To begin this discussion of the tax law changes that went into effect in 2014, lets start with a definition of terms:
Minimum Essential Coverage (MEC) - This is an insurance coverage under a government sponsored program, an eligible employer sponsored plan, a plan in the individual market, a grandfathered health plan or other coverage recognized by the Dept of Health and Human Services. Also known as qualifying health care coverage.
Shared Responsibility Payment (SRP) - If the taxpayer or any member of the tax household, did not have either MEC or an exemption for any month during the tax year, a taxpayer must compute a shared responsibility payment on the income tax return.
Tax Household - the tax household includes the taxpayer, taxpayer's spouse if filing a joint return, ANY individual claimed as a DEPENDENT on the return as well as EACH person the taxpayer can, but does not claim as a dependent.
Marketplace (aka The Exchange, Health Insurance Marketplace) - A government or nonprofit entity that offers qualified health plans to individuals.
Health Coverage Exemptions- A recognized reason for not having MEC during any month of the tax year. Examples are unaffordable coverage, short coverage gap, household income below filing threshold.
Premium Tax Credit - A new tax credit for certain people who enrolled in a qualified health plan offered through the Marketplace. A taxpayer MUST NOT be eligible for other minimum essential coverage, as through an employer to qualify.
Under the Affordable Care Act (ACA), the federal and state governments, insurers, employers and individuals share responsibility for improving health insurance coverage in the US. The ACA created the "Marketplace" where taxpayers find information about insurance options, purchase qualified health plans and when eligible acquire help paying premiums and out of pocket expenses utilizing the new premium tax credit. The ACA also created the individual shared responsibility provision, which requires individuals to have minimum essential coverage for each month of the year, qualify for a coverage exemption, or make a shared responsibility payment when filing their income tax return.
Most taxpayers will have had this MEC when covered by an employer plan. If coverage was maintained, then these taxpayers will simply have to check a box indicatingthis fact on the tax form, no further action is required. Taxpayers with this type of coverage will receive a 1095-B from the insurance company by March 31st with their coverage information. They do not have to wait to recieve this form to file since it does not accompany the return. Taxpayers who did not maintain a MEC throughout thee year may still be exempt from the SRP and will not have to make a payment with the return if an applicable coverage exemption applies for the periods not covered by the MEC. Coverage exemptions are available for individuals who are specifically described as having a religious, economic, or other justification for not having the MEC. These taxpayers who qualify for an exemption will be required to file Form 8965, Health Coverage Exemptions with their tax returns. Needless to say, if a taxpayer or any dependent on the return did not maintain MEC for each month of the tax year and does not qualify for a coverage exemption, will have to calculate a shared responsibility payment when filing their income tax return.
As you can see, in terms of simplifying the tax code, we have added another layer of calculations to complete the yearly return. As stated, for most individuals who have family plans through their employer or seniors on Medicare Part A or Medicare Advantage, there is little to be concerened, a simple box must be checked. This year you will receive a reporting form in the 1095 series to verify your MEC. It is for individuals, who purchased through the Marketplace and qualify for the new Premium Tax Credit or for individuals that did not maintain an MEC throughout the year and must calculate a payment where confusion will abound.
If a taxpayer purchased insurance through the Marketplace, then they will receive a 1095-A which has pertinent information required to complete the return. A taxpayer who is offered health insurance through their employer, but has decided that they cannot afford the insurance and did not end up purchasing through the Marketplace will receive a 1095-C. ( Note: Only employers with 50 or more employees are considered to be an Applicable Large Employer and required to furnish this 1095 form.) This form will have the information regarding what the employer offered and what the employee payment share would be. Taxpayers with no insurance and are expecting to receive this form are urged to obtain the required information to file your return accurately. Companies have until March 31 to get the forms mailed to their employees.
Only taxpayers who purchased qualified health plans from a state or federal operated Health Insurance Marketplace, may be eligible for the new Premium Tax Credit (PTC). When taxpayers enrolled in a plan through the Marketplace, if they were eligible for the PTC, had the option to choose to have some or all of the credit paid in advance to their insurance company to lower their monthly premium payments or they could claim all of the benefit through their filed return. You must file a tax return to claim this credit, or if you received advance credit payments to offset your premiums throughout the year, you must file to reconcile these advance payments with the actual amount allowed. Since income is estimated at the time of plan sign up taxpayers must now calculate the actual credit allowed for the year based upon the actual income received on the tax return. If excess payments were received during the year, the excess amount will need to be added to the tax liability on the return and be repaid.
Taxpayers are allowed a premium tax credit if they meet the following criteria: 1) The taxpayer, spouse or dependents were enrolled at some time in one or more plans offered through the Marketplace. ( You are considered to be covered for a month of MEC if you were enrolled and entitled to receive benefits for at least one day during that month), 2) one or more of these individuals were NOT eligible for another MEC (such as through your employer) during the time enrolled in the Marketplace 3) and the taxpayer is an applicable taxpayer. (You are an applicable taxpayer if your household income is at least 100%but not more than 400% of the federal poverty line (FPL) for your family size. If married, you must file a joint return with your spouse, unless you are considered "unmarried" for the Head of Household filing status. You cannot be claimed as a dependent by another taxpayer.)
The Federal Poverty Line (FPL) is determined, adjusted for inflation, and published at the beginning of each year by the US Dept. of Health and Human Services (HHS). It is based upon family size. The Premium Tax Credit for 2015 is based upon the 2014 FPL that was available when enrollment started in 2014. (Please see the link below to the HHS web site. All numbers are at the 100% level.)
The taxpayer's household income is the modified adjusted gross income (MAGI) of the taxpayer, spouse if married filing a joint return and all dependents listed on the taxpayers return who are required to file a federal return for the year. MAGI for purposes of the Premium Tax Credit, is the adjusted gross income on the return (AGI) plus any excluded foreign income, nontaxable social security benefits including tier 1 railroad retirement benefits (not SSI), and any tax exempt interest.
A taxpayer is allowed a PTC only for months that a member of his (her) family was enrolled in a plan through the Marketplace and not eligible for another MEC from any other source. This includes eligibility for Medicaid, Medicare or other government sponsored programs. The taxpayer, spouse and others for whom the taxpayer claims a personal exemption on the return, meeting these 2 requirements are part of the taxpayers "coverage family".
Taxpayers who purchased their MEC through the Marketplace, will receive a Form 1095-A, Health Insurance Marketplace Statement. The information on the form includes monthly premiums applicable to the SLCSP used to compute the credit, the total monthly premium paid for the coverage of all family members, the amount of advance credit payments and the SSN, names of all covered individuals, and other required information. (The SLCSP is the second lowest cost silver plan offered by the Marketplace. The Marketplace offers Bronze, Silver Gold and Platinum)
This information must be entered into the Form 8962 Premium Tax Credit. Since a taxpayer's MEC is considered on a month by month basis, then the Form 1095-A and Form 8962 is broken down into monthly segments. If plans change, family members change throughout the year or the MEC is not met during any part of the year, then the PTC can only be calculated on a month to month basis and then totaled to determine the credit for the year. If taxpayers are enrolled in the same qualified plan for all 12 months and if their SLCSP does not change, then a single annual calculation can be completed. Taxpayers must wait to receive their 1095-A before attempting to complete their 2015 income tax return so that Form 8962 can be completed correctly.
The Premium Tax Credit is the sum of the credit calculated amount for each month. The credit amount is the lesser of (1) the monthly premium for the plan in which the taxpayer's family enrolled and (2) the monthly premium for the taxpayer's applicable second lowest cost silver plan (SLCSP) minus the taxpayers contribution amount. The taxpayers contribution amount is the taxpayers household income multiplied by the applicable figure as determined in the following manner. Using the FPL based upon your family size, divide the household income by the 100% FPL. The result is your household income in relation to the FPL as a percentage. Utilizing the percentage amount, use the chart as found in the instructions for Form 8962, to determine your applicable figure. Please see the reproduced table below.
An example: A single person, John, has an annual premium of $5000. His applicable SLCSP as reported on his 1095-A is $5200. His household income for the year is $28725. 100% of his FPL for a family of 1 is $11490. $28725 divided by $11490 is 250% of the FPL. Based upon the chart, 250% = an applicable figure of .0805. His PTC is the lower of $5000, his annual premium or the SLCSP of $5200 minus his contribution amount which is $28725 (household income) x .0805 (applicable figure) = $2312. $5200(his SLCSP) - $2312 (his calculated contribution amount) = $2888. The lesser of $5000 (his plan premiums) or $2888 is his PTC. (Since all 12 months of his SLCSP and health plan were the same, we can do a single annual calculation.)
Taxpayers who have changes in monthly amounts not shown on their 1095-A (the taxpayer became eligible for an employer plan as an example and did not notify the Marketplace) must do monthly calculations. If the family size changed during the year since enrollment, the bigger the difference will be between advanced payments and actual credit due. Taxpayers should notify the Marketplace as soon as possible about changes in their circumstances. Unexpected increases in household income, marriage, divorce, birth of a child and changes in address are just some of the circumstances where the Marketplace should be notified.
It is also worthy to note that the PTC is a refundable credit. If the amount of the calculation of credit is greater than the tax liability on the return, the taxpayer will receive the difference as a refund.
If you should receive a 1095-A which is incorrect, it is lost or you never receive the form, contact your Marketplace directly for a replacement. Form 1095-A is required to be mailed to taxpayers by January 31st for the prior year of coverage. ( in 2015, some of the initial 1095-A,s were sent out with incorrect information. Taxpayers affected were required to await corrected forms before filing their tax returns.)
As previously mentioned, some taxpayers opted to have an advance credit payment paid directly to the insurance provider to lower their monthly premium amounts. When filing Form 8962, these taxpayers will be calculating how much they should receive in credit due to household income and will be subtracting the amount already paid to the insurance carrier in advance. If an excessive amount was received during the year due to changes in household conditions or due to underestimating total income for the year, the difference will increase the amount of tax due on the return. For taxpayers whose household income is below 400% of the FPL, the amount of taxed owed due to advanced payments may be limited.
The Form 8962 consists of 5 parts the last two are to cover unusual situations. In some circumstances, a taxpayer may be enrolled in a policy with a person who is not part of their tax family. This can happen when a taxpayer got divorced or separated during the year. A taxpayer who is claiming a deduction for a person who was actually enrolled in a policy by another taxpayer. A taxpayer who enrolls in a policy but is actually being claimed by another taxpayer on their return. Also when a taxpayer decides to file separately from their spouse. Under these conditions, Part 4 of 8962 must to used for a Shared Policy Allocation.
If taxpayers got married during the year, and one or both taxpayers received advance payments, they may use an alternative calculation to determine their excess advance payments in Part 5 of 8962 Alternative Calculation for Year of Marriage.
As previously stated, all US taxpayers are subject to the individual shared responsibility provision of the ACA. A taxpayer is liable for their self,and for any individual that the taxpayer could claim as a dependent for tax purposes. Therefore all individuals must have a MEC or qualify for a coverage exemption for each month of the year. Parents who can claim a child as a dependent, will need to calculate a shared responsibility payment for a child that is not covered or exempted.
Most taxpayers who are covered through an employer, through a government sponsored program ( Medicare, Medicaid, CHIP, TRICARE), through the "Marketplace" etc. will meet the requirements of the minimum essential coverage (MEC). Plans that do not meet MEC criteria are plans such as stand alone dental and vision plans, accident and disability insurance, workman's compensation insurance, Medicaid that provides for only specific coverage such as family planning and treatment in emergency situations.
If a taxpayer's family was not covered each month, then the next step would be to qualify for a health coverage exemption. The new tax Form 8965, Health Coverage Exemptions is used to list month's not covered by the MEC, to list the exemption for not having coverage, or if no exemption applies to calculate the shared responsibility payment for those months in question.
Some exemptions are granted only through the "Marketplace". An exemption granted through the "marketplace" will be given an Exemption Certificate Number (ECN). This number will be present on the 1095-A issued by the "Marketplace". Some exemptions are only claimed on the income tax return and some may be obtained through the Marketplace or claimed through the return.
An example of some exemptions granted through the return are 1) Unaffordable Coverage the amount you would have to pay for the lowest cost employer coverage or Marketplace (bronze) coverage is more than 8.05% of the taxpayer's household income. 2) Short Coverage Gap you went without coverage for less than 3 consecutive months during the year. 3) Household Income Below the Return Filing Threshold your household income is below the minimum threshold for filing a return. (An example of this is a single person 65 or older has a filing threshold of $11,850 in 2015. However remember you are comparing household income to gross income. A person who is over 65 may not have to file because gross income is below this number, since social security benefits are not entered into gross income calculation, however non-taxable social security is calculated in household income.)
As mentioned if an exemption does not exist for a month of not meeting the MEC, then a shared responsibility payment (SRP) is calculated on Form 8965. The annual SRP is the greater of a percentage of household income or a flat dollar amount. However the amount is capped at the national average premium for a Bronze level MEC for the household size in question.
For 2015, the annual SRP amount is the greater of 2% of the household income that is above the tax return filing threshold for the taxpayers filing status or the family's flat dollar amount which is $325 per adult and $162.50 per child (under age 18) limited to a family total of $975. These are annual amounts.The 2015 national Bronze level average is $207 per month for a single person, $1035 per month for a family of 5. (5 x $207)
(The 2016 % increases to 2.5%.The flat dollar rates increase in 2016 to $325 $695 per adult and $347.50 per child under 18. All are annual amounts)
Lets do a calculation for 2015: A married couple with 2 children under 18, household income of $70,000. No MEC for 12 months
The filing threshold for married filing joint is $20,600. (household income) $70000 - (filing threshold) $20,600 = $49400
2% of $49700 is $988. Their flat dollar rate is $975 (2 adults at $325 is $650 and 2 children under 18 is $325)
Because $988 is greater than $975 and less than the national average of $9936 ($828 x 12 months), their shared responsibility payment is $828 for 12 months, $69 per month without coverage.
Types of Minimum Essential CoverageEmployer-sponsored coverage:
Group health insurance coverage for employees under—
A governmental plan, such as the Federal Employees Health Benefit program
A plan or coverage offered in the small or large group market within a state
A grandfathered health plan offered in a group market
A self-insured health plan for employees
Individual health coverage:
Health insurance you purchase directly from an insurance company
Health insurance you purchase through the Marketplace
Health insurance provided through a student health plan
Health coverage provided through a student health plan that is self-funded by a university*
Coverage under government-sponsored programs:
Medicare Part A coverage
Medicare Advantage plans
Most Medicaid coverage**
Children's Health Insurance Program (CHIP)
Most types of TRICARE coverage**
Comprehensive health care programs offered by the Department of Veterans Affairs
State high-risk health insurance pools*
Health coverage provided to Peace Corps volunteers
Department of Defense Nonappropriated Fund Health Benefits Program
Refugee Medical Assistance
Certain foreign coverage
Certain coverage for business owners
*This type of health coverage will not qualify as minimum essential coverage for plan years beginning after 2014 unless HHS recognizes it as minimum essential coverage under its own regulations.**Medicaid and TRICARE programs that provide limited benefits generally do not qualify as minimum essential coverage; however, see Limited benefit Medicaid or TRICARE programs that are not minimum essential coverage, later.