2014 YEAR-END
TAX GUIDE
Patient Protection Affordable Care Act 2014 Update
By Michael D'Addio

2014 has seen a number of developments involving the Patient Protection Affordable Care Act, including the application of the Individual Mandate, the Premium Tax Subsidy, the Shared Responsibility Payment for Large Employers, and complex reporting requirements.

Individual Mandate

U.S. citizens and legal residents are required to have certain health insurance (referred to as Minimum Essential Coverage) or pay a penalty. A non-exempt person must maintain coverage for each month beginning April 1, 2014 for him/herself and any person whom he/she can claim as a dependent. While the Individual Mandate was originally set to begin on January 1, 2014, it was delayed by the Administration to April 1, 2014.

The penalty for failure to have Minimum Essential Coverage for 2014 is the greater of $95 for an adult (up to $285/family) or 1% of Household Income over one’s filing threshold. The penalty increases to $325 for an adult (up to $975/family) or 2% of Household Income over the filing threshold for 2015 and to $695 for an adult (up to $2,085/family) or 2.5% of Household Income over the filing threshold for 2016. For each year, the penalty is capped and cannot exceed the national average cost of a Bronze plan.

Exceptions apply to the Individual Mandate for:

  • Religious beliefs
  • Undocumented workers, including those legally in the country but treated as nonresident aliens under income tax rules
  • Individuals suffering financial hardship
  • Incarcerated individuals (except those pending trial)
  • Individuals with a coverage gap of less than 3 months
  • Members of an Indian tribe
  • Those with Household Income less than the Filing Threshold
  • Persons who cannot afford coverage (based on the cost of lowest single coverage offered being more than 8% of Household Income). The 8% rate is subject to annual adjustments by DHHS
  • Members of a Health Sharing Ministry in existence since 1999

In 2013, many troubled insurers cancelled unprofitable policies so the federal Department of Health & Human Services decided that this whole quality as a “hardship” for those affected. Those with cancelled policies were given an exemption for one year to 2015. However, under a 2014 technical bulletin, an additional extension is given until 2016 if your coverage was cancelled. To take advantage of this extra extension, you will need to fill out a form attesting to this fact and your belief that plan options under the Exchanges are more expensive than the cancelled policy and that other policies are unaffordable.

Premium Tax Subsidy

The Government pays a portion of Exchange-based premiums for insureds with income between 100% and 400% of the Federal Poverty Level (FPL) who either: a) are not eligible for employer-provided Minimum Essential Coverage; or b) are eligible for employer-provided Minimum Essential Coverage but such coverage is either unaffordable or does not provide “minimum value.”

The government-provided subsidy is accomplished through a tax credit to be calculated on the 2014 income tax return. If it is estimated during 2014 that you qualify for the subsidy, you are given a choice as to how to receive the benefit. You can pay the Exchange premiums in full and take the credit when your 2014 tax return is prepared (in 2015). Alternately, you can elect to take an advance on the credit as a reduction of the monthly Exchange policy premium.

There is a seldom-discussed potential problem with electing to reduce the monthly Exchange premiums. Since the estimate of the credit in 2014 is based on prior year tax information, the amounts used to reduce the premiums may exceed the tax credit which is ultimately calculated based on the actual 2014 tax information. In this circumstance, a “true-up” is required, and the excess credit will be owed back to the federal government. The amount owed back under this rule is subject to caps in 2014 for single filers of $300 if Household Income is less than 200% FPL; $750 if between 200% and 300% FPL; and $1,250 if between 300% and 400% of FPL. The caps are doubled for those using a different filing status.

2014 also saw some action on lawsuits questioning the right of a federal exchange to provide tax subsidies to insureds. The D.C. Circuit found, in a three-judge decision Halbig v Burwill that the law does not permit a federal exchange to provide tax credits to insureds. However, within three hours of that decision, a Virginia Circuit Court reached a contrary decision permitting credits by federal exchanges. Since that time, the D.C. court has agreed to review its decision en banc, a relatively rare step for the court. Since only 14 states have state-run exchanges (with two more planning to have theirs in operation in 2015), this is a significant issue for the continued operation of the Affordable Care Act. If federal exchanges, which operate in the majority of the states, cannot provide otherwise qualified persons with tax credits, then the appeal of exchange policies will be significantly reduced.

The text of the law is fairly specific that the subsidies are to be allowed by state exchanges. Some argue that the federal exchanges should be seen as surrogates where a state has failed to set up its own exchange. Since the law looks to increase participation in coverage through use of the subsidies, they claim it could not be the intent of the law to eliminate a substantial portion of the population from receiving them.

However the other side argues that the text of the law is clear. Furthermore, the loss of subsidies may have been intentionally included in the law as a penalty, so as to incentivize states to establish their own exchanges stayed tune to see how the D.C. Court ultimately rules.

Employer Mandate (Shared Responsibility Payment for Large Employers)

2014 has seen significant developments with respect to the application of the ACA to Large Employers, including the issuance of final regulations.

A Large Employer is subject to penalties (commonly referred to as a “shared responsibility payment” or a “pay-or-play” penalty) when a full-time employee with Household Income between 100%-400% FPL meeting certain requirements receives a tax credit from the government to buy coverage through a public exchange. This disqualifying employee either (i) Is not offered employer group health plan coverage (including dependent coverage); or (ii) Is offered employer group health plan coverage which is either unaffordable (based on the employee’s required participation in the lowest cost singleonly coverage exceeding 9.5% of Household Income) or does not provide “Minimum Value.” Note that the penalty applies only where an actual full-time employee gets subsidized coverage under a government exchange and does not apply where full-time equivalent employees get such coverage.

A Large Employer is one with 50 or more full-time equivalent (FTE) employees in the prior calendar year. A full-time employee is one who works on average 30 hours per week or 130 hours per month. Other employees not meeting this definition (non-full time employees) have their hours counted for a month and divided by 120 to produce the number of full-time equivalent employees. The number of full-time equivalent employees is added to the actual number of full-time employees to determine if the 50-employee limit is satisfied. In making this determination, related employers (i.e., members of controlled groups of businesses or affiliated service groups) must aggregate their employees.

While the ACA Employer Mandate rules were originally scheduled to apply on January 1, 2014, their implementation was delayed by the Administration until 2015. During 2014, regulations and other guidance have provided other delays and limitations on the Large Employer Penalty.

Medium-Large Employers: Employers with 50-99 full-time equivalent employees in 2014 who meet certain criteria will not be subject to the Large Employer penalty until 2016. To ake advantage of this extension, the employer must maintain the overall workforce size and hours of service from 2/2/2014 to 12/31/2014. This rule is intended to discourage a reduction in workforce or shifting from full-time to part-time. However, adjustments due to bona fide business reasons will not affect eligibility. Additionally, the employer cannot eliminate or materially reduce healthcare coverage in effect on 2/9/14 through the end of the plan year which begins in 2015. To satisfy this latter condition, the employer must continue to offer coverage to eligible employees and contribute either (a) 95% of the dollar amount of the contribution for single coverage; or (b) the same or a higher percentage of single coverage in effect on 2/29/2014. The employer must maintain a Minimum Value Plan, and not alter or reduce the class of employees who were eligible for coverage on 2/9/2014.

For example, assume that C has 65 FTE in 2014 and contributes $300 toward the cost of single coverage (75%) on 2/9/14. On 7/1/14, the cost of single coverage increases to $450, and C maintains a $300 contribution level (67%). On 7/1/15, the cost increases to $500, and C maintains the same contribution level (60%). C will qualify for the deferred effective date of the Employer Mandate since C has between 50 and 99 employees, has maintained the same workforce in 2014 and is paying the same dollar amount for single coverage (although the percentage dropped).

Determining Large Employer Status: Determination of large employer status is any year is normally based on the number of full-time equivalent employees in the prior calendar year. The regulations provide that for 2015 (and for 2016 for certain Medium-Large Employers for which the ACA is delayed), the employer can select a timeframe of at least six consecutive months in the prior calendar year to determine Large Employer status. This may produce some important planning opportunities for employers nearing the 50 and 100 employer mandate cutoffs.

Large Employer Penalties: The ACA provides two different penalties on Large Employers. For those which provide no insurance coverage to employees, the annual penalty equals $2,000 times the total number of actual full-time employees over 30. For 2015, this 30-person exclusion is increased to 80.

Additionally, under the ACA, an employer is considered to provide coverage to its employees where it offers coverage to 95% of full-time employees and their dependents [“Coverage Threshold”]. Generally, coverage must begin within 90 days of the date of service. For 2015, the Coverage Threshold is reduced to 70% of full-time employees and their dependents.

Special Rules: The regulations provide special rules with respect to the application of the ACA to volunteers of government or exempt organizations, adjunct professors of educational organizations, and seasonal employees. The regulations also provide rules as to whether a terminated employee is considered to be an “ongoing employee” or a “new employee.”

Reporting Requirements

The IRS issued guidance concerning the annual requirements placed upon large employers under reporting. Such employers will be required to file a Form 1094-C to the IRS and Form 1095-C Individual Statements to each full-time employee. Since the Large Employer Mandate is delayed until 2015, the first filing of these forms for the 2015 year will be in 2016. However, the publication of a draft of these forms gives some indication of the types of information which a Large Employer will need to develop during the year so as to properly complete the form.

Types of Information Required:

  • Name, address, EIN of employer
  • Address and phone number of employer contact person
  • Calendar year
  • Certification as to whether full-time employees and their dependents could enroll in Minimum Essential Coverage
  • Number of full-time employees by month
  • For each full-time employee: a) months MEC offered; b) employer share of the lowest cost premium for self-only coverage; c) name, address and social security number and months employee was covered under the plan
  • Certain Indicator Codes will provide other information required.

The Service has determined that if the employer files 250 of any form with the IRS, the Large Employer forms will be required to be filed electronically.

As the Large Employer penalty rules get closer to full application, we will watch for additional IRS guidance. This guidance should consider the comments of businesses and their professionals so as to reduce the administrative burdens caused by this law.