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ACA Individual Mandate Update

In 2014, the most significant change to the Patient Protection and Affordable Care Act (“Affordable Care Act” or “ACA”) is the individual mandate, which is the topic of today’s blog.

Signed into law on March 23, 2010, the Affordable Care Act is one of the most comprehensive overhauls in the history of U.S. Healthcare. The ACA’s individual mandate was upheld by the Supreme Court on June 28, 2012 and now the U.S. Department of Treasury is shaping the implementation of the law with new regulations.

For tax payers, the new regulations mean potential penalties and taxes of which they need to be aware. The taxes, penalties, and “shared responsibility payments” of the ACA are being rolled out over several years. As the ACA regulations go into effect, watch this blog for updates.

Minimum essential coverage

The 2014 Form 1040, U.S. Individual Income Return has been updated to include a new line (line 61). All individual taxpayers who are required to file a tax return are required to state whether or not they and their tax household had minimum essential coverage or “full-year coverage” of healthcare.

Minimum essential coverage is defined as health “coverage that satisfies the individual shared responsibility provisions of the code” (Instructions for Form 8965, Health Coverage Exemptions). It includes employer sponsored health coverage (group health, COBRA, etc), and individual health coverage (Government sponsored Marketplace, direct from insurance, etc). Your tax household must have coverage for each month of the year.

If your tax household had minimum essential coverage, then a box is checked of Form 1040 and no further action is required. However, if you are unable to check the box, then you may have additional disclosures for the Internal Revenue Service.

ACA exemptions
A tax household which qualifies for an ACA exemption and is required to file a return needs to use Form 8965, Health Coverage Exemption, to claim the exemption.

You can receive an exemption several ways. One way is to receive an exemption from the Marketplace. If you do you’ll need to include your Market-Granted Coverage Emption on Part I of the Form. Other exemptions include (but are not limited to), citizens living abroad, coverage considered unaffordable (because the minimum amount is more than 8% of your household income), and incarceration (hopefully this does not apply to you).

Shared Responsibility Payment

A tax household which does not qualify for an ACA exemption must pay a “shared responsibility payment”. The payment is the greater of 1% of household income above tax return filing threshold or flat dollar amount ($95 per adult and $47.50 per child; limited to $285 per family). The payment is capped at the average bronze level heath plan available in the Healthcare Insurance Market Place. For 2014 the cap for an individual is $2,448 (or $204 per month), while the cap for a family of five or more is $12,240 (or $1,020 per month).

Shared Responsibility Payment Example

Chelsea is single with no dependents. She does not have minimum essential coverage for any month in 2014 and she does not qualify for an exemption. Her household income is $100,000. For 2014, her filing threshold is $10,150 (single).

In order to calculate her payment, first you need to calculate her income in excess of the filing threshold. $100,000 – $10,150 is 89,850. By taking 1% of 89,850 you arrive at $898.50 as her payment amount based on household income. $898.50 is greater than the flat dollar amount for an individual of $95 and less than the cap of $2,448 (bronze plan), so Chelsea’s “shared responsibility payment” is $898.50.

With new ACA regulations going into effect it is important to meet with a tax professional to avoid penalties from the IRS. Please consult with a Frazier & Deeter tax advisor to see how ACA may affect you.

About the blogger
Jeff Price is a Senior Manager in Frazier & Deeter’s tax department and one of our resident experts regarding the Affordable Care Act. Jeff provides specialized tax, accounting and personal wealth management services to privately held businesses and high net-worth entrepreneurs and executives.

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