Exemptions From the
Individual Shared
Responsibility Payment
Thomas E. Crice, Esq.
Volunteer Attorney
Greater Boston Legal Service, LITC
tcrice@gbls.org
MCLE December 10, 2014
No Good Deed…
• Beginning with Tax Year 2014
– On their income tax returns, taxpayers must
- Affirm MEC (minimum essential coverage) for the year, OR
- Claim an exemption from coverage, OR
- Pay the “shared responsibility payment,” aka penalty
- If affirming coverage, taxpayers must provide the IRS proof of
MEC (minimum essential coverage)
o Tax Year 2014
– No proof required but must affirm full or part year coverage as part
of tax return
o Tax Year 2015 and beyond
– The Marketplace will send policy holders Form 1095-A
– Private insurers will send policy holders Form 1095-B
– Employers who provide coverage will send Form 1095-C
2
…Goes Unpunished
• If not affirming coverage taxpayers can still avoid the penalty
by claiming an exemption
– in the Marketplace, and/or
– on their tax returns
Note: Exemptions granted by the Marketplace also get reported
to the IRS.
• So far, there are 19 possible exemptions. To qualify,
taxpayers will need to
– Figure out which ones apply to them, AND
– Document as required, AND
– Follow correct procedure
3
The Exemptions (and who can grant them)
Source: i8965 (IRS Draft), p. 2
4
Marketplace Exemptions
• Applied for during the tax year
– Before the tax return is due
– But can ask for an exemption retroactively
o Up to three years
• Must apply on paper, by mail
– Processing time could be lengthy
• Exemption applications are available on healthcare.gov
• Decision on the application is made by the Marketplace
• Once granted, must be reported to IRS on filing return
– Use form 8965 Part I
5
IRS Exemptions
• Applied for after close of the tax year (on tax return)
• Can be submitted electronically (e-filed with tax return)
• IRS decides whether to grant
– Will require that IRS verify some taxpayers
– May require documentation be submitted
• To claim exemption, file Form 8965 with the return
– Complete Part III
• If not required to file a return, but filing anyway (i.e., to claim
refund or EITC), check box in Part II
o Most taxpayers will check the box on Line 7a
6
Draft Form 8965
7
Hardship Exemptions - Marketplace
• These exemptions can be obtained ONLY from the
Marketplace:
– Circumstances prevent you from obtaining qualified coverage
– No access to affordable coverage based on projected
household income
o Exception: This is actually the same as the IRS exemption for
“Unaffordability”
– Your health insurance policy will not be renewed and you
consider the other available plans unaffordable
– Ineligible for Medicaid solely because your state does not
participate in the ACA Medicaid expansion
o Not relevant to Massachusetts
• Note: The applications are available online at www.healthcare.gov/fees-exemptions/applyfor-exemption/
8
Marketplace Hardship Exemptions – The Decision Rule
• A hardship exemption must be granted if the Marketplace determines
that:
1. The applicant experienced financial or domestic circumstances, including
an unexpected natural or human-caused event, such that the applicant had
a significant, unexpected increase in essential expenses that prevented
him/her from obtaining coverage under a qualified health plan;
2. the expense of purchasing a qualified health plan would have caused
him/her to experience serious deprivation of food, shelter, clothing, or other
necessities;
3. the applicant experienced other circumstances that prevented him/her
from obtaining coverage under a qualified health plan;
9
Marketplace Hardship Exemption – The Criteria
• Healthcare.gov representatives are currently saying that a
Hardship exemption will be granted if the applicant shows
just one of the following:
1. Became homeless
2. Evicted in the last 6 months (or facing
eviction or foreclosure)
3. Utility shut-off notice received
4. Domestic violence victim
5. Recent death of a close family member
6. Disaster that resulted in significant
property damage (fire, flood, other
natural or human caused)
7. Filed for bankruptcy in the last 6 months
8. Substantial debt from unreimbursed
medical expenses in the last 24 months
9. High expenses caring for ill, disabled or
aging family member
10. Failure of another party to comply with
a medical support order for a child (not
that party’s tax dependent) who is
determined ineligible for Medicaid or
CHIP
11. Through an appeals process, applicant is
deemed eligible for a Marketplace QHP,
PTC, or CSR but was not enrolled
12. Individual health insurance plan was
cancelled and applicant believes
Marketplace plans are unaffordable
13. Other hardship in obtaining coverage
(including for people in AmeriCorps,
VISTA and NCCC who are enrolled
limited duration or self-funded
coverage)
10
Other Marketplace Exemptions
• Although these can also be granted by the IRS it’s probably
easier for applicants to go through the Marketplace for the
following:
– Member of health care sharing ministry
– Member of federally recognized Indian tribe
o Or otherwise eligible for services from an Indian health care
provider
– Member of religious sect
• If granted, the Marketplace certificate number can be used
for future years
– But must notify Marketplace if status changes
– Will still need to file form 8965 with tax return every year
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Exemptions - IRS
• These are granted by the IRS only:
– Incarceration
o Only applies to period after disposition of charges
– U.S. expatriates
o Can claim exemption as part of foreign income tax filings
– Not a U.S. citizen or alien lawfully present in U.S.
– Short coverage gap
– “Household income” below the filing threshold
– Coverage is “unaffordable”
o Exception: Also available from the Marketplace
– Same decision rule as IRS (8% of household income)
– But is based on “projected income”
12
13
The Short Coverage Gap
• No penalty is assessed if the taxpayer went without
coverage for “less than three consecutive months”
– 3 or more months means no exemptions for any months
– Any month with at least one day of coverage counts as
coverage for the entire month
– If there is more than one gap in a year, only the first one is
eligible for this exemption
No Coverage
Coverage
EXEMPT:
(for both months)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Sep
Oct
Nov
Dec
NOT EXEMPT:
(for any months)
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Example: Short Coverage Gap
• Joe – employed for 3 years with ESI
– Laid off March 1, 2014 – coverage lapses
– Gets new job, with insurance, on May 30,
2014
– Laid off October 10, 2014 – coverage
lapses for rest of year
• Result:
– Two gaps:
o Gap 1: 1 month (April 1-April 30)
o Gap 2: 2 months (November 1-December
31)
– Only Gap 1 (1 month) qualifies for
exemption
o Will owe penalty for November, December
14
Household Income Below Tax Filing Threshold
• What is a “Household”?
– Everyone named on the tax return
o Principal filers and their dependents
• What is “Income”?
– For each person in the Household, add together their “MAGI”
(modified adjusted gross income)
– Note: If a dependent is not required to file his/her own tax return the
taxpayer doesn’t have to include that income.
• If this MAGI number is less than the filing threshold for the return then
everyone in the Household is exempt from the penalty.
15
Income Tax Filing Thresholds
16
By way of illustration, the 2014 thresholds (under 65) for filing a
return are:
Exemption: Coverage is Unaffordable
• Rule = No penalty payment required if the cost of coverage is more
than 8% of Household Income for the year
– Household Income is the same as before EXCEPT
o Must add to it any health insurance premiums paid pre-tax
(“salary reduction plans”)
– What is Cost of Coverage?
• Case 1: Employer Sponsored Insurance (ESI)
– Cost = Employee’s premium for the lowest cost plan (individual and/or
family)
o Includes amounts paid pre-tax (“salary reduction plans”)
• Case 2: Not Eligible for Employer Plan
– Cost = lowest cost Bronze level Marketplace plan
o Less the Premium Tax Credit the taxpayer is “eligible to receive”
17
Affordability Exemption: Example 1*
Sonia Reyes is offered health insurance at work but
she doesn’t accept it.
• Household Income: $47,000 for a family of four,
Sonia, Gilberto (spouse), and two children
• Sonia’s premium for employee-only plan:
$196/month ($2,350/year)
5% of income
• Sonia’s premium for employee plus children:
$392/month ($4,700/year)
10% of income
• No spousal coverage is offered
Do Sonia or her family qualify for exemptions based on affordability?
*Slide courtesy of Center on Budget and Policy Priorities
18
Question 1: Is individual coverage affordable?*
Test for Sonia (an employee with an offer of ESI)
Household Income: $47,000
Sonia’s premium for employee-only plan: $2,350/year (5% of income)
Sonia’s premium for employee plus children: $4,700/year (10% of income)
No spousal coverage is offered
Does the lowest-cost plan that covers only the employee
cost more than 8% of household income?
• No, the lowest cost employee-only plan is 5% of income.
The plan is considered affordable. Sonia does not qualify
for exemption on the basis of affordability.
*Slide courtesy of Center on Budget and Policy Priorities
19
Question 2: Is family coverage affordable?*
20
Test for the kids (family members with an offer of ESI)
Household Income: $47,000
Sonia’s premium for employee-only plan: $2,350/year (5% of income)
Sonia’s premium for employee plus children: $4,700/year (10% of income)
No spousal coverage is offered
Does the lowest-cost plan that covers the kids cost more
than 8% of household income?
• Yes, the kids are eligible for an exemption because the cost
of coverage is greater than 8% of household income.
• On Form 8965, the kids will be listed in Part III and Code A
will be entered for each month.
What about Medicaid or CHIP?
The children may be eligible for Medicaid or CHIP, but
eligibility for those programs is not taken into account in
awarding this exemption.
*Slide courtesy of Center on Budget and Policy Priorities
Question 3: Is coverage for non-eligible spouse affordable?*
Test for Gilberto (spouse without an offer of ESI)
Household Income: $47,000
Sonia’s premium for employee-only plan: $2,350/year (5% of income)
Sonia’s premium for employee plus children: $4,700/year (10% of income)
No spousal coverage is offered
Does the lowest-cost bronze plan covering only Gilberto in
the Marketplace, after accounting for premium tax credits,
cost more than 8% of household income?
• His lowest cost bronze plan is $2,000 (4% of household
income), taking into account premium tax credits. The plan
is considered affordable. He is not eligible for this
exemption.
*Slide courtesy of Center on Budget and Policy Priorities
21
Affordability Exemption: Example 2
Ana has no insurance offered at work.
• Household Income: $40,000
• No dependents or spouse
• Lowest cost Bronze plan for $5,000/year
• Eligible for $1,700 premium tax credit
(Example taken from instructions for IRS Form 8965)
Does Ana qualify for exemptions based on affordability?
22
23
Affordability Exemption: Example 2
• Is self-coverage affordable?
𝐴𝑓𝑓𝑜𝑟𝑑𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝐿𝑖𝑚𝑖𝑡:
$40,000
×
0.08
=
$3,200
Income
Cost of Coverage:
$5,000
−
Cost of Bronze plan
$1,700
=
$3,300
Tax Credit
$3,300 > $3,200
– Ana is exempt from the penalty if she
forgoes coverage.
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Affordability Exemption: Example 3*
Bob and Joan have jobs that offer health coverage to the
employee only.
•
•
•
•
•
Household Income: $45,000
Premium cost for Bob: $2,400/year 5.3% of income
Premium cost for Joan: $2,100/year 4.6% of income
Aggregate cost: $4,500/year 10% of income
Neither is offered family coverage that would cover them both
for less than 8% of income
12%
10%
8%
6%
10%
4%
2%
5.3%
4.6%
1
2
0%
3
*Slide courtesy of Center on Budget and Policy Priorities
They can claim the Code G
exemption because the total
cost of coverage exceeds
8% of income.