Starting January 2014, The Individual Shared Responsibility provision of the Affordable Care Act takes effect. This means that each and every taxpayer (and family member) is now required to maintain basic health insurance, also known as “minimal essential coverage.” You must either have health insurance coverage throughout the year, qualify for an exemption from coverage, or make a payment when you file your 2014 federal income tax return in 2015. Many people already have qualifying health insurance coverage and do not need to do anything more than maintain that coverage. Plans that meet the minimal essential coverage requirement may be obtained through employer-sponsored coverage, government programs, or the Health Insurance Marketplace. Visit the IRS website for a chart of coverage types that qualify.
Health Coverage Exemptions
There are a limited number of exemptions from the individual shared responsibility provision. Types of exemptions include: members of certain religious sects, members of Federally-recognized Native American tribes, certain non-citizens, households with income below the return filing threshold, people for whom coverage is considered unaffordable, incarceration exemptions, and certain hardship exemptions.
Exemptions must be obtained through either the Marketplace or the IRS. Exemptions are reported on your income tax return, but you are automatically exempt if you aren’t required to file a return because of insufficient income.
Individual Shared Responsibility Payment
The 2014 tax return (IRS Form 1040) will ask whether you have health insurance coverage or if you qualify for an exemption. If you (or any member of your household) do not have the minimal essential coverage and do not meet the exemption criteria, you will need to make an Individual Shared Responsibility payment. For 2014, the individual shared responsibility payment is the greater of:
1% of your household income above your tax filing threshold
The flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285
Health Care Tax Tips
Here are some general tax tips for the Affordable Care Act:
Certain employers are required to report the cost of coverage under an employer-sponsored group health plan. Consequently, your employer may report the value of the health insurance provided to you on your Form W-2 (in Box 12 with Code DD) — however, it is not taxable income. This amount is only provided for informational purposes and should not be reported as taxable earnings.
If you are self-employed, you can deduct the cost of health insurance premiums (within limits) on your Federal income tax return, as well as on your state tax return in many cases.
Individuals and families with low or moderate income, who purchased health insurance through the Health Insurance Marketplace (the “Exchange”), may be eligible for a Premium Tax Credit designed to help them afford insurance coverage. You can elect to have the tax credit paid in advance to your insurance company to lower your monthly premiums, or you can claim all of the credit when you file your Federal tax return for the year. If you choose to have the credit paid in advance, you will need to reconcile the amount paid in advance with the actual credit you calculate (based upon family size and income) when you file your tax return.
As part of the Affordable Care Act, an Additional Medicare Tax went into effect in 2013. This affects taxpayers at higher income levels (as measured by wages, compensation, and self-employment income). The rate of the Additional Medicare Tax is 0.9%. To find out if you are subject to this tax, you can view the income threshold charton the IRS website.
Tax-Favored Health Plans
Some employers offer additional types of tax-favored health plans, including the following:
A health flexible spending arrangement (FSA) enables you to reduce your taxable income by the amount of money you contribute.
A health savings account (HSA) allows your employer to put money aside for you, which is not taxable to you within certain limits. Money that you put into an HSA generally qualifies for a tax deduction and can reduce your income tax liability. Money that you withdraw from an HSA to use for qualified medical expenses is not considered taxable income. However, withdrawals for other (nonqualified) purposes are taxable and may even trigger an additional tax.
Money you receive from a health reimbursement arrangement (HRA) is usually not taxable.
Information for Employers
An employer’s tax responsibilities are based on how many employees they have and what type of health coverage they offer. The general rules are as follows:
Employers with less than 25 full-time employees may qualify for the Small Business Health Care Tax Credit, which helps cover the cost of providing insurance coverage.
Employers with 50 employees or less are generally eligible to purchase coverage through the Small Business Health Options Program (SHOP).
Employers with 50 or more employees must file an annual information return and report what type of health insurance they provide (if any). These employers are also subject to the Employer Shared Responsibility Provisions under the Affordable Care Act.