PILLA TALKS TAXES - Prior Featured Article
AVOIDING PENALTIES UNDER OBAMACARE
Exceptions and Exemptions to the "Individual Mandate"
by Daniel J Pilla
As we all know by now, federal law requires all persons in the United States to maintain “minimum essential health care coverage” for themselves and their dependents beginning this year. See code §5000A. Failure to purchase such care will subject the individual to an annual penalty, which the statute refers to as a “shared responsibility payment.” Code §5000A(b).
This provision of the Patient Protection and Affordable Care Act (Obamacare) is referred to as the “individual mandate” in that Congress has mandated that individual citizens purchase an insurance product that meets federal guidelines. Such a mandate is unprecedented in American law. There is no other example in U.S. history where the government required a person, as a matter of law, to purchase a specific product or service or risk civil penalties.
The penalty is equal to the greater of:
• $695 per person per year, up to a maximum of $2,085 per family, or
• 2.5 percent of “household income.” Code §5000A(c).
The percentage increase is phased-in over three years. Beginning in 2014, the percentage is 1 percent. Beginning in 2015, the percentage is 2 percent. For years after 2015, the percentage jumps to 2.5 percent. The gross applicable penalty is pro rated to apply on a monthly basis “for any month during which any failure” to have adequate coverage exists. Code §5000A(c)(2). The penalty amount must be computed by the taxpayer and reported on his tax return.
In my Special Report I published on Obamacare, entitled “IMPLEMENTING NATIONAL HEALTH CARE: Taxpayers and IRS to be Challenged as Never Before,” (PTT, July 2012), I discussed this penalty and explained that the law contains both “exceptions” and “exemptions” to the penalty. Now that the IRS has issued regulations on this element of the law, it is time to elaborate on the “exceptions” and “exemptions” that allow one to avoid the penalty. Let’s us discuss each of them individually.
1. Religious conscience exemption – §5000A(d)(2)(A). This provision holds that any member of a recognized religious group that has historically been exempt from Social Security taxes may also be exempt under Obamacare. Tax code §1402(g)(1) defines who is exempt for purposes of Social Security taxes and that definition applies to the penalty under Obamacare.
Code §1402(g)(1) provides that a person can be exempted from Social Security taxes if he:
a. Is a member of a recognized religious sect or organization,
b. Is an adherent to the established tenets, teachings or beliefs of that sect or organization, and
c. By reason of those beliefs, he is conscientiously opposed to accepting benefits under any private or public insurance policy that would make payments in the event of death, disability, old-age or retirement or makes payments toward the cost of, or provides services for, medical care.
The exemption is honored only if it is established that the organization to which the person belongs actually has established teachings or tenets regarding the provision of insurance, that the organization has a long standing practice of providing for the needs of their members, and that the religious organization has been in existence at all times since December 31, 1950. Code §1402(g)(1)(C)-(E).
To establish this exemption, you must provide a certification to the health care Exchange that proves you meet all of the above elements. See: Rev. Reg. §1.5000A-3(a)(2). The Exchange is then required to issue the certificate of exemption. For more on the Exchanges, see my report, “IMPLEMENTING NATIONAL HEALTH CARE.”
A family with minor children that meets the requirements for exemption may also exempt their minor children. However, once a child turns age twenty-one, to maintain the religious conscience exemption, the child must reapply for the exemption and attest to membership individually. See: Treasury Decision 9632, §III.A.
2. Persons involved in a “health care sharing ministry” – §5000A(d)(2)(B). A health care sharing ministry (HCSM) provides a health care cost sharing arrangement among persons of similar and sincerely held beliefs. An HCSM is founded on the Biblical mandate of believers to share each other’s needs. The goal is to share the health care needs of others in order to meet the rising costs of health care.
HCSMs are non-profit religious organizations acting as a clearinghouse for those who have medical expenses and those who wish to share the burden of those medical expenses. HCSMs receive no funding or grants from government sources. HCSMs are not insurance companies. HCSM do not assume any risk or guarantee the payment of any medical bill. Twenty-five states have explicitly recognized this structure and specifically exempt HCSMs from their insurance codes. According to the Alliance of Health Care Sharing Ministries, there are now over 210,000 people participating in these ministries in all fifty states.
Examples: See www.healthcaresharing.org or Medi-Share
Section 5000A(d)(2)(B)(ii) provides that an HCSM:
a. Must be an established 501(c)(3) tax-exempt organization,
b. Members must share a common set of “ethical or religious beliefs” and “share medical expenses among members” in accordance with those beliefs and without regard to where the member lives or works,
c. Must have been in existence since at least December 31, 1999,
d. The medical expenses of its members must have been shared “continuously and without interruption” since December 31, 1999, and
e. Must undergo an annual audit by “an independent public accounting firm” and the results of the audit must be “made available to the public upon request.”
The regulations require that a person establish his eligibility for the exemption on a monthly basis. That is, this appears not to be an annual exemption, but must be verified “for every month of that taxable year for which they seek exemption.” See: Treasury Decision 9632, §III.B; Rev. Reg. §5000A-3(b)(2).
It seems that the IRS has put provisions in place to make the process for achieving exemption under this provision as arduous as possible.
3. Persons not lawfully present in the United States – §5000A(d)(3). A person who does not have lawful immigration status is not obligated to have health insurance under the law. A person falls under this exemption if he either is: a) a nonresident alien, or b) is not lawfully present in the U.S. See: Rev. Reg. §1.5000A-3(c)(2). Thus, all the illegal aliens currently in the country have no duty under the law to have insurance. But how do they claim the exemption? The regulations provide no mechanism for doing so. I suppose they will do so that the same way they currently file their tax returns: not at all. Further IRS guidance will be issued on the topic in the future.
4. Persons who are incarcerated – §5000A(d)(4). This section provides that an individual is exempt for a month when the individual is incarcerated (other than incarceration pending the disposition of charges). The regulations provide that an individual confined for at least one day in a jail, prison, or similar penal institution or correctional facility after the disposition of charges is exempt for the month that includes the day of confinement.
5. Those who cannot afford coverage – §5000A(e)(1). The law exempts those who cannot afford minimum essential coverage. The exemption applies only on a month-to-month basis. That is, if a person cannot afford coverage for two of twelve months, his exemption applies only to those two months.
Insurance is considered unafforable if the premium exceeds 8 percent of “household income.” Rev. Reg. §1.5000A-3(e)(2). This amount is indexed for inflation so is likely to increase annually after 2014. The amount of increase is determined by the Department of Health and Human Services based upon a ratio between income growth and insurance costs.
In determining the “household income” for purposes of the 8 percent cap, you are required to include in your income any amounts withheld under a salary reduction agreement, or cafeteria plan provided by an employer. While these benefits are considered not taxable for federal income tax purposes, they are included in the calculation of “household income” for purposes of determining whether your insurance coverage is “affordable.”
What is “household income?” The phrase “household income” is defined by Rev. Reg. §1.36B-1(e)(1). Generally, the phrase means the sum of:
a. The taxpayer’s modified adjusted gross income (discussed below); plus
b. The aggregate modified adjusted gross income of all other individuals who—
1. Are included in the taxpayer’s family (as discussed below), and
2. Are required by law to file a federal income tax return under code §6012. Generally, the requirement to file a tax return is tripped by the receipt of income in excess of the filing requirements expressed in §6012.
Now we have to define “modified adjusted gross income.” That phrase is held to constitute adjusted gross income plus:
a. Tax exempt interest the taxpayer “receives or accrues” during the tax year,
b. Any foreign earned income that otherwise would be excluded under code §911, and
c. Social Security benefits that were not otherwise includable in income under code §86.
Finally, we have to define “family” for purposes of this discussion. The term “family” is defined in Rev. Reg. §1.36B-1(d) as follows:
A taxpayer’s family means the individuals for whom a taxpayer properly claims a deduction for a personal exemption under section 151 for the taxable year. Family size means the number of individuals in the family. Family and family size may include individuals who are not subject to or are exempt from the penalty under section 5000A for failing to maintain minimum essential coverage.
Thus, “household income” includes not only the taxpayer’s wage or business income, but it includes his tax-exempt interest, non-taxable Social Security benefits and non-taxable foreign earned income, plus all of the same income items of every person in his household for whom he claims a dependent exemption. That can include all children up to 24 years of age or a disabled child of any age, any relative that lives with you such as a parent or grandparent, brother, sister, etc., provided they qualify as your dependent exemption on your tax return.
The 8 percent premium cap is figured on the basis of this “household income.” In many cases, it will be substantially more than the income reported on your tax return for the period in question. My question is who made the decision that the income of other persons is available to you to pay medical expenses? The 8 percent cap is based upon all the income of the household while it is probably the case that the income of third parties is just not available to cover medical bills. For example, if your seventeen year old son makes $4,800, that will raise your “household income.” However, none of his money is available to you because he spent it all on his car and girlfriend.
6. Those with incomes below the tax return filing requirement – §5000A(e)(2). This section provides that a person is exempt if his “household income” for the year is less than the return filing requirement under code §6012(a). The problem here is that the filing thresholds under §6012 have nothing to do with “household income.” The filing thresholds are based solely (as they most certainly should be) on individual income, since the liability for return filing and tax payment is based solely on one’s individual income.
Even in the case of a husband and wife, the requirement to file a tax return (assuming both had income) is an individual responsibility. Married couples have the option to file a joint income tax return, but that is a voluntary election that must be made by both spouses on the return itself. Only then can one spouse be held liable for the tax owed by the other spouse. Under no circumstances can the IRS force a married couple to file a joint income tax return.
The regulations shed no light on how this discrepancy is to be reconciled. Rev. Reg. §1.5000A-3(f)(2)(ii) simply states:
The applicable filing threshold for an individual who is properly claimed as a dependent by another taxpayer is equal to the other taxpayer’s applicable filing threshold.
I’m sorry to say I don’t know what that means. As near as I can tell, the determination of a filing requirement is based upon the income of all family members, added together, then applied to the code §6012 threshold amounts. Thus, a person may not have a filing requirement based solely on his personal income. But he may have a “filing requirement” when his “household income” is calculated. And while that “household income” may not then actually trip a tax return filing requirement, it would kick that person out of the exemption provision of this section. Anyway, that’s my guess. God help us.
7. Members of an Indian tribe – sec 5000A(e)(3). Any person who is a member of an Indian tribe is exempt during the period of his membership.
8. Those with “short coverage gaps” – sec 5000A(e)(4). A “short coverage gap” is defined as:
…a continuous period of less than three months in which the individual is not covered under minimum essential coverage. If the individual does not have minimum essential coverage for a continuous period of three or more months, none of the months included in the continuous period are treated as included in a short coverage gap. Rev. Reg. §1.5000A-3(j)(2)(i).
Thus, your coverage gap must be less than three months during the year. There is no partial exemption if your coverage gap exceeds two months. Moreover, the coverage gap “is determined without regard to a calendar year in which months included in that gap occur.” Rev. Reg. §1.5000A-3(j)(2)(iii). Thus, if you have a coverage cap in December of 2014 and January – February of 2015, you have three months of gap in coverage and may be subject to the penalty.
9. Those with a hardship waiver – §5000A(e)(5). A “hardship” waiver certificate is issued by the Exchange to the individual and certifies that the person “has suffered a hardship affecting the capability to obtain minimum essential coverage.” Rev. Reg. §1.5000A-3(h)(2). The term “hardship” for this purpose is not defined in the Internal Revenue Code. Rather, it’s in the heath care regulations, at 45 CFR §155.605(g).
The application for a hardship waiver must be made to the Exchange based upon the forms and procedures offered by the Exchange. The hardship waiver applies if the Exchange determines that the individual:
a. Experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he had a significant, unexpected increase in essential expenses that prevented purchasing coverage under a qualified health plan,
b. Would have experienced serious deprivation of food, shelter, clothing or other necessities due to the expense of purchasing a qualified health plan, or
c. Experienced other circumstances that prevented purchasing coverage under a qualified health plan. 45 CFR §155.105(g)(1)(i) - (iii).
The hardship waiver is determined by the Exchange based upon the individual’s “projected annual household income.” Moreover, the individual’s eligibility for an employer-sponsored plan is also considered. Ibid, at §(g)(2).
As discussed in more detail in the following article, there have been many delays in implementing and enforcing Obamacare. Both the employer mandate and individual mandates have been pushed back. Thus, the penalties are not currently being enforced. Because this issue continues to be in a state of massive flux, I will stay on top of it as necessary.
Article taken from February 2014 T issue of "Pilla Talks Taxes."
*Portions modified March 2017
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