With funding from the Robert Wood Johnson Foundation, we at Georgetown’s Center on Health Insurance Reforms and the Center for Children and Families have been providing technical assistance to Navigators and assisters in a handful of states, helping answer the questions they receive from consumers. As the second open enrollment period (OE2) winds down and attention turns to filing taxes, we take a look at one of the questions that’s come up for consumers who may face a tax penalty for failure to obtain health coverage.
The current tax filing season, for the 2014 tax year, is the first in which consumers will need to indicate whether or not they had coverage in 2014, or face a potential tax penalty for failure to have coverage throughout the year. Some individuals will qualify for an exemption from the tax penalty if they can meet certain conditions. The IRS estimates 2% to 4% of taxpayers will pay the penalty this year and 20% will qualify for an exemption. Just this week, CMS announced a special enrollment period for those who learn at tax time that they owe a penalty for 2014 and didn’t enroll in coverage for 2015.
The law outlines a number of exemptions from the tax penalty for failure to obtain health coverage. For example, people who have a gap in coverage of less than 3 months, or who have income under the tax filing threshold automatically qualify for an exemption. One exemption – based on affordability of coverage – requires some additional steps, a bit of math, and a closer look at what constitutes “affordable.”
Taxpayers can use IRS Form 8965 (and in particular the instructions for Form 8965) to determine whether or not they have coverage that meets the coverage requirement, known as minimum essential coverage. Failing that, Form 8965 also helps taxpayers determine whether they meet the conditions to qualify for an exemption and calculate the tax penalty for months when they have neither coverage nor an exemption. Part III of Form 8965 applies to taxpayers who can claim an exemption at tax time, including the affordability exemption, which applies to taxpayers who couldn’t find coverage in 2014 that would cost less than 8% of their household income (or 8.05 % of household income for coverage in 2015). To do so, they will need to know: to which plan to apply the affordability test; how to measure affordability; and against what income to measure the cost of coverage. And keep in mind that the affordability test applies separately to each individual included on the tax return.
Which plan to use: The first question is which plan to use in determining affordability of coverage. If an individual has access to employer-sponsored coverage, either as an employee or as a dependent of an employee, then the cost to use in calculating affordability will be the employee’s premium for the employer plan. If an individual doesn’t have access to an employer-sponsored plan, the affordability test applies to the lowest cost bronze plan available through the marketplace.
How to calculate affordability: Next comes calculating affordability. Those with employer-sponsored coverage that covers only employees use the employee’s required contribution for self-only coverage in the lowest cost plan. If the plan covers dependents, as well, use the required contribution for all family members to enroll in the lowest cost plan with dependent coverage. And for those families with access to two employer-sponsored plans – for example, each spouse is eligible for coverage through an employer – the test applies to the combined cost of coverage under each plan (as long there is no offer of family coverage). That means that even if the premiums for each person to enroll in their own employer plan is affordable, the family might still qualify for an affordability exemption if the total cost of their separate premiums is unaffordable. This particular exemption applies for the whole year as long as the two offers of self-only coverage is unaffordable for at least one month in 2014.
Those without employer-sponsored coverage will use the premiums for the lowest cost bronze plan but must reduce that cost by the amount of any premium tax credits for which they would qualify.
How to calculate income: In all cases, the household income for the affordability test will be the adjusted gross income (AGI, line 37 of the 1040 tax form) + tax-exempt interest + excluded foreign income. Nontaxable Social Security benefits must also be added for tax filers and for tax dependents, but only if the tax dependent is required to file taxes. (See more on counting Social Security here. The difference, however, is that those with employer-sponsored coverage will add back any salary reduction for the required contribution to enroll in the employer plan. In other words, they need to add back the amount taken out of each paycheck to cover their share of premiums.
The affordability exemption can also be claimed by applying to the marketplace during the coverage year and will be based on projected income for the tax year. If granted, the exemption applies to subsequent months in the year. If the exemption is be claimed at tax time, it will be based on actual income for the tax year, as discussed above, and apply for each month that coverage is unaffordable.
Savvy followers of all things ACA might notice that the test for affordability when applying for an exemption is different from the test for affordability of employer coverage when qualifying for premium tax credits (PTCs). In that case, the test for affordability is whether the cost of self-only coverage in the lowest cost plan exceeds 9.56% of household income in 2015. Under this test, dependents that do not have access to affordable coverage cannot get premium tax credits if the coverage would be affordable for the employee to enroll in the lowest cost plan. This is often called the “family glitch.” But as with other aspects of the ACA, consumers who can’t get a break when applying for premium tax credits can get a break from the individual mandate. That’s because the test for the affordability exemption recognizes that employer coverage may be “affordable” by one measure – eligibility for PTCs – but not necessarily affordable when it comes to being able to buy coverage.
