment should not apply to any taxpayer for whom coverage is unaffordable, who has other good cause for going without coverage, or who goes without coverage for only a short time.

The following is a summary of some of the more important aspects of the final regulations.

Partial-Month Coverage for the Month

The final regulations provide that an individual is treated as having coverage for a month so long as he or she has coverage for any one day of that month. For example, an individual who starts a new job on April 30 and is enrolled in employer-sponsored coverage on that day is treated as having coverage for the month of April. Similarly, an individual who is eligible for an exemption for any one day of a month is treated as exempt for the entire month.

The IRS rejected a practitioner's recommendation that an individual be considered as covered for a month only if the individual is enrolled in and entitled to receive benefits under a plan or program identified as minimum essential coverage for a majority of the days in the month. The IRS said it chose the one-day rule over the majority of the days in the month rule because it provides administrative convenience for both taxpayers and the IRS. Without the one-day rule, taxpayers and the IRS would need to determine the number of days each person in a shared responsibility family is covered in each month of a tax year. However, the IRS said it will reconsider this rule if future developments indicate that the rule is being abused, for example, if individuals obtain coverage for a single day in a month over the course of several months in a year.

A practitioner requested that the final regulations provide that an individual who has submitted an application for Medicaid but is awaiting approval for enrollment has minimum essential coverage while the application is pending approval. In general, Medicaid coverage is granted retroactively to the date the application is filed. Code Sec. 5000A(a) requires that an individual have minimum essential coverage for a month. If retroactive coverage is granted, an applicant has minimum essential coverage. If the application is denied, the applicant does not have minimum essential coverage. Thus, the IRS rejected this recommendation. However, an individual without coverage may be eligible for an exemption, such as a short coverage gap exemption.

Exemptions for Certain Gaps in Coverage

The statute provides an exemption for gaps in coverage of less than three months. It generally specifies that such gaps be measured without regard to the calendar years in which the gap occurs. For example, a gap lasting from November through February lasts four months and therefore generally would not qualify for the exemption. However, recognizing that many individuals file their tax returns as early as January, before the length of an ongoing gap may be known, the final regulations provide that if the part of a gap in the first tax year is less than three months and the individual had no prior short coverage gap within the first tax year, then no shared responsibility payment is due for the part of the gap that occurs during the first calendar year, regardless of the eventual length of the gap. For example, for a gap lasting from November through February, no payment would be due for November and December.

Liability for Dependents

Consistent with Code Sec. 5000A(b)(3), the final regulations provide that a taxpayer is liable for the shared responsibility payment imposed for any individual for a month in a tax year for which the individual is the taxpayer's dependent (as defined in Code Sec. 152) for that tax year.

Practice Tip: 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.

Some practitioners recommended that a taxpayer's liability for the shared responsibility payment be limited to individuals eligible for the same minimum essential coverage for which the taxpayer is eligible. According to those practitioners, many taxpayers are unable to enroll their qualifying children in their employer-provided plans. Other practitioners recommended that a taxpayer's liability under Code Sec. 5000A extend solely to those dependents who meet the requirements to be a qualifying child under Code Sec. 152, so that a taxpayer's qualifying relatives would be disregarded. In addition, practitioners requested that Code Sec. 5000A liability extend only to those dependents who are actually claimed by the taxpayer. They felt that the complexity in identifying a potential dependent before the tax year begins, particularly a qualifying relative, would prevent them from making informed coverage decisions. The practitioners claimed that, unless the rule is revised, those taxpayers may unexpectedly be liable for shared responsibility payments for dependents for whom a deduction under Code Sec. 151 is not claimed. The IRS rejected these suggestions, and the final regulations retain the rule imposing liability on the taxpayer who may claim an individual as a dependent.

Other practitioners recommended that a noncustodial parent who must provide the health care of a child under a separation agreement, divorce decree, court order, or other similar legal obligation and who fails to provide that health care be liable for the shared responsibility payment attributable to that child even if the child is the custodial parent's dependent under Code Sec. 152.

As the IRS noted, Code Sec. 5000A places liability for a dependent's lack of minimum essential coverage on the taxpayer who may claim the individual as a dependent and it does not provide that this liability may be assigned to another taxpayer, even if the other taxpayer has a legal obligation to provide the child's health care. Accordingly, the IRS rejected these practitioners' suggestions. However, the IRS noted, HHS has addressed the situation described in these comments in recently issued guidance, permitting Exchanges to grant a hardship exemption 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).

Liability for Adopted Children

Like the proposed regulations, the final regulations provide special rules for determining liability for the shared responsibility payment attributable to children adopted or placed in foster care during a tax year. If a taxpayer legally adopts a child and is entitled to claim the child as a dependent for the tax year when the adoption occurs, the taxpayer is not liable for a shared responsibility payment attributable to the child for the month of the adoption and any preceding month. Conversely, if a taxpayer who is entitled to claim a child as a dependent for the tax year places the child for adoption during the year, the taxpayer is not liable for a shared responsibility payment attributable to the child for the month of the adoption and any following month. Similar to the comments on a custodial parent's liability, practitioners recommended that a taxpayer's liability for shared responsibility payment for an adopted child be based on the state law assigning responsibility for the child's health care, not when a child is adopted or placed for foster care. The IRS rejected this recommendation because, it said, determining when a taxpayer is liable for an adopted child's health care under numerous and varying state laws would introduce considerable administrative difficulty and uncertainty into the implementation and administration of Code Sec. 5000A.

Categories of Coverage That Comprise Minimum Essential Coverage

The regulations explain that minimum essential coverage includes, at a minimum, all of the following statutory categories:

(1) employer-sponsored coverage (including COBRA coverage and retiree coverage);

(2) coverage purchased in the individual market;

(3) Medicare Part A coverage;

(4) Medicaid coverage;

(5) Children's Health Insurance Program (CHIP) coverage;

(6) Certain types of Veterans health coverage; and


Minimum essential coverage does not include certain specialized coverage, such as coverage only for vision care or dental care, workers' compensation, or coverage only for a specific disease or condition. Under the law, minimum essential coverage also includes any additional types of coverage that are designated by the Department of Health and Human Services (HHS) or, as detailed by the regulation, when the sponsor of the coverage follows a process outlined in the regulations to be recognized as minimum essential coverage.

Employer-Sponsored Coverage

In the proposed regulations, the IRS explained that a self-insured group health plan is an eligible employer-sponsored plan and thus is considered minimum essential coverage. Several practitioners requested additional clarification on the treatment of a self-insured group health plan because these plans are not offered in a large or small group market within a state. The IRS revised the final regulations to clarify that a self-insured group health plan is an eligible employer-sponsored plan, regardless of whether the plan could be offered in the large or small group market in a state.

The proposed regulations did not specifically address arrangements in which an employer provides subsidies or funds a pre-tax arrangement for employees to use to obtain coverage under plans offered in the individual market. At least one practitioner suggested that certain arrangements of this type be treated as eligible employer-sponsored plans, arguing that treating these arrangements as eligible employer-sponsored plans would increase flexibility for employers and employees in satisfying their respective shared responsibility requirements.

The IRS did not specifically address these arrangements in the final regulations. Instead, it anticipates that future guidance will address the application of Code Sec. 5000A and the Affordable Care Act's insurance market reforms to these types of arrangements.

The proposed regulations provide that the term employee includes former employees and, as a result, treat coverage provided by an employer to former employees as coverage under an eligible employer-sponsored plan. Practitioners noted that retiree coverage may be unlike coverage offered to current employees in terms of cost, scope of benefits, and enrollment opportunities and, therefore, should be treated differently from other employer-provided coverage. Employer-sponsored group health plans offered to former employees are treated similarly for purposes of the Public Health Service Act, the Employee Retirement Income Security Act, and other provisions of the Code, the IRS noted. Therefore, the IRS did not revise the final regulations to adopt this suggestion, and retiree coverage under a group health plan is minimum essential coverage. However, the final regulations provide that, for the lack of affordable coverage exemption, an individual will not be eligible for retiree coverage unless the individual enrolls. Therefore, an individual who is eligible for retiree coverage but does not enroll disregards that eligibility in determining qualification for the lack of affordable coverage exemption.

Individuals Exempt from the Shared Responsibility Payment

Consistent with the statute, the final regulations provide nine categories of individuals who are exempt from the shared responsibility payment. These categories are as follows:

(1) Religious conscience. This applies to a member of a religious sect that is recognized as conscientiously opposed to accepting any insurance benefits. The Social Security Administration administers the process for recognizing these sects according to the criteria in the law.

(2) Health care sharing ministry. This applies to a member of a recognized health care sharing ministry.

(3) Indian tribes. This applies to a member of a federally recognized Indian tribe.

(4) No filing requirement. This applies to an individual whose income is below the minimum threshold for filing a tax return. The requirement to file a federal tax return depends on the individual's filing status, age and types and amounts of income.

(5) Short coverage gap. This applies to an individual went without coverage for less than three consecutive months during the year.

(6) Hardship. The Health Insurance Marketplace, also known as the Affordable Insurance Exchange, has certified that an individual has suffered a hardship that makes the individual unable to obtain coverage.

(7) Unaffordable coverage options. An individual can't afford coverage because the minimum amount that the individual must pay for the premiums is more than 8 percent of the individual's household income.

(8) Incarceration. This applies to an individual in a jail, prison, or similar penal institution or correctional facility after the disposition of charges against the individual.

(9) Not lawfully present. The individual is not a U.S. citizen, a U.S. national or an alien lawfully present in the U.S.

The religious conscience exemption and the hardship exemption are available exclusively through a Health Insurance Marketplace or Exchange. Four categories of exemptions are available exclusively from the IRS through the filing process the exemptions for individuals who are not lawfully present, taxpayers with household income below the filing threshold, individuals who cannot afford coverage, and individuals who experience short coverage gaps.

Practice Tip: Starting in early 2015, individuals filing a tax return for 2014 will indicate which members of their family (including themselves) are exempt from the provision. For family members who are not exempt, the taxpayer will indicate whether they had insurance coverage. For each nonexempt family member who doesn't have coverage, the taxpayer will owe a shared responsibility payment.

A choice is available to individuals for the exemptions in the three remaining categories members of a health care sharing ministry, individuals who are incarcerated, and members of Indian tribes. These exemptions can be obtained either through a Health Insurance Marketplace or through the tax return filing process.

Parker Tax Publishing Staff Writers


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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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