The Patient Protection and Affordable Care Act (referred to as ACA or Obamacare) requires employers and health insurance marketplaces to report health coverage for an individual starting with coverage for 2014 (Code Secs. 6055 and 6056). Individuals who claimed the premium tax credit (explained below) on an advance basis or may be eligible to claim it when they file their federal income tax return also have special reporting requirements. Those who failed to carry minimum essential health coverage are subject to a penalty unless they can claim exemption from this individual mandate. Claiming the credit or exemption from the individual mandate is effective for 2014 returns. Drafts of new forms that will be used in the next tax season have been unveiled. Here is an overview of the forms and who must file them.
Information reporting
Third parties such as employers with employer health care plans and the government’s health insurance marketplace (also referred to as exchanges) are required to report certain coverage information to the IRS and to the individual. This information is used by the individual to demonstrate that he/she is covered and therefore exempt from the penalty for not having required coverage.
The information returns include:
- Form 1095-A, Health Insurance Marketplace Statement, which is issued by a Marketplace.
- Form 1095-B, Health Coverage, which is issued by employers offering health coverage. This includes small employers which are exempt from the employer mandate but opt to offer coverage anyway. The form usually is not required for medical flexible spend accounts (FSAs), health reimbursement accounts (HRAs), or in some cases health savings accounts (HSAs), because these plans do not offer minimum essential coverage.
- Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, will be used by large employers (100 or more employees).
There are also transmittal forms to accompany each of these information returns that will be used by the marketplace or employers to send all such returns to the IRS. There is some reporting relief for employers with 100 or fewer employees.
Reporting for the premium tax credit
Individuals can obtain federal assistance in paying for required health coverage in the form of an advanceable, refundable tax credit (Code Sec. 36B). Eligibility for the credit depends on household size and income, modified adjusted gross income, and the applicable federal poverty line. The credit applies only if coverage is obtained through a marketplace.
Form 8962, Premium Tax Credit, is used to claim the credit if an eligible individual did not do so when purchasing health coverage through a marketplace. It is also used to reconcile the credit that was claimed with the amount to which the individual is actually entitled. In other words, the individual may receive a larger credit when filing his/her return or have to repay some or all of the credit previously enjoyed. The discrepancy can result, for example, from a change in income or a change in family size.
The credit can only be claimed on Form 1040 or 1040A; it cannot be claimed on Form 1040EZ.
Note: There is a split in the federal appellate courts on the question of whether the premium tax credit can be claimed by an individual who purchases coverage through the federal exchange (those in the 36 states without their own Marketplaces use the federal exchange. The Circuit for the District of Columbia said there was no authority to give the credit to individuals who buy their coverage through the federal exchange (Jacqueline Halbig v. Sylvia Mathews Burwell, No. 14-5018). The Fourth Circuit said just the opposite (David King. v. Sylvia Mathews Burwell, No. 14-1158).
Claiming exemption from the individual mandate
Generally, every individual must have minimum essential coverage for the entire year (Code Sec. 5000A). There is a box on the tax return (Forms 1040, 1040A, and 1040EZ) labeled “Health care: individual responsibility…Full-year coverage” that should be checked if the taxpayer has minimum essential coverage. Failure to have such coverage can result in a penalty. However, there are certain exemptions from this mandate that can be claimed to avoid the penalty, including:
1. The individual has no coverage for up to three months only.
2. The lowest-priced coverage would cost more than 8% of household income.
3. The individual’s gross income is below the filing threshold.
4. The person is member of a federally recognized Native American tribe.
5. The person is a member of a recognized health care sharing ministry or a recognized religious sect with religious objections to insurance.
6. The person is incarcerated.
7. The individual is not lawfully present in the U.S. (is an illegal alien).
8. The person claims a hardship exemption (e.g., because of being homeless; evicted or facing eviction; having received a utility shut-off notice; experienced domestic violence, had a death of a close family member; went through a disaster causing serious property damage; filed for bankruptcy within the last six months; had medical expenses within the past two years resulting in substantial debt or unexpected increases in necessary expenses caring for a ill, disabled or aging family member; having a dependent child denied coverage in Medicaid or CHIP [exemption from the penalty for the child]; being enrolled in a marketplace plan after an eligibility appeals decision; determined ineligible for Medicaid because of the state not expanding its coverage; the person’s individual health plan was canceled and he/she believes the marketplace plans are unaffordable).
Form 8965, Health Coverage Exemption, is used by an individual to claim exemption from the mandate. Part I is the marketplace-granted exemption. Part II is for an exemption claimed by an individual because of having household income below the filing threshold or gross income below the filing threshold.
This form accompanies any of the individual income tax returns: Form 1040, 1040A, or 1040EZ.
Self-employed Use Credit or Deduction
Self-employed individuals deduct premiums they pay for health coverage for them, spouses, dependents, and any child under age 27 as an adjustment to gross income (Code Sec. 162(l)). However, some self-employed individuals may be eligible for the premium tax credit to help pay for coverage. How do these two tax rules relate to each other? The IRS has provided guidance (Rev. Proc. 2014-41).
The challenge is the fact that the deduction for health insurance premiums for self-employed individuals must be taken into account in determining adjusted gross income for purposes of the premium tax credit. And the amount of the deduction is based on the amount of the premium tax credit. In effect, there is a circular relationship between these two tax breaks. Self-employed individuals who have specified premiums (e.g., basic coverage that the self-employed individual purchases through a marketplace) can use the calculations provided by the IRS to determine their tax breaks.
The calculations use two methods: iterative and alternative. Both are complex but will be built into tax preparation software, which avoids the need to personally make these complex computations. To better understand the interplay between the deduction and credit, the IRS has provided a number of examples.
Credit for small employer health insurance premiums
Eligible small employers that are not non-profit organizations may claim a tax credit if they pay at least 50% of the cost of employee health coverage and purchase their coverage through a Small Business Health Options Program (SHOP) exchange (Code Sec. 45R). An eligible small employer is one that has no more than 25 full-time equivalent employees (FTEs), and the average annual wages of its FTEs do not exceed an amount equal to twice a set dollar amount, which is adjusted annually for inflation for tax years starting in 2014. This dollar amount is $25,000; as adjusted for inflation for 2014, it is $25,400. Final regulations clarify some rules related to this credit (T.D. 9672, 6/26/14).
Form 8941, Credit for Small Employer Health Insurance Premiums, is revised to reflect the new credit limits for 2014: 35% for employers that are tax-exempt entities; 50% for all other employers (which is up from 25% and 35%, respectively, for 2010 through 2013).
Conclusion
Absent any radical change in ACA in the coming months, taxpayers will be seeing new forms next year when they prepare their returns (or sign returns prepared by tax practitioners) for 2014. Draft versions of IRS forms may be viewed at http://apps.irs.gov/app/picklist/list/draftTaxForms.html?indexOfFirstRow=0&sortColumn=sortOrder&value=&criteria=&resultsPerPage=25&isDescending=false.
Sidney Kess, CPA, J.D., LL.M., has authored hundreds of books on tax-related topics. He probably is best-known for lecturing to more than 700,000 practitioners on tax and estate planning.
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