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Implementing Health Reform: Shared Responsibility Tax Exemptions And Family Coverage Affordability
Editor’s note: This post was updated on February 1, 2013, to clarify the regulatory consequences when an employee is offered unaffordable family coverage.
On January 30, 2013, the Departments of Treasury  and Health and Human Services  issued what I believe may be the last major set of proposed rules necessary to implement that 2014 Affordable Care Act reforms. The proposed rules define who is exempt from the ACA’s shared responsibility (individual mandate) tax, how eligibility for an exemption will be determined, and how the amount of the tax will be calculated and collected.
Treasury (the IRS) and HHS each play a role in defining exemptions and determining eligibility, so both are publishing distinct proposed rules simultaneously. The agencies also published a fact sheet  and a question and answer sheet  covering the proposed rules.
The Implications Of Unaffordable Family Coverage
Perhaps more importantly, Treasury also published on January 30 a final rule on what had been an unresolved issue involving premium tax credits . The final rule addresses the question of eligibility for premium tax credits when an employee has an offer of employment-based coverage. The ACA provides that an employee is not eligible for a premium tax credit if the employee is offered adequate and “affordable” employee coverage. “Affordable” employer coverage is defined by the ACA as coverage for which the employee is not required to pay more than 9.5 percent of modified adjusted gross household income.
An earlier final regulation  on the premium tax credit, however, had left open the question of what would happen if an employed individual can afford self-only coverage for 9.5 percent or less of household income, but family coverage costs more. Would the family, or at least the family members other than the employee, be eligible for premium tax credits? The final rule says no, the employee’s family is not eligible.
This is a very important issue to consumers. An employer could offer self-only coverage that costs less than 9.5 percent of household income, but charge far more for dependent coverage. If the employee’s dependents are not eligible for premium tax credits, they may simply have no way of affording health insurance, and thus remain uninsured. A 2012 GAO report  estimated that 460,000 children would be rendered ineligible for coverage by the interpretation of the statute the IRS has adopted. The total number of persons who would remain uninsured may well be in the millions.
This issue relates to several other issues that the IRS has currently under consideration. In its employer responsibility proposed rules , the IRS proposed that the statutory requirement that an employer offer coverage to employees “(and their dependents)” be interpreted to require employers to offer coverage to an employee’s children, but not spouse, as well as the employee. The IRS further proposed, however, that an employer should not be penalized for offering unaffordable coverage if the employer complies with one of three safe harbors, all of which turn on offering affordable self-only rather than family coverage.
In its January 30 proposed individual responsibility rule, the IRS proposes to require an employee who is offered self-only coverage for 8 percent or less of household income to purchase that coverage to avoid a tax penalty. However, under the January 30 rule, the employee would not be penalized for not purchasing family coverage if family coverage costs more than 8 percent, even though the ACA premium tax credit eligibility requirements cross reference the individual responsibility provisions, and thus should arguably apply the same standard).
The bottom line seems to be that even though an employer must offer coverage for an employee and the employee’s children, the employer will not be penalized if family coverage is unaffordable as long as self-only coverage is affordable If self-only coverage is affordable (defined as costing no more than 9.5 percent of the employee’s income), the employer will have satisfied the employer responsibility requirement, even though family coverage is unaffordable.
On the other hand, if self-only coverage is affordable to the employee (defined now as costing no more than 8 percent of household income) an employee must purchase it to avoid the individual responsibility penalty, but need not purchase family coverage for dependents if family coverage costs more than 8 percent of household income. Spouses of employees, presumably, can get premium tax credits if they are not offered employer coverage, but the premium the employee must pay for self-only coverage will not be taken into account in determining the spouse’s eligibility. Family members eligible for employer coverage will not be eligible for premium tax credits if the employer can purchase self-only coverage for 9.5 percent of household income or less, even if family coverage costs more.
Employers can offer unaffordable family coverage and avoid a penalty. The federal government will pay less for premium tax credits as fewer people will be eligible. And hundreds of thousands, probably millions, of children (and spouses) will remain uninsured.
Minimum Essential Coverage And The Shared Responsibility Tax
The ACA, as interpreted by the Supreme Court, offers nonexempt individuals the choice of maintaining “minimum essential coverage” for themselves and their nonexempt dependents or paying an additional “shared responsibility” tax, beginning on January 1, 2014. (Actually the tax would first be due in 2015 when taxes are filed for 2014). The requirement applies to adults, children (who are the responsibility of whomever claims them as tax dependents), seniors (most of whom have minimum essential coverage through Medicare), and legally resident aliens. Married persons who file a joint return are jointly liable for the tax.
The vast majority of Americans have “minimum essential coverage” and thus do not have to worry about the tax. Minimum essential coverage includes government-sponsored programs (including Medicare, Medicaid, CHIP, TRICARE, and other listed programs); employer-sponsored coverage (including insured, self-insured, grandfathered, and government employee health plans); individual market plans; and other health benefit plans recognized by HHS. Although large employers must offer “adequate” (60 percent actuarial value) coverage to avoid the employer mandate, the proposed rules curiously do not explicitly provide that employer-sponsored coverage must be adequate to be minimum essential coverage.
United States citizens or residents who are bona fide residents of a United States possession or foreign nation are treated as having minimum essential coverage. An individual who is covered only by an “excepted benefits” plan, such as dental, vision, specified-disease, or fixed-indemnity coverage does not have minimum essential coverage.
The ACA gives HHS discretion to recognize forms of minimum essential coverage not listed in the statute, and HHS is proposing to exercise this discretion by recognizing self-funded student health plans, coverage of foreign nations from their country of citizenship, refugee medical assistance, Medicare Advantage plans, state high-risk pools, and AmeriCorps coverage as minimum essential coverage. Self-insured student plans are not regulated by the federal government and not necessarily by the states, so recognizing them as minimum essential coverage is troubling. HHS also proposes that sponsors of plans that “substantially comply” with individual coverage requirements can apply to have their coverage certified as minimum essential coverage. While this exception might open the possibility for recognizing useful forms of coverage not otherwise recognized under the ACA, it could also be abused and should be monitored closely.
Exemptions From The Shared Responsibility Tax
Religious exemptions. If an individual does not have minimum essential coverage in any month, the individual must pay the shared responsibility tax unless the individual qualifies for an exemption. There are nine exemption categories. First, members of religious groups that are conscientiously opposed to the acceptance of public or private insurance benefits and who subscribe to the teachings of those groups are exempt. This provision cross-references a similar provision under the Social Security Act and includes only organizations on a list kept by the Social Security Administration. It includes the Amish, some Old Order Mennonites, and similar groups. Second, members of health care sharing ministries are exempt. These entities must meet a number of requirements listed in the statute, including having been in existence since December 31, 1999, and are also identified on a list (although the proposed rule does not eliminate the possibility of entities being eligible that have not yet been identified).
The incarcerated, aliens, and members of Indian tribes. Third, incarcerated individuals who are confined after a final disposition of charges are exempt, as are, fourth, aliens not lawfully present in the United States and, fifth, members of federally-recognized Indian tribes are exempt.
No access to affordable coverage. The remaining exemptions are more complicated. A sixth exemption covers individuals who lack access to affordable minimum essential coverage. Specifically, an individual is not subject to the tax if the cost to the individual of coverage, including employer coverage and coverage through the exchange with the aid of premium tax credits, exceeds 8 percent of the individual’s household income in any given month. An employee is treated as having affordable coverage if the lowest-cost self-only coverage the employee is offered does not cost the employee more than 8 percent of household income.
If two or more members of a household are employed and each offered health insurance, affordability is determined using the premium for self-only coverage for each individual even though the cost of covering all employees may exceed 8 percent of household income. In this situation, HHS is proposing that the individuals would qualify for the separate hardship exemption. Former employees for whom retiree coverage is affordable are treated as having affordable coverage. Affordability for dependent individuals related to the employee is determined based on the cost of the lowest-cost family coverage plan. As noted above, if self-only coverage is affordable but family coverage is not, the employee must purchase self-only coverage to be exempt from the tax, but the family members would be exempt even though family coverage is not purchased.
An individual who is not offered employer-sponsored coverage is not exempt from the penalty if the individual can purchase the lowest cost bronze level plan available through the exchange for 8 percent of less of household income, taking into account the maximum amount of any premium tax credit for which the individual and his or her family is eligible. Both the premium and premium tax credit are calculated for all members of a family who are not otherwise exempt from the minimum coverage requirement or eligible for employer-sponsored coverage. The proposed rule provides special rules for determining the premium of the lowest-cost bronze plan if the exchange does not offer a bronze-level plan that would cover the entire family.
Insufficient income to file a tax return. A seventh exemption covers individuals whose household income is below the tax filing limit for the taxable year for which the exemption is claimed. This is to say, the individual’s income is low enough that the individual (or a taxpayer who could properly claim the individual as a dependent) is not obligated to file taxes. If the taxpayer nonetheless files a federal income tax return (for example to claim an earned income tax credit) and claims a dependent whose gross income triggers a tax filing requirement, the household would be covered by a hardship exemption.
Short coverage gaps. An eighth exemption covers short coverage gaps. An individual is not liable for the penalty if the individual lacks minimum essential coverage only for one period in a given year that does not exceed three full calendar months. If the individual is covered for one day during a calendar month, the month does not count. Where coverage gaps straddle multiple tax years (for example, November and December of one year and continuing into the next year), the individual can claim the short coverage gap exception for the first year even if the period continues for more than three calendar months into the next year. Months in which an individual is otherwise exempt do not count toward the short coverage gap exception.
Hardship exemptions. The ninth and final exemption is the hardship exemption, or rather hardship exemptions, because there are a number of them proposed, two of which have already been mentioned. One is for months in which the applicant experiences financial or domestic circumstances, including unexpected natural or human-caused events, which cause significant and unexpected increases in essential expenses such that the individual must choose between insurance and food, shelter, clothing, or other necessities. These circumstances could include homelessness, utility shut-offs, natural disasters or similar circumstances.
The proposed rule would also provide a hardship exemption for individuals determined ineligible for Medicaid in states that do not expand Medicaid to cover all adults with incomes not exceeding 138 percent of the poverty level and who do not qualify for another exemption. HHS asks for comments as to whether this exemption should apply only for individuals with household incomes below 100 percent of poverty, since individuals with income above that level will be eligible for premium tax credits
Finally, a hardship exemption can be granted to an individual whose projected annual income would render the person eligible for the affordability exception before final information on income becomes available. This determination will render the applicant eligible for purchasing the catastrophic plan, which is only available to adults over age 30 if coverage is otherwise unaffordable.
Exemption Applications, Certifications, And Appeals
In order to claim an exemption based on religious beliefs or on hardship, the taxpayer that expects to be responsible for the shared responsibility payment must apply to and receive an exemption certification from the exchange. Additionally, exemption certificates can be obtained from the exchange for Indians, incarcerated individuals, and members of health care sharing ministries during, but not after, the calendar year for which the exemption is claimed. Alternatively, members of these three groups may wait until they file their taxes for a year and claim the exemption retrospectively with their tax filing.
Exemptions for short coverage gaps and for lack of affordable coverage can only be claimed on an individual’s tax return at the time of filing. Undocumented aliens can also identify themselves as such through the tax filing process. The exemption for income below the filing limit can be claimed with a tax filing, but taxpayers are not required to file solely for this purpose.
The exchange will provide the IRS a list of individuals to whom it has granted exemptions. The exchange will also give an applicant notice of its determination, and if it grants the application must provide the applicant with a certification number that the applicant will provide to the IRS at tax filing time. An applicant denied an exemption will have a right to appeal.
Significantly, HHS states that it will provide a “federally managed” service for processing exemption requests for state exchanges that request it to do so. Some states have not been eager to get tangled up with the individual responsibility provision, and it seems that they will not have to do so.
The HHS NPRM lists the information that must be provided supporting an application for an exemption. In most instances, exemption determinations will be based heavily on attestation, although electronic data sources can also be consulted and further evidence can be required if the attestation is not reasonably compatible with other information available to the exchange or IRS. Applicants can apply for multiple exemptions if they believe they qualify for more than one.
In most instances, an applicant must file a new application for each year for which an exemption is claimed, although certification can be granted for shorter periods of time and exempt individuals must notify the exchange if their status changes. Exemptions for religious beliefs and for membership in an Indian tribe may be granted for an indefinite period of time, as qualifications for these exemptions are unlikely to change over time. Children of parents who have a religious objection to insurance coverage must apply themselves for an exemption upon reaching 18, which could be problematic since most of the groups that are covered by the exemption base membership on an adult decision, which could happen after age 18.
A taxpayer must pay the shared responsibility payment for each month that the taxpayer or the taxpayer’s dependents lacked minimum essential coverage and did not qualify for an exemption. The amount of the tax is the lesser of the applicable national average bronze plan premium or the sum of the monthly payment amounts. The monthly payment amount equals one twelfth of the greater of
The tax is due when taxes are otherwise due and is assessed and collected like any other tax, except that taxpayers who fail to pay the tax are subject neither to criminal penalties nor to liens and levies.
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