Affordable Care Act Tax Provisions for Individuals
Additional Medicare Tax
A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. On Nov. 26, 2013, the IRS and the Department of the Treasury issued final regulations which provide guidance for employers and individuals relating to the implementation of Additional Medicare Tax, including the requirement to withhold Additional Medicare Tax on certain wages and compensation, the requirement to report Additional Medicare Tax, and the employer process for adjusting underpayments and overpayments of Additional Medicare Tax. In addition, the regulations provide guidance on the employer and individual processes for filing a claim for refund for an overpayment of Additional Medicare Tax. For additional information on the Additional Medicare Tax, see our questions and answers.
For tax years 2010 and 2011, the Affordable Care Act raised the maximum adoption credit per child and the credit was refundable. For more information related to the adoption credit for tax years 2010 and 2011, see our news release, tax tip, Notice 2010-66, Revenue Procedure 2010-31, Revenue Procedure 2010-35 and Revenue Procedure 2011-52.
For tax year 2012, the credit has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child. If you adopted a child in 2012, see Tax Topic 607 for more information.
Expatriate Health Plans
On June 10, 2016, the Treasury Department and Internal Revenue Service, the Department of Health and Human Services, and the Department of Labor (the Departments) issued proposed regulations that implement the Expatriate Health Coverage Clarification Act of 2014 (EHCCA). The EHCCA generally provides that most ACA provisions do not apply to expatriate health plans covering individuals traveling to or from the United States. More specifically, the EHCCA provides that the requirements of the ACA do not apply to expatriate health plans, expatriate health insurance issuers for coverage under expatriate health plans, and employers in their capacity as plan sponsors of expatriate health plans, except that: (1) an expatriate health plan shall be treated as minimum essential coverage under section 5000A(f) of the Code and any other section of the Code that incorporates the definition of minimum essential coverage; (2) the employer shared responsibility provisions of section 4980H of the Code continue to apply; (3) the health care reporting provisions of sections 6055 and 6056 of the Code continue to apply but with certain modifications relating to the use of electronic media for required statements to enrollees; (4) the excise tax provisions of section 4980I of the Code continue to apply with respect to coverage of certain qualified expatriates who are assigned (rather than transferred) to work in the United States; and (5) the annual health insurance providers fee imposed by section 9010 of the ACA takes into account expatriate health insurance issuers for certain purposes for calendar years 2014 and 2015 only. The EHCCA proposed regulations provide that the market reform provisions enacted as part of the ACA generally do not apply to expatriate health plans, any employer solely in its capacity as a plan sponsor of an expatriate health plan, and any expatriate health insurance issuer with respect to coverage under an expatriate health plan. Further, the EHCCA proposed regulations define the benefit and administrative requirements for expatriate health issuers, expatriate health plans, and qualified expatriates, and provide clarification regarding the applicability of certain fee and reporting requirements.
Health Coverage for Older Children
Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. Learn more by reading our news release or this notice.
Health Flexible Spending Arrangements
Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after Jan. 1, 2011. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers. FSA and HRA participants can continue using debit cards to buy prescribed over-the-counter medicines, if requirements are met. For more information, see news release IR-2010-128 and Notice 2011-5. Additionally, Notice 2013-57 provides information about the definition of preventive care for purposes of high deductible health plans associated with HSAs.
In addition, starting in 2013, there are new rules about the amount that can be contributed to an FSA. Notice 2012-40 provides information about these rules and flexibility for employers applying the new rules. On Oct. 31, 2013, the Department of the Treasury and IRS issued Notice 2013-71, which provides information on a new $500 carryover option for employer-sponsored healthcare flexible spending arrangements. Learn more by reading the news release issued by the U.S. Department of the Treasury.
Further, Notice 2013-54 provides guidance regarding the application of the Affordable Care Act’s market reforms to certain health FSAs.
On February 5, 2016, the Treasury Department and IRS issued Notice 2016-17, which provides guidance on the application of certain provisions of the Affordable Care Act to premium reduction arrangements offered in connection with student health plans. The notice also provides temporary transition relief from enforcement by the Treasury Department, DOL and HHS in certain circumstances. On February 5, 2016, DOL issued similar guidance in Technical Release 2016-01 and HHS issued similar guidance in an Insurance Standards Bulletin.
Individual Shared Responsibility Provision
Starting in 2014, the individual shared responsibility provision calls for each individual to either have minimum essential coverage for each month, qualify for an exemption or make a payment when filing his or her federal income tax return. On June 26, 2013, the IRS released Notice 2013-42, which provides transition relief for employees eligible to enroll in a non-calendar year employer-sponsored health plan that begins in 2013 and ends in 2014. On Aug. 27, 2013, the Department of the Treasury and the IRS issued final regulations on the individual shared responsibility provision. On July 24, 2014, the IRS issued Rev. Proc. 2014-46, which provides the 2014 monthly national average premium for qualified health plans that have a bronze level of coverage. This amount is used to determine the maximum individual shared responsibility payment that may be due. On Jan. 16, 2015, the IRS issued Rev. Proc. 2015-15, which provides the 2015 monthly national average premium for qualified health plans that have a bronze level of coverage. On Nov. 21, 2014, the Department of the Treasury and the IRS issued final regulations addressing the treatment of health reimbursement arrangements, cafeteria plans, and wellness program incentives for purposes of determining the unaffordability exemption for individuals with offers of employer sponsored coverage. The regulations also provide that certain limited benefit Medicaid and TRICARE coverage is not minimum essential coverage (Notice 2014-10, issued on Jan. 23, 2014, provides transition relief from the shared responsibility payment for months in 2014 in which individuals have this limited benefit coverage). On Nov. 21, 2014, the IRS issued Notice 2014-76, which identifies the hardship exemptions from the individual shared responsibility payment that a taxpayer may claim on a federal income tax return without obtaining an exemption certification from a Health Insurance Marketplace. For additional information on the individual shared responsibility provision, see our ISRP page and questions and answers. Additional information on exemptions and minimum essential coverage is available in final regulations issued by the U.S. Department of Health & Human Services.
Information Reporting on Health Coverage by Employers (Form 1095-C) – See Tax Provisions for Employers
Information Reporting on Health Coverage by Insurers (Form 1095-B) – See Tax Provisions for Other Organizations
Itemized Deduction for Medical Expenses - Changes
Beginning Jan. 1, 2013, you can claim deductions for medical expenses not covered by your health insurance when they reach 10 percent of your adjusted gross income. This change affects your 2013 tax return that you will file in 2014. There is a temporary exemption from Jan. 1, 2013, to Dec. 31, 2016, for individuals age 65 and older and their spouses. For additional information, see our questions and answers.
Medicare Part D Coverage Gap “Donut Hole” Rebate
The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan’s coverage gap. This payment is not taxable. This payment is not made by the IRS. More information can be found at www.medicare.gov.
Net Investment Income Tax
A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. On Nov. 26, 2013, the IRS and the Treasury Department issued final regulations, which provide guidance on the general application of the Net Investment Income Tax and the computation of Net Investment Income. In addition, on Nov. 26, 2013, the IRS and the Treasury Department issued proposed regulations on the computation of net investment income as it relates to certain specific types of property. Comments may be submitted electronically, by mail or hand delivered to the IRS. For additional information on the Net Investment Income Tax, see our questions and answers.
Premium Tax Credit
Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. On May 18, 2012, the Department of the Treasury and the IRS issued final regulations, which provide guidance for individuals who enroll in qualified health plans through Marketplaces and claim the premium tax credit, and for Marketplaces that make qualified health plans available to individuals and employers. On Jan. 30, 2013, the Department of the Treasury and IRS released final regulations on the premium tax credit affordability test for related individuals. Notice 2013-41, issued on June 26, 2013, provides information for determining whether or when individuals are considered eligible for coverage under certain Medicaid, Medicare, CHIP, TRICARE, student health or state high-risk pool programs. This determination will affect whether the individual is eligible for the premium tax credit. On November 7, 2014, the Department of the Treasury and IRS issued Notice 2014-71, which advises that an individual enrolled in a qualified health plan who becomes eligible for Medicaid coverage for pregnancy-related services that is minimum essential coverage, or for CHIP coverage based on pregnancy, is treated as eligible for minimum essential coverage under the Medicaid or CHIP coverage for purposes of the premium tax credit only if the individual enrolls in the coverage.
On April 30, 2013, the Department of the Treasury and the IRS issued proposed regulations relating to minimum value of eligible employer-sponsored plans and other rules regarding the premium tax credit. On November 4, 2014, the Department of the Treasury and IRS issued Notice 2014-69, which provides additional guidance regarding whether an employer-sponsored plan provides minimum value coverage if the plan fails to substantially cover in-patient hospitalization services or physician services. Notice 2014-69 also advises taxpayers that the Department of Treasury and the IRS intend to propose new regulations providing that plans that fail to provide substantial coverage for inpatient hospitalization or physician services do not provide minimum value. On August 31, 2015, the Department of Treasury and the IRS issued proposed regulations supplementing the prior proposed regulations and amending the definition of minimum value. On December 16, 2015, the Department of Treasury and IRS issued final regulations providing guidance on the Premium Tax Credit. The final regulations adopted some of the proposed rules regarding the Premium Tax Credit, including the definition of Modified Adjusted Gross Income (MAGI); rating areas for purposes of determining benchmark plans used in determining applicable credits; the effect of eligibility for COBRA continuation coverage on Premium Tax Credit eligibility; coverage months for newborns and new adoptees; proration of monthly premiums for individuals enrolled for less than a month; and determining the benchmark plan for family members living at different addresses. The final regulations also withdrew and re-proposed some of the rules relating to minimum value of eligible employer-sponsored plans and reserved on other proposed rules relating to minimum value of eligible employer-sponsored plans. The re-proposed and reserved rules will be finalized separately.
On July 24, 2014, the Department of the Treasury and the IRS issued proposed, temporary and final regulations providing further guidance on the premium tax credit. In particular, the regulations provide relief for certain victims of domestic abuse or spousal abandonment from the requirement to file jointly in order to claim the premium tax credit. In addition, the regulations provide special allocation rules for reconciling advance credit payments, address the indexing in future years of certain amounts used to determine eligibility for the credit and compute the credit, and provide rules for the coordination between the credit and the deduction under section 162(l) for health insurance costs of self-employed individuals. Rev. Proc. 2014-41, also released on July 24, 2014, provides methods for determining the section 162(l) deduction and the premium tax credit for health insurance costs of self-employed individuals who claim the deduction under section 162(l).
On May 2, 2014, the Department of the Treasury and the IRS issued final regulations on the reporting requirements for Marketplaces.
On Jan. 26, 2015, the IRS issued Notice 2015-9, which provides limited penalty relief for taxpayers who have a balance due on their 2014 income tax return as a result of reconciling advance payments of the premium tax credit against the premium tax credit allowed on the tax return. Specifically, Notice 2015-9 provides relief from the penalty under section 6651(a)(2) for late payment of a balance due and the penalty under section 6654(a) for underpayment of estimated tax. The relief applies only for the 2014 taxable year.
On April 10, 2015, the IRS issued Notice 2015-30 providing penalty relief for the 2014 taxable year for taxpayers who received a Form 1095-A, Health Insurance Marketplace Statement, that was delayed or believed to be incorrect and who timely file their 2014 income tax return, including extensions. This relief applies to the following (1) the penalty for late payment of a balance due (section 6651(a)(2)), (2) the penalty for failure to pay an amount due upon notice and demand (section 6651(a)(3)), (3) the penalty for underpayment of estimated tax (section 6654(a), and (4) the accuracy-related penalty (section 6662).
On April 24, 2015, the IRS issued Notice 2015-37, which advises that an individual who may enroll in a CHIP buy-in program that HHS has designated as minimum essential coverage is eligible for minimum essential coverage under the program for purposes of the premium tax credit only for the period the individual is enrolled.
On December 22, 2015, the IRS issued Notice 2016-02, which provides guidance for taxpayers eligible to claim the Health Coverage Tax Credit who enrolled in a qualified health plan through a Health Insurance Marketplace in tax years 2014 or 2015, and who claimed or are eligible to claim the premium tax credit.
On July 8, 2016, the Department of the Treasury and the IRS issued proposed regulations providing further guidance on the premium tax credit. In particular, the proposed regulations address various issues regarding: (1) eligibility for the premium tax credit (including how opt-out arrangements affect an employee’s required contribution); (2) the due date for payment of premiums in the case of retroactive enrollments; (3) the premium assistance amount when certain coverage is terminated mid-month; (4) the benchmark plan premium (including how pediatric dental benefits affect the benchmark plan premium); (5) the reconciliation of advance payments for an individual whom no one claims as a dependent; and (6) certain information reporting rules.