Individual mandate

With the exceptions noted below, U.S. residents and their dependents must have “minimum essential” health insurance coverage or pay a penalty beginning in 2014. “Minimum essential” coverage refers to the set of benefits that all plans will be required to provide in order to be offered through the insurance exchanges. Adults under age 30 can have a catastrophic-only coverage, but all others must have more robust insurance that covers at least the following: office visits, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse, prescription drugs, physical therapy, laboratory services, preventive care, and pediatric care, including pediatric dentistry and vision care.

The Act provides exemptions from the mandate to have insurance for those who are members of certain religious sects, as well as several exceptions relating to affordability. Those with income below the tax return filing threshold are not subject to penalties for not having coverage; neither are those whose net cost of insurance coverage exceeds 8% of household income.

The penalty for not having coverage phases in from 2014 to 2016 and is indexed to inflation thereafter. For 2014, the penalty is the greater of $95, or 1.0% of the taxpayer’s gross income over the tax return filing threshhold for the taxpayer’s filing status. In 2016, when fully phased in, the penalty is the greater of $695, or 2.5% of income, but limited to the cost of minimum allowable insurance coverage through an exchange. The penalty should therefore never exceed the cost of actually acquiring minimum coverage, although it could certainly reach this level if gross income is high enough. Additional penalties apply for uninsured dependents (generally, 50% of the penalty assessed on uninsured adults).

The penalty is determined on a monthly basis, but will not be imposed for a single coverage gap of less than three months.

Exchanges; Tax credits for individuals earning 400% of federal poverty line or less

Even though these provisions don’t apply to employers or individuals earning more than 400% of FPL, you’ll want to keep them in mind if you are an employer -- the employer mandate is enforced based on whether any of your employees are receiving this tax credit!

Individuals could meet their obligation to have health insurance coverage by purchasing insurance through a health-insurance exchange, and, if they meet certain criteria, some of their premium cost will be covered by a federal credit. Insurance exchanges are not insurance providers; rather, they review insurance plans, and, if the plans meet the specified criteria for coverage and cost, they include them in their listing of available plans. Individuals and small businesses seeking insurance can shop for it through the exchanges.

Individuals will be eligible for a federal credit if (a) household income is not above 400% of federal poverty line (see table for amounts representing 100% and 400% of federal poverty line (FPL) for various household sizes in 2009); and (b) employer does not provide coverage, or coverage provided by employer costs the employee more than 8% of household income AND the employer does not provide the employee with a voucher for coverage through an exchange equal to the employer’s cost of coverage if that employee had enrolled in the employer’s plan.

The amount of credit is initially determined based on the previous year’s household income; the credit decreases as household income increases, phasing out entirely over 400% of the FPL. The credit is paid directly to the insurance exchange to offset the cost of insurance throughout the year, but will also be calculated and reported on individual tax returns. Additional allowable credits will offset tax and be refundable; excess credits allowed will be recouped as additional tax liability, although that additional liability will be capped at $400 for any taxpayer whose household income is less than 400% of FPL ($250 for single filers).

Employer mandate

Starting in 2014, a penalty can be imposed on any employer with at least 50 full-time employees (how 50 employees is calculated will be explained shortly). There are two different potential penalties: a penalty for not providing coverage at all, and a penalty for providing coverage that isn’t “affordable” and failing to subsidize an employee’s purchase of alternative insurance through an exchange.

Any employee working 30 hours or more per week is considered full-time; for employees working less than this, their hours are aggregated for the month and divided by 120 to determine how many full-time employees they represent.

The first penalty – the penalty for not providing health insurance – will be assessed only if at least one of the employer’s employees enrolls in an insurance plan through the insurance exchange and receives a federal credit to assist in paying for the coverage. Keep in mind that individuals are only eligible for the federal credit if they earn less than 400% of the federal poverty line (FPL), and their employer doesn’t provide them coverage. Therefore, employers whose employees all have household incomes in excess of 400% of the federal poverty level will not be assessed any penalties for failing to provide insurance coverage.

If this penalty is assessed, it is calculated as follows: $2,000 annually per employee over a 30-employee threshold. Example: an employer who does not provide any health insurance coverage and has 70 employees, one or more of whom obtains coverage through an exchange and receives a federal credit for health insurance premiums, will be assessed a penalty of $80,000: 70 employees less the 30 employee threshold = 40 times $2,000. The penalty is pro-rated monthly, if coverage is provided for part of the year.

The second penalty is imposed if an employer offers coverage, but it isn't "affordable." This penalty comes into play if the employer's plan requires any employee whose household income is at or below 400% of the federal poverty level to pay at least 8% of household income for self-only coverage in the employer's plan. The employer can avoid the application of the penalty if it provides a "free choice voucher" to such employees. If the employee declines the employer coverage and enrolls in the state exchange instead, the voucher obligates the employer to pay a portion of the exchange insurance coverage equal to the amount the employer would have paid, had the employee been enrolled in the employer's plan. The employer can therefore entirely avoid this penalty by providing the free choice voucher, which obligates the employer to no additional cost beyond the employer’s share of the employee’s health insurance coverage. The cost of the free choice voucher is deductible by the employer as additional compensation, and is not taxed to the employee.

The amount of this penalty is $3,000 annually per employee who enrolls in insurance through an exchange and receives a federal health insurance premium credit. This penalty, unlike the penalty for simply failing to provide coverage, is assessed per employee enrolled through an exchange who is receiving a credit. This penalty is capped at the amount the employer would have paid under the other penalty - $2,000 per employee over the 30 employee threshold.

This bulletin is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern.

Based on the most recent "best practice" standards for tax advisors issued by the Treasury Department, commonly referred to as Circular 230, we wish to advise you that this bulletin has not been prepared to be used, and cannot be used, to provide assurance that penalties which may be assessed by the IRS or other taxing authority (including specifically section 6662 understatement penalties) will not be upheld.