The IRS has finally taken one more step to clarify what will constitute the Individual Mandate provision of the Affordable Care Act. The mandate, which requires all Americans to obtain health insurance, had gone mostly undefined until now. As we approach the 30 day mark to the opening of the “online marketplace” also known as exchanges and the 100 day mark of Obamacare Implementation, American consumers and small businesses now have a clearer picture as to what will be required on January 1, 2014.
1. First, the penalty has been “remarketed” as a shared responsibility payment. This still requires those that do not qualify for an exemption or tax subsidies based on income, to obtain health insurance that meets minimum essential coverage.
2. “Minimum essential coverage” broadens the definition of employer sponsored plans to include multiemployer plans, single employer collectively bargained plans, plans sponsored by third parties such as professional employer organizations, temporary staffing agency, etc.
3. One of the big coverages that was not identified in the ruling by the IRS pertains to how some funding arrangements will be considered. Standalone Health Reimbursement Accounts, which are a common funding option to allow employees to purchase their own health insurance in the open market, have not yet been addressed.
4. Penalty exemptions have also been clarified, in an effort to make it easier for lower income individuals to understand how the subsidies work, and what is needed to claim them. Some changes include:
- A taxpayer is not required to file a federal income tax return solely to claim the exemption, and may apply for exemption via the Exchange/Marketplace
- Individuals who have a gap in minimum essential coverage of less than three consecutive months in a calendar year, with the continuous period beginning no earlier than January 1, 2014
5. How will the penalties be paid? – Penalties are to be paid to the IRS through the filing of tax returns starting in 2015. A penalty is the greater of either a specified dollar amount or percentage of income. The annual penalties for 2014 through 2016 are noted below. Beginning in 2017, penalties will increase based on the cost of living.
- 2014: Greater of $95 per adult and $47.50 per child under age 18, maximum of $285 per family, or 1% of income over the tax-filing threshold
- 2015: Greater of $325 per adult and $162.50 per child under age 18, maximum of $975 per family, or 2% over the tax-filing threshold
- 2016: Greater of $695 per adult and $347.50 per child under age 18, maximum of $2,085 per family, or 2.5% over the tax-filing threshold