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New Rules for Minimum Essential Coverage to Avoid Tax Penalties in 2014

February 11th, 2013 – The IRS and Department of Health and Human Services announced new proposed regulations related to the Affordable Care Act (ACA).

Under the ACA, starting in 2014 most people are required to have a minimum level of health insurance coverage or pay a tax penalty. Going forward, this penalty will now be called a “Shared Responsibility Payment.”

The proposed regulations define the minimum essential coverage for health insurance benefits to avoid paying the Shared Responsibility Payment.

What Coverage Qualifies as Minimum Essential Coverage

Individuals are considered to have minimum essential coverage for any month in which they are enrolled in one of the following types of coverage for at least one day:

  • Employer group health plan
  • Individual health insurance policy
  • Government plan such as Medicare, Medicaid, Children’s Health Insurance Program (CHIP), TRICARE or veterans coverage
  • Student health coverage
  • Medicare Advantage plan
  • State high risk pool coverage
  • Coverage for non-U.S. citizens provided by another country
  • Refugee medical assistance provided by the Administration for Children and Families
  • Coverage for AmeriCorp volunteers

How Tax Penalties will be Determined and Paid

The first Shared Responsibility Payment penalties will be due when individuals file their 2014 tax returns in 2015. A penalty is determined by calculating the greater amount of either a flat dollar amount or set 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

If the penalty applies for less than a full calendar year, the penalty will be 1/12 of the annual amount per month without coverage.

Exemptions for Penalties for Not Having Coverage

Individuals who meet the following criteria will not pay a penalty if they do not have minimum essential coverage:

  • Individuals who cannot afford coverage. Coverage is considered unaffordable if an individual’s contribution toward minimum essential coverage is more than 8% of the annual household income. The monthly contributions are calculated at 1/12 the annual household income to determine if they exceed the 8%.
  • Taxpayers with income below the tax filing threshold, which is the amount required to file a federal tax return
  • Individuals who qualify for a hardship exemption. This exemption is available to individuals who are not eligible for Medicaid because their state chose not to expand Medicaid, or to individuals who have a personal or financial hardship that keeps them from being able to afford coverage.
  • Individuals who have a gap in minimum essential coverage of less than three consecutive months in a calendar year
  • Members of religious groups that object to coverage on religious principles
  • Members of health care sharing ministries. These are non-profit religious organizations where members share medical costs.
  • Individuals in prison
  • Individuals who are not U.S. citizens
  • Members of Native American tribes

U.S. citizens residing in a foreign country are typically exempt from having minimum essential coverage if they meet certain requirements, such as residing abroad for an entire calendar year. And, residents of U.S. territories (Guam, American Samoa, Northern Mariana Islands, Puerto Rico, and Virgin Islands) are automatically deemed to have minimum essential coverage.

When People Can Apply to Request an Exemption

There are times when a person may request exemption. The Exchange will review the application, issue a certificate of exemption and notify the IRS. Other types of exemptions are claimed when individuals file their federal income tax returns.

  • Religious and hardship exemptions are only available when applying through an Exchange.
  • Individuals who cannot afford coverage, who experience short coverage gaps, who are not U.S. citizens and who have household incomes below the filing threshold may apply for an exemption through the IRS.
  • Members of a health care sharing ministry, individuals in prison and members of Native American tribes may apply for an exemption through either an Exchange or through the IRS when filing a federal tax return.
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