Key provisions of the Patient Protection and Affordable Care Act (also referred to as the Affordable Care Act, ACA, or Obamacare) (P.L. 111-148) are set to take effect on January 1, 2014. This includes the individual mandate, which requires all individuals without an exemption to have minimum essential health coverage or pay a penalty (Code Sec. 5000A). Individuals must also have coverage for their dependents up to age 18. In the case of an adopted child or a child placed for foster care, the requirement for coverage starts with the first month after the legal adoption or acceptance of the placement.
Final regulations on the individual mandate clarify some important rules (T.D. 9632, 8/27/13). The final regulations generally follow proposed regulations issued last February (REG-148500- 12). The preamble to the final regulations discusses commentators’ suggestions, most of which were rejected by the IRS.
Overview
On October 1, 2013, the health insurance marketplace opened so that individuals could enroll for coverage starting on January 1, 2014. Individuals will have access to a menu of health plans: bronze, silver, gold, and platinum. The more precious the metal, the higher the premiums but the lower the out-of-pocket costs. Using the marketplace is simply an online portal that can be used to compare health care options and make a selection. Individuals need to enter personal information, including income and household size.
As of now, there are 16 states, including Connecticut and New York, as well as the District of Columbia, that have set up their own marketplaces. About half a dozen states are planning “partnerships” with the federal government.
For individuals in states without a marketplace, such as New Jersey, there is a federal exchange. Details about the marketplace, including links to state marketplaces, can be found at HealthCare.gov (https://www.healthcare.gov/marketplace/ individual) and the Kaiser Family Foundation (http://kff.org/state-healthexchange- profiles).
Governance of the Affordable Care Act is left primarily to three government departments: the Treasury (through the IRS), the Department of Health and Human Services, and the Department of Labor. Each issues its own guidance; there is some overlap. The following discussion centers on IRS guidance.
Maintenance of Minimum Essential Coverage
Every nonexempt individual must have minimum essential coverage, which is now defined by the regulations. Minimum essential coverage is coverage under any of the following types of plans: -An employer-sponsored plan (Reg. Sec. 1.5000A-2(c)). - A plan in the individual market, which in 2014 includes coverage obtained through a health insurance marketplace. - Any other health plan recognized by the U.S. Department of Health and Human Services (Reg. Sec. 1.5000A- 2). For 2014, it has recognized student health plans as minimum essential coverage (www.cms.gov/Newsroom/MediaReleaseDatabase/ Fact-Sheets/2013-Fact- Sheets-Items/2013-06-26.html).
Pregnancy coverage under Medicaid is not treated as minimum essential coverage. However, women who are eligible for pregnancy-related Medicaid may not know at open enrollment for the 2014 coverage year that such coverage is not minimum essential coverage. Accordingly, the IRS anticipates issuing guidance providing that women covered with pregnancy-related Medicaid for a month in 2014 will not be liable for the shared responsibility payment for that month.
Computation of the Shared- Responsibility Payment
Individuals who opt not to carry health coverage and who are not exempt must make a shared-responsibility payment. The U.S. Supreme Court (NFIB v. Sebelius, S.Ct., 6/24/13) called this payment a tax (a penalty) and it is figured as such. For 2014, the penalty is the lesser of 1% of modified adjusted gross income or $95. The penalty is one-half that amount for any uncovered dependent up to age 18. Modified adjusted gross income for this purpose is adjusted gross income increased by any foreign earned income exclusion and tax-exempt interest.
The tax is scheduled to increase in 2015 to $325 and 2% and, in 2016, to $695 and 2.5%. After 2016, the dollar limit will be indexed for inflation.
The regulations provide examples on how to figure the penalty in different situations (e.g., part-year coverage; change in the family during the year).
Administrative issues
The payment is made by individuals on their income tax returns. Married persons filing joint returns are jointly and severally liable for the tax.
It is unclear exactly how the penalty will be enforced. The IRS is precluded from filing a lien or levy against a taxpayer who owes the penalty. Also, there are no criminal sanctions for noncompliance with the penalty. Presumably, the IRS can withhold a tax refund as an offset to the penalty. The preamble to the final regulations makes it clear that the penalty is not subject to the accuracy-related penalty under Code Sec. 6662.
The final regulations, however, do not explain how someone claims an exemption. Presumably, IRS forms and publications will address this matter. It will not impact filing 2013 income tax returns in 2014, so there is time for more guidance.
Conclusion
Despite postponement of the employer mandate to 2015, the individual mandate is still scheduled to start on January 1, 2014. Thus, the final regulations under Code Sec. 5000A apply to months beginning after December 31, 2013. It is likely that in addition to these final regulations, additional guidance on the individual mandate will be forthcoming. For example, the preamble to the final regulations promise that future guidance will address the impact of the cost of wellness programs in determining an individual’s required contributions toward health coverage.
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