Affordable Care Act Alert: Shared Responsibility Payment

Affordable Care Act Alert

IRS Issues final regulations:

The IRS has issued final regulations discussing the individual mandate’s shared responsibility payment system included in the Affordable Care Act. The shared responsibility payment system is the enforcement mechanism which is designed to entice taxpayers to purchase health insurance coverage rather than pay penalties with their tax return(s).

Background:

For tax years ending after Dec. 31, 2013, the Affordable Care Act requires non-exempt U.S. citizens and legal residents to maintain minimum essential health insurance coverage or pay a penalty. This requirement is referred to as the “individual mandate,” and the penalty is often referred to as the “shared responsibility payment.”

On their 2014 tax returns Taxpayers will indicate if any members of their family (including themselves) are exempt from the individual mandate. For family members who are not exempt, the taxpayer will indicate whether they had required minimum essential health insurance coverage. For each non-exempt family member who doesn’t have coverage, the taxpayer will owe a shared responsibility payment.

Detailed Analysis:

–          U.S. citizens are required to maintain health insurance coverage unless they fall into one of the below exempt groups:

  • Individuals who for whom minimum coverage costs exceed 8% of adjusted household income
  • Taxpayers with income below the 1040 filing threshold
  • Members of Indian tribes
  • Persons experiencing certain hardship such as unavailability of coverage or unexpected personal or financial circumstances
  • Individuals who experience short coverage gaps of less than three months
  • Persons who are not covered due to religious conscience
  • Members of a health care sharing ministry
  • Incarcerated individuals
  • Individuals who are not lawfully present in the United States

–          Minimum essential health insurance coverage generally falls into the below types of coverage:

  • Government sponsored programs such as:
    • Medicare
    • Medicaid
    • Children’s Health Insurance Program (CHIP)
  • Many employer-sponsored plans
  • Plans purchased via insurance exchanges or in the individual marketplace
  • Certain grand-fathered group health plans

–          Taxpayers who do not Minimum essential health insurance coverage and are not otherwise exempt will be subject to shared responsibility payment penalties payable with their tax return(s). A general outline of penalties is as follows:

  • For 2014 the penalty will be the lesser of:
    • $95 for each non-covered individual (prorated by number of months without coverage)
    • 1% of adjusted household income
  • For 2015 the lesser of:
    • $325 for each non-covered individual (prorated by number of months without coverage)
    • 2% of adjusted household income
  • For 2016 and later years
    • $695 for each non-covered individual (prorated by number of months without coverage)
    • 2.5% of adjusted household income

The exceptions to the individual mandate and penalty calculations for taxpayers who do not comply are very complex. If you think you may be subject to such a penalty you should contact the KatzAbosch Tax Department at 410-828-2727 or by email at jeaton@katzabosch.com.

prepared by James F. Eaton, III, CPA, MBA

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