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What the Heck is the Deal with Healthcare?

Whether you agree with the Affordable Care Act, or not it is here.  Somewhere along the line they made healthcare a tax issue.  In 2013, I had a book published entitled The Complete Guide to the Affordable Healthcare Act, but there have been so many changes since then.  I also hear a lot of people just not understanding what is going on with healthcare.  I am here to tell you this is a very complicated topic.  I am going to take this opportunity to explain this complex topic in language that my readers can easily understand.

Let’s start at the beginning.  In 2014 you are required to have healthcare, but not just any ole healthcare.  You are required to have healthcare that meets certain specifications.  Minimum Essential Coverage (this is an important term, I will come back to this) that satisfies the Individual Mandate (important as well and we will circle back to this too) includes the following types of coverage:

  1. Coverage under an “eligible employer-sponsored plan,” which the proposed Treasury rule defines generally to mean coverage under a group health plan, whether insured or self-insured, including coverage under a federal or non-federal governmental plan;

  2. Coverage under an employer-sponsored retiree health plan;

  3. Coverage under certain government programs, such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and TRICARE;

  4. Coverage in the individual insurance market, including a plan offered by an Exchange; and

  5. Other coverage recognized by HHS, including self-funded student health coverage and coverage under Medicare Advantage plans.

  6. Coverage that consists of “excepted” benefits (as defined in regulations issued under the Health Insurance Portability and Accountability Act) does not qualify as minimum essential coverage. This means that limited-scope dental and vision coverage and most health Flexible Spending Arrangements by themselves will not qualify.

Exactly what constitutes Minimum Essential Coverage was batted around for many months, but the government finally settled on the above definition.  Technically, and forgive the quote of the actual code section, but I am what is known as a “code head.” IRC § 5000A(f) spells out exactly what qualifies as Minimum Essential Coverage.  If you are having a hard time getting to sleep some night, Google that.

Now I am not a person that sells health insurance, but I can tell you that 99.9 percent of the health plans out there meet the requirements of Minimum Essential Coverage.

Now that we have that covered let’s dive into IRC §5000A (again bear with the codes).  IRC §5000A is what is known as the Individual Mandate.  This is exactly what you would think it is.  This little (well actually not so little) Code Section spells out that you must have Minimum Essential Coverage or you will be fined…oops…sorry I mean TAXED.  That’s the right word.  Remember that Supreme Court

Case?  It’s definitely not a fine. It is a tax.

Just like every good Internal Revenue Code Section, there are exemptions.  This particular section, there are many exemptions from the Individual Mandate. One exemption is available to individuals who lack access to affordable health coverage. The purpose of the exemption is to avoid making an individual pay a tax penalty if his or her only health coverage option is unaffordable.

The exemption provides that group health plan coverage is not affordable for an employee if the employee’s required contribution for the lowest cost self-only coverage exceeds 8 percent of his or her household income. That employee would be exempt from the Individual Mandate. He or she could apply for coverage with the Healthcare Exchange (or Marketplace, these two terms are the same thing and I may use them interchangeably). Exchange coverage using the Premium Assistance Tax Credit, enroll in the employer’s health plan despite the cost, or remain uninsured without paying a penalty.  So basically, if you can’t afford healthcare, you may be able to get free healthcare.

So, I know what you are thinking right now: “I will just tell the government that I can’t afford it, and I am good.”  Well the government beat you to that punch.  There are also different measures of affordability for family members. One relates to eligibility for the Premium Assistance Tax Credit and one relates to the Individual Mandate Exemption.

I am going to stop here and let you go to the bathroom, stretch your legs, talk a walk, “smoke ‘em if you got ‘em.”  We are about to get technical, and I want you to come into this part of the article with a fresh mind.  It’s okay…I can wait…Take your time…

Just a side note here.  Congress made this law and left it up to the Internal Revenue Service to make the rules.  Treasury Regulations, or as we in the biz call them, “regs” are the IRS giving us as practitioners guidance on something.  It isn’t part of the Tax Code, but it is how the IRS is going to deal with something.  When it came to the Premium Assistance Tax Credit and Individual Mandate Exemption, the IRS issued several Temporary Treasury Regulations as their initial guidance.  It wasn’t until May of 2013 that we finally got the Final Regulations.

The final Treasury rule addresses affordability for employees’ family members who are applying for a Premium Assistance Tax Credit in the Exchange. If the employee’s required contribution for self-only coverage is affordable using the 9.5 percent test (we will discuss this in a second) the employee’s family members will not qualify for tax credit. The Exchange will not look at the cost of family coverage and assess whether family coverage is affordable.

So what is this magic 9.5 percent test?  Very simply this 9.5 percent of Box 1 of your W-2 Form.

Example: For 2014, Employer XYZ pays employee ABC $24,000 annually as identified in Box1 of the employee’s W-2. The employee’s contribution for the lowest cost self only coverage is $1,200 or $100 a month. $1,200 is 5% of $24,000 which is less than 9.5%. The coverage offered by employer XYZ is affordable.

The way that it is determined that you cannot afford the coverage is if the plan being offered by your employer costs you more that 9.5 percent of your income for an employee-only plan.  If it does you may be given an advance on your Premium Assistance Tax Credit to afford health insurance on the Exchange.  The test to determine if you are exempt from the Individual Mandate Penalty is 8 percent of household income for employee-only plans.

However, a different test applies in determining if a family member is exempt from the individual mandate penalty. For this purpose, group health plan coverage is unaffordable if the required contribution for family coverage exceeds 8 percent of household income. This means that family members who do not qualify for the tax credit (because employee-only coverage is affordable) would at least qualify for an exemption from the individual mandate penalty if the cost of family coverage made family coverage unaffordable.

Now that we have that down pat, let’s talk about this mystical Premium Tax Credit.  The Premium Tax Credit is given to those individuals or families that cannot afford it.  If you go to the Marketplace and shop for insurance, they will ask you about your income, and if you meet the requirements, they will ADVANCE you this credit, so that a portion, if not all, of your health insurance will be paid for.  That is kind of nice right?  It is actually a ticking time bomb.  When you applied for health insurance through the Exchange back in 2013, your situation may have been different then it turned out to be in 2014.  For example, in November of 2013 you may have been unemployed and as a consequence received free health insurance through the Exchange.  In May of 2014, you got a job.  Your new employer wasn’t required to offer health insurance to their employees so they didn’t.  However, you still received healthcare for free.  In 2015, when you file your 2014 tax return, you are going to have to reconcile the ADVANCE (remember I said advance earlier) to the amount of the Premium Tax Credit that you are allowed for 2014 (remember you got that job in May).  The difference of what you were fronted and what you were supposed to get will now have to be paid back to the government on your tax return.

Now let’s say you decided to thumb your nose at the government and not get healthcare for 2014.  You are required to pay a fee…darn it…a tax called: Individual Shared Responsibility Payment.

If you and your dependents had minimum essential coverage for each month of 2014, you will check a box indicating that when you file your 2014 federal income tax return.  If you qualify for an exemption, you will attach a form to your tax return to claim that exemption.  If you are required to make the Individual Shared Responsibility Payment, you will calculate your payment and make the payment with your return.

If you choose to make an individual shared responsibility payment instead of maintaining minimum essential coverage, this means you will not have health insurance coverage to help pay for medical expenses.

Now it is time to get that calculator out.

In general, the individual shared responsibility payment for 2014 is the greater of:

  1. One percent of your household income above the income filing threshold for your tax filing status, or

  2. A flat dollar amount of $95 per adult and $47.50 per child (under age 18) in your family, but no more than $285 per family.

The Individual Shared Responsibility Payment is also capped at the cost of the national average premium for bronze level health plans (we are not going to get into medal level plans in this article) available through the Marketplace that would cover everyone in your family who does not have minimum essential coverage and does not qualify for an exemption – for example, $12,240 for a family of five.  However this maximum fee will only impact the small number of high-income taxpayers who choose to go without health insurance. The payment amount is based on each individual’s personal circumstances.

Here is an example:

Victor and Julia are married and have two children under age 18. No family member has minimum essential coverage for any month during 2014, and no family member qualifies for an exemption. For 2014, their household income is $70,000 and their tax return filing threshold amount is $20,300.

  1. Using the household income formula: Subtract the tax return filing threshold amount for 2014 from the 2014 household income, then multiply the answer by one percent (0.01).

$70,000 – $20,300 = $49,700

One percent of $49,700 equals $497.00.

  1. Using the flat dollar amount formula: Add $95 per adult for Victor and Julia to $47.50 per child – for their two children.

$95.00 + $95.00 + $47.50 + $47.50 = $285.00

Victor and Julia’s shared responsibility payment for the year for 2014 is $497. That’s because the household income formula amount of $497 is greater than flat dollar formula amount of $285, and it is less than the $9,792 annual national average premium for bronze level coverage for a family of four in 2014.

Sorry about that last part.  I couldn’t sugar coat or make that any easier for you.  It is just a calculation you have to go through.

I hope that this article has demystified healthcare for you.  If not, well I guess you go back to Google and do more searches.

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