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Obamacare Tax Credits

  • Written by Sidney Kess, CPA, J.D., LL.M.

By: Sidney Kess, CPA, J.D., LL.M. | The main provision of the Patient Protection and Affordable Care Act of 2010, otherwise known as the Affordable Care Act (ACA or Obamacare), applies starting in 2014: Each person, other than those who are exempt, must have minimum essential coverage or pay a penalty. Each person must ensure that dependents also have minimum essential coverage or pay a penalty, which is one half of the amount that would be paid by the person. In the words of the U.S. Supreme Court in NFIB v. Sebelius (132 S. Ct. 2566 (2012)), the penalty is a tax and it is collected by the IRS. The rules are very confusing to many people. Here are some of the practical and tax considerations of ACA as of now.

The following information has been prepared with the help of Carolyn McClanahan, M.D., CFP® with Life Planning Partners, Inc., in Florida.

Overview of ACA

The massive law is divided into various titles, some of which may be relevant to your practice while others are not.

- Title I (374 pages) covers quality affordable health care (including the individual mandate)
- Title IX (93 pages) covers the revenue provisions

While the individual mandate contained in Title I is effective starting January 1, 2014, many of the revenue provisions have already taken effect.

Individual mandate

Every individual is required to have minimum essential coverage or pay a tax penalty (Code Sec. 5000A) unless a specific exemption applies. The exemptions include:

- Financial hardship
- Religious objection
- Native Americans
- Incarcerated individuals
- Those without coverage for no more than three months
- Those whose premiums exceed 8% of income

Individuals obtain insurance through:

- Large groups (employer plans)
- Small groups (plans of small businesses)
- Individual market (through government exchanges or directly from insurers)
- Public programs (Medicare, Medicaid, Tricare, CHIPs).

Individual policies must meet certain coverage requirements (e.g., provide certain preventive care; have no limits for pre-existing conditions). There are five types of acceptable policies:

- Bronze—these plans limit out-of-pocket costs to 60% of the limits under Health Savings Accounts (HSAs)
- Silver—these plans limit out-of-pocket costs to 70% of the limits under Health Savings Accounts (HSAs)
- Gold—these plans limit out-of-pocket costs to 80% of the limits under Health Savings Accounts (HSAs)
- Platinum—these plans limit out-of-pocket costs to 90% of the limits under Health Savings Accounts (HSAs)
- Catastrophic—for those under age 31, covers three primary care visits and preventive care, then all other expenses that are out-of-pocket subject to the HSA limits.

Enrollment. Open enrollment on the exchanges (called the individual marketplaces) for 2014 began October 1, 2013, and is set to end on March 31, 2014. Open enrollment for 2015 begins on November 15, 2014, and ends on January 15, 2015.

Individuals with income of more than 400% of the federal poverty level (FPL) do not have to purchase coverage through an exchange (they are not eligible for the premium tax credit); they can choose to purchase coverage through an exchange. Alternatively, they can purchase coverage directly from insurance companies (many of which offer online shopping) or through health insurance agents. The 2013 FPL is used to determine eligibility for government assistance with health insurance premiums in 2014. The 2013 400% of the FPL means individuals with income over $45,960 and a family of four with income over $94,200.

Premium tax credit. This credit is available to individuals whose income is between 133% and 400% of the FPL and who meet certain eligibility requirements (Code Sec. 36B). This means buying coverage through an exchange or being ineligible for an employer or government plan, filing jointly if married, and not being claimed as a dependent by another taxpayer.

The amount of the credit is keyed to a percentage of household income, which is modified adjusted gross income (adjusted gross income without regard to the foreign earned income exclusion under Code Sec. 911) of all those taken into account in figuring the size of the household. The applicable percentages are:

- Up to 133% of FPL - 2% of household income
- 133% to 150% of FPL – 3% to 4% of household income
- 150% to 200% of FPL – 4% to 6.3% of household income
- 200% to 250% of FPL – 6.3% to 8.05% of household income
- 250% to 300% of FPL – 8.05% to 9.5% of household income
- 300% to 400% of FPL – 9.5% of household income

The credit can be paid in advance by having it applied to premiums (the “get it now” option). The credit amount in this case is sent directly to the insurance company. Individuals who purchased coverage through an exchange and qualify for the credit but did not opt to have it paid in this manner can claim it as a tax credit on their income tax return (the “get it later” option). Thus, the credit for 2014 will be claimed when the 2014 return is filed in 2015. The credit is fully refundable.

Medicaid is a government program that has traditionally provided health insurance for those under age 65 who are disabled, families with children, or pregnant and meet income requirements. ACA extended Medicaid eligibility to individuals with income less than 138% of the FPL. However, in the 25 states that have not expanded Medicaid coverage to include this income threshold for eligibility, some individuals fall into a gap (some have referred to this as the Medicaid donut hole); they have too little income to obtain a tax credit but do not qualify for Medicaid.

Cost-sharing subsidies. In addition to a tax credit to help cover premiums, some individuals may qualify for assistance with paying their deductibles, co-payments, co-insurance, and out-of-pocket spending limits; this help is called cost-sharing subsidies. Cost-sharing subsidies are available for those who have a silver, gold, or platinum plan and whose household income is between 100% and 250% of the FPL. More specifically, the subsidies are:

- 100% to 150% FPL - covers 94% of expenses
- 151% to 200% FPL – covers 85% of expenses
- 201% to 250% FPL –covers 73% of expenses

For example, an individual whose household income puts her at 200% of the FPL has a silver plan. Ordinarily the plan pays 70% of costs; the individual is responsible for 30% of costs. Cost-sharing subsidies change this equation. The cost-sharing subsidies aren’t paid to the individual; they effectively increase the portion paid by the insurer to 73%. So instead of being responsible for 30% of out-of-pocket costs, this exposure is capped at 27% for this individual.

Employer mandate for large employers

Companies with 50 or more full-time employees (including full-time equivalent employees) must purchase coverage for staff or pay a penalty (Code Sec. 5000A). Part-timers are taken into account in figuring whether an employer is subject to the mandate, but an employer subject to the mandate is only required to provide coverage for full-time employees. Volunteer first-responders are not treated as employees and are not counted in determining the employer mandate (Dept. of the Treasury Letter, 1/14/14; www.scribd.com/doc/198549760/Treasury-Letter-to-Senator-Warner-on-Emergency-Responders).

As a general rule, paying the penalty is less costly than providing required coverage.

The employer mandate, which had been set to take effect on January 1, 2014, has been postponed by the U.S. Treasury until January 1, 2015 (www.treasury.gov/connect/blog/pages/continuing-to-implement-the-aca-in-a-careful-thoughtful-manner-.aspx). Final regulations provide additional relief for employers with 50 to 99 employees; they do not have to comply until January 1, 2016 (T.D. 9655, 2/10/14). However, they must file a prescribed return that they not make changes in their staffing because of ACA.

Figuring the penalty. There are different penalty amounts, depending on whether or not the employer offers coverage and other factors. If an employer does not offer coverage and at least one full-time employee obtains individual coverage using a premium tax credit, then the employer pays a penalty of $2,000 for each employee over 30 employees. There is no penalty on the first 30 employees.

For example, a company has 110 full-time employees and does not provide health insurance in 2015. One employee has income low enough to qualify for a premium tax credit to help pay for coverage obtained through a government exchange (the individual marketplace). The employer’s penalty is $160,000 ($2,000 x [110 employees – 30 employees]).

If the employer offers coverage but a worker declines it and uses the premium tax credit to obtain coverage through a government exchange, then the employer’s penalty is the lesser of $3,000 per employee taking the credit, or $2,000 for each full-time employee. For 2015 only, employers that provide coverage for at least 75% of full-time employees will not be subject to a penalty (T.D. 9655, 2/10/14). Starting in 2016, the penalty applies unless 95% of full-time employees are covered.

Employer coverage need not extend to employees’ spouses; it merely must be offered to employees and their dependents.

Small employers

Small employers (those with 50 or fewer full-time employees) are not required by ACA to provide health coverage or pay a penalty. Instead, they are incentivized to provide coverage by a special tax credit. If they pay at least half the cost of premiums, they can take a tax credit in 2014 and 2015 of 50% of the cost as long as coverage is obtained through the Small Business Health Insurance Options Program (SHOPs) (Code Sec. 45R). Proposed regulations clarify some details about the small employer health insurance credit (NPRM REG-113792-13, 8/26/13).

To qualify for this credit, an employer must have fewer than 25-full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,400 in 2014. However, a full credit applies only for an employer with no more than 10 FTEs who have average wages not exceeding $25,400 in 2014 (Rev. Proc. 2013-35, IRB 2013-47, 537). Owners and their relatives are not taken into account.

The SHOPs are a way for small businesses to purchase coverage without a broker. SHOPs are open to employers with fewer than 50 employees (fewer than 100 starting in 2016). After 2016, states can allow larger employers to utilize SHOPs. For 2014, there is only one insurance choice in the SHOP; choices are set to be expanded for 2015.

When enacted, it had been expected that between 1.4 and 4 million small businesses would be eligible for the tax credit. However, in 2011, only 228,000 employers actually took the credit. The reasons for the disappointing use of the credit: the limitations on the credit (e.g., restricted payroll), complications in computing the credit (e.g., phase-outs for payroll size and amount), and general ignorance of the credit’s existence.


While there have been numerous attempts to repeal or defund ACA, many of the provisions are already well entrenched, making changes difficult at this point. Still, there could be changes made after the mid-year elections in 2014 if there is a major shift in the Congress.

Sidney Kess, CPA, J.D., LL.M., has authored hundreds of books on tax-related topics. He probably is best-known for lecturing to more than 700,000 practitioners on tax and estate planning.

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