The Affordable Care Act (ACA) is a comprehensive health care reform law that President Obama signed into law on March 23, 2010.¹ The ACA significantly amends the IRC, ERISA, and the Public Health Service Act. The new law, known as the PPACA, ACA, or Affordable Care Act, focuses on expanding health care coverage, controlling health care costs, and improving the health care delivery system. It attempts to accomplish these goals in a variety of ways, as described in Q 8839 to Q 8845.

In many ways, the ACA is only a broad outline of the reforms that have taken place, or will take place, over several years, and many of the details either have been, or will be, filled in by regulators. The Department of Labor, the Department of Treasury, the IRS, and the Department of Health & Human Services have all proposed regulations, or will propose regulations, that outline the more detailed requirements of the ACA.

The ACA went into effect between 2010 and 2018. The bulk of the provisions were effective beginning in 2011 through 2014. One provision, the tax on so-called “Cadillac” health care plans was scheduled to go into effect in 2022. The SECURE Act repealed the Cadillac tax entirely late in 2019.

Planning Point: The ACA continues to be subject to challenges. Early in 2023, a Texas judge declared that the ACA preventive care mandate is unconstitutional under the Appointments Clause of the U.S. constitution. The preventive care man-date requires health care providers to cover certain preventive services without requiring the patient to contribute to the cost (whether through deductibles, co-pays or otherwise). Covered services are those that have an “A” or “B” rating, as determined by an advisory committee called the U.S. Preventive Services Task Force. Examples of covered services include cancer screenings, drugs that can re-duce the risk of contracting HIV and drugs that lower the patient’s cholesterol. The Texas court ruling included a nationwide injunction. The Department of Jus-tice has already filed an appeal in this case, which many expect could ultimately reach the U.S. Supreme Court.

The ACA covers insured and self-funded comprehensive medical health plans. In effect, the ACA governs major medical insurance and self-insured major medical plans.

Certain excepted benefits, which include standalone vision, standalone dental, cancer, long-term care insurance, Medigap insurance, certain flexible spending accounts (“FSAs”), and accident and disability insurance that make payments directly to individuals, are generally not regulated under the ACA.

Similarly, plans that only impact retirees (“retiree-only plans”) are not impacted by the ACA. Although the ACA removed the exemption for retiree-only plans and excepted benefit plans from the PHS Act, it left those exemptions in the IRC and ERISA. The preamble and footnote 2 of interim final grandfathered plan regulations explain that the exemption for retiree-only plans and excepted benefit plans still applies for those plans subject to the IRC and ERISA.

Federal regulators have determined that, with respect to retiree-only and excepted benefit plans, even though those provisions were removed by the ACA, they will read the PHS Act as if an exemption for retiree-only and excepted benefit plans were still in effect. Federal regulators have encouraged state insurance regulators to do the same, although in any given state it is possible, although unlikely, that regulators will decide to enforce the ACA mandates on all fully insured plans.

The health insurance tax credit applies to for-profit and non-profit employers meeting certain requirements (see Q 8841). From 2010 through 2013, the amount of the credit for for-profit employers was 35 percent (25 percent for non-profit employers) of qualifying health insurance costs. The credit is increased for any two consecutive years beginning in 2014 to 50 percent of a for-profit employer’s qualifying expenses and 35 percent for non-profit employers.¹

The new tax credit is effective for 2010 and thereafter. Beginning in 2014, it is only available for two consecutive years. Thus, the maximum number of years that an employer can take advantage of this tax credit is six, namely 2010 through 2013, plus any two consecutive years beginning in or after 2014.²

Planning Point: The IRS provided relief for small employers who wish to claim the small business health care tax credit, but did not have access to a small business health options program (SHOP) marketplace plan for 2017. Under IRC Section 45R, certain small employers may claim a tax credit for two consecutive years if they provide qualified health coverage to employees. However, some employers who first claimed the credit in 2016 found that they no longer had access to a SHOP plan beginning in 2017. These employers were permitted to claim the credit with respect to health insurance coverage provided outside of the SHOP marketplace for the remainder of the credit period if the coverage that is provided would have qualified for the credit under the rules that applied before January 1, 2014.³

The health insurance tax credit¹ is designed to help approximately four million small for-profit businesses and tax-exempt organizations that primarily employ low and moderate-income workers. The credit is available to employers that both:

(1)     have 25 or fewer eligible full time equivalent (FTE) employees, and

(2)     pay wages averaging under $50,000 (this amount is indexed for inflation) per employee per year.²

IRC Section 45R provides a tax credit beginning in 2010 for a business with 25 or fewer eligible FTEs. Eligible employees do not include seasonal workers who work for an employer 120 days a year or fewer, owners, and owners’ family members, where average compensation for the eligible employees is less than $50,000 and where the business pays 50 percent or more of employee-only (single person) health insurance costs. As a result, the compensation of owners and family members is not counted in determining average compensation, and the health insurance cost for these people is not eligible for the health insurance tax credit.³

The credit is largest if there are 10 or fewer employees and average wages do not exceed $25,000. The amount of the credit phases out for businesses with more than 10 eligible employees or average compensation of more than $25,000 and under $50,000. The amount of an employer’s premium payments that counts for purposes of the credit is capped by the average premium for the small group market in the employer’s geographic location, as determined by the Department of Health and Human Services.⁴

Example: In 2024, a qualified employer has nine FTEs (excluding owners, owners’ family members, and seasonal employees) with average annual wages of $24,000 per FTE. The employer pays $75,000 in health care premiums for these employees, which does not exceed the average premium for the small group market in the employer’s state, and otherwise meets the requirements for the credit. The credit for 2024 equals $37,500 (50 percent x $75,000).⁵

The health insurance nondiscrimination rules (see Q 8795 to Q 8797), the effective date of which has been delayed until regulations have been released and a new effective date has been announced by the IRS, have different sanctions than those applicable to self-insured plans that fall under IRC Section 105(h).

For discriminatory self-insured plans, highly compensated employees have taxable income based on the benefits paid by their employer. By contrast, with respect to the new health insurance nondiscrimination requirements, the sanction under IRC Section 4980D is a $100 per day excise tax on affected employees.¹

The IRS request for comments indicates that the term “affected employees” means those who are not highly compensated. Thus, if an employer has an insured health plan that is not grandfathered and that violates these new nondiscrimination rules for a plan year beginning on or after September 23, 2010, and if that employer has 20 non-highly compensated employees, the penalty will be $2,000 per day as a result of having a discriminatory non-grandfathered health insurance plan.

IRC Section 4980(D)(d)(1) contains an exception to the excise tax for small employers, but the language is somewhat ambiguous. It states, “In the case of a group health plan of a small employer which provides health insurance coverage solely through a contract with a health insurance issuer, no tax shall be imposed by this section on the employer on any failure (other than a failure attributable to section 9811) which is solely because of the health insurance coverage offered by such issuer.” It is not clear whether this exception applies to the new nondiscrimination rules or simply to a health insurance policy that does not meet federal requirements. For the purpose of this exception, a small employer is defined as two to 50 employees.²

There also is a 10 percent cap on the excise tax, that is, 10 percent of aggregate premiums paid by an employer, for inadvertent violations of the nondiscrimination rules.³

The shared responsibility penalty provisions became effective January 1, 2015, after a delay of one year. This delay was a result of the corresponding delay in the information reporting requirements applicable to certain employers, because that information was to be used to calculate the amount of an employer’s shared responsibility payment.¹

Beginning in 2015, employers with at least 50 full-time equivalent employees (FTEs) must offer health insurance coverage meeting specified requirements or pay a $2,000 per full-time worker penalty (after its first 30 employees) if any of its FTEs receive a federal premium subsidy through a state health insurance exchange (which would occur because the employee was not being offered sufficient coverage through the employer and, instead, purchased individual coverage through the exchanges). This penalty is adjusted annually for inflation ($2,080 per employee for 2015, $2,160 for 2016, $2,260 for 2017, $2,320 for 2018, $2,500 in 2019, $2,570 in 2020, $2,700 in 2021, $2,750 in 2022, $2,880 in and $2,970 in 2024 (projected).

A different penalty applies for employers of at least 50 FTEs that offer some type insurance coverage that is not sufficient to meet federal requirements. In this case, the penalty is $3,000 ($3,480 in 2018, $3,750 in 2019, $3,860 in 2020, $4,060 in 2021,  $4,120 in 2022, $4,320 in 2023 and $4,460 in 2024 (projected) per full-time employee who gets government assistance and buys coverage through an exchange, subject to a maximum penalty of $2,000 times the number of full-time employees in excess of the first 30. Proposed regulations provide that an employer with a non-calendar year plan in existence on December 27, 2012 that offers employees affordable coverage, which satisfies the minimum value requirement by the first day of the plan year starting in 2014, will not be assessed a shared responsibility penalty for any period in 2014 prior to the beginning of the next plan year.²

The shared responsibility penalty that is imposed on employers for failing to provide minimum essential health insurance excludes excepted benefits under Public Health Service Act 2971(c). Excepted benefits include long-term care as well as standalone vision and standalone dental plans.

On June 28, 2012, the Supreme Court, in National Federation of Independent Business v. Sebelius,³ upheld the constitutionality of the Affordable Care Act, with only minor changes to certain Medicaid provisions.

Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed. Late in 2019, the 5th Circuit Court of Appeals held that the individual mandate was unconstitutional. The rest of the ACA survived the latest Supreme Court constitutional challenge in 2021 and continues to be effective.

Health care reform required that most Americans have health insurance beginning in 2014, or a monetary penalty is imposed.

Unless exempt, individuals must have major medical health coverage provided by their employer or that they purchase themselves, or, for tax years prior to 2019, they were required to pay a fine that was the greater of a flat amount, or a percentage of income (above the tax filing threshold). The amounts were as follows:

(1)     $95 or 1 percent of income in 2014;

(2)     $325 or 2 percent of income in 2015; and

(3)     $695 or 2.5 percent of income in 2016-2018.¹

Families were to pay half the penalty amount for children under 18, up to a cap of $2,085 per family. After 2016, penalties were indexed to the Consumer Price Index.

Planning Point: Despite the repeal of the federal individual mandate, several states have already enacted their own state-level versions of the mandate. For example, New Jersey adopted its own state-level individual mandate for failure to purchase qualifying health insurance. The New Jersey law references the federal law. Like the federal rule, individuals may be exempt from the penalty if they fail to obtain coverage for religious reasons or if they are incarcerated. The penalty is equal to the amount that would have been owed had the federal mandate not been repealed: the greater of $695 for adults or 2.5 percent of income. The penalty is capped at the average premium cost of a bronze level policy in the state.

Exemptions from the individual penalty were granted for financial hardship, religious objections, American Indians, those without coverage for fewer than three months, undocumented immigrants, incarcerated individuals, those for whom the lowest cost plan option exceeds 8 percent of an individual’s income, and those with incomes below the tax filing threshold.² See Q 8847 for a detailed discussion of these exemptions.

The IRS has recently released guidance for taxpayers who may receive corrected or voided Forms 1095-A relating to prior or current tax years. The information found in Form 1095-A is used in claiming the premium tax credit and in reconciling any advance payments of the credit. It also contains information regarding months of coverage, and the cost of the taxpayer’s coverage.

For tax years beginning in 2014-2017, if the taxpayer has not yet filed his or her tax return, the corrected form should be used in preparing that return. If the return has already been filed, he or she must examine the new form to determine whether the changes will impact that tax return.

Taxpayers should be aware that the following changes will likely impact their tax return: (1) the number of individuals covered, or their ages, (2) monthly premiums for the plan, (3) the cost of the second lowest Silver plan, (4) advance payments of the premium tax credit and (5) months that the taxpayer had coverage. Any of these changes could necessitate filing an amended tax return.

Changes to identifying information likely will not impact the taxpayer, and will not require that he or she file an amended return.

If the taxpayer receives a voided Form 1095-A, it generally means that he or she did not enroll in marketplace coverage and the original form was sent in error (so the form should be disregarded when preparing taxes).¹

Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed.

Beginning in 2014 (and ending after 2018), taxpayers were required to obtain a certain minimum level of health coverage or pay a penalty (known as the shared responsibility provision) for failure to obtain minimum essential coverage unless the individual was statutorily exempted from this requirement. In general, the following exemptions may have been applicable:

1. Religious Exemption. A taxpayer was exempt from the shared responsibility provision if the taxpayer (a) is a member of a recognized religious sect, the teachings of which render the taxpayer conscientiously opposed to accepting benefits provided by any public or private insurance provider that makes payments toward the expenses of obtaining medical care and (b) adheres to the established tenets or teaching of that sect.¹ The religious sect must have been in existence on December 31, 1950 and must be recognized by the Social Security Administration as one that is conscientiously opposed to accepting insurance benefits, including Medicare and Social Security.
2. Foreign Persons Exemption. A taxpayer was exempt from the shared responsibility provision if he or she was not a citizen or national of the United States or an alien lawfully present in the United States.²
3. Exemption for Incarcerated Individuals. A taxpayer was exempt from the shared responsibility provision during any month incarcerated, other than incarceration while awaiting the disposition of the charges that are pending against the taxpayer.³
4. Affordability Exemption. If an individual’s required contribution for health coverage for the month exceeded 8 percent of the taxpayer’s household income for the year (see Q 8850), the taxpayer will not be subject to the shared responsibility provision.⁴
5. Exemption for Individuals not Required to File a Tax Return. Individuals who were not required to file a federal tax return for the year because their income did not exceed the applicable filing thresholds (see Q 8501) were not subject to the shared responsibility provision.⁵
6. Membership in an Indian Tribe. Members of recognized Indian tribes were not subject to the shared responsibility provision.⁶
7. Exemption for Short Coverage Gaps. An individual was not subject to the shared responsibility provision if there was a gap in health coverage for a period that was less than three months. However, if there was more than one such gap in coverage during the tax year, the exemption applied only to the first coverage gap.⁷
8. Hardship Exemption. The Secretary of Health and Human Services may allow exemptions from the shared responsibility provision on a case-by-case basis if it determined that an individual had suffered a hardship and was thereby unable to obtain the required coverage.⁸

In 2018, the Centers for Medicare and Medicaid Services (CMS) announced four new hardship exemptions that could exempt individuals from penalty for failure to purchase health insurance. The exemptions applied if: (1) the individual lives in an area with no available marketplace plans, (2) the individual lives in an area with only one insurer selling marketplace plans, (3) no affordable marketplace plan that does not cover abortion is available or (4) the individual experiences personal circumstances that make it difficult for them to buy a marketplace plan (including lack of access to required specialty care). Individuals claiming these new exemptions will be required to file a brief explanation of their circumstances when filing their application with the health insurance marketplace (individuals can apply for the 2016, 2017 and 2018 tax years).⁹

Both children and senior citizens were subject to the shared responsibility provision. If a child who could be claimed as a dependent did not qualify for an exemption, the taxpayer who could claim that child as a dependent was required to make the shared responsibility payment with respect to the child’s failure to obtain the requisite coverage.¹⁰ See Q 8848 for information on how to claim an applicable exemption.

Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed.

An individual who may have been exempt from the ACA individual penalty provisions could often obtain a certificate of exemption from the health insurance exchanges. With respect to the religious and hardship exemptions, this was the only method of claiming the exemption. Individuals claiming the exemption based upon membership in an Indian tribe or incarceration could either obtain a certificate of exemption from the exchanges or claim the exemption on the federal tax return when the return was filed in the subsequent tax year. Exemptions for lack of affordable coverage, a short coverage gap, and certain hardships were required to be claimed on the taxpayer’s federal income tax return.

Individuals who were exempt from the shared responsibility provision because their income for the year fell below the filing threshold, so that they were not required to file a federal tax return for the year, did not need to take any action in order to obtain the exemption.¹

The IRS has also provided a list of the hardship exemptions that a taxpayer was entitled to claim without first obtaining a hardship exemption certification from the health insurance exchanges.² The hardship exemptions outlined in this notice were available if two or more members of a family had a combined cost of employer-provided health coverage that was deemed unaffordable, a taxpayer’s gross income was below the applicable threshold for filing a tax return, or a taxpayer applied for minimum essential health coverage during the periods described in the notice, or applied for coverage and could not complete the process.

Further, the taxpayer was not required to obtain prior certification if (1) the taxpayer applied for coverage under the Children’s Health Insurance Program and was found eligible, but had a gap in coverage before the program’s effective date, (2) the taxpayer was eligible for services through an Indian healthcare provider or (3) the taxpayer resided in a state that did not expand Medicaid coverage and that taxpayer’s household income was below 138 percent of the applicable poverty line. Taxpayers seeking to claim a hardship exemption that was not outlined by the IRS in Notice 2014-76 were still permitted to apply for an exemption through the health insurance marketplace.

Planning Point: The IRS announced that all taxpayers who qualify for a hardship exemption under 45 CFR 155.605(d)(1) may claim the exemption without first obtaining a hardship exemption certification from the health insurance marketplace. These hardship exemptions include (1) financial or domestic circumstances, including unexpected natural or human-caused events, that cause an unexpected and significant increase in essential expenses that prevented the individual from obtaining qualifying health insurance, (2) situations where the cost of qualifying health insurance would cause the individual to experience a serious deprivation of food, shelter, clothing or other necessities, and (3) other circumstances that prevent an individual from obtaining coverage under a qualified health plan. This expansion is designed to provide added flexibility from the individual health insurance mandate for the 2018 tax year.³

Editor’s Note: The ARPA expanded the premium tax credit rules to provide a more generous ACA benefit for 2021 and 2022. The Inflation Reduction Act of 2022 extended those expanded rules through 2025. Under the preexisting ACA rules, the premium tax credit was only available to taxpayers with household income between 100 percent and 400 precent of the federal poverty line. ARPA generally eliminated the upper income limit and increased the amount of the premium tax credit (by decreasing the percentage of household income that individuals are required to contribute to their health insurance coverage). Under the ARPA, the percentage rates ranged from zero to 8.5 percent of household income (down from between 2.07 percent and 9.83 percent in 2021 under prior law) regardless of how much a family earns. In other words, even taxpayers with household income that exceeds 400 percent of the federal poverty line may be eligible for a credit if their cost of coverage exceeds 8.5 percent of income in 2021-2025. The enhanced credit was generally available for taxpayers who submit a health insurance exchange application and select a plan on or after April 1, 2021. Taxpayers who had previously enrolled in exchange coverage could reselect their plan to qualify for the increased tax credits effective May 1, 2021.

The premium assistance tax credit is a subsidy that can be claimed by certain low-to-moderate income taxpayers in order to offset the cost of health insurance coverage. In order to be eligible to claim the premium assistance tax credit, a taxpayer must meet all of the following requirements:¹

1. The taxpayer must purchase health insurance through the health insurance marketplace (also known as the health insurance exchanges).
2. The taxpayer must have income that falls within certain ranges (see Q 8850).
3. The taxpayer must not be able to obtain affordable coverage through an employer-provided health plan that provides minimum value (see Q 8883 for a discussion of what constitutes “affordable coverage” and Q 8885 for a discussion of plans that provide “minimum value”).

Planning Point: In 2022, the IRS proposed regulations that would change the ACA rules governing premium tax credit eligibility to provide that the affordability of employer-sponsored coverage for the employee’s family would be based on the amount the employee would be required to pay to cover both the employee and eligible family members, rather than the individual employee alone.  Under the existing rules, if the self-only coverage is “affordable” for the employee, coverage is also deemed affordable for a spouse and dependents (meaning that the spouse and dependents would not qualify for the premium tax credit).  Under the new rule, family members would be disqualified only if the cost of family coverage is less than the annual affordability threshold.  “Family coverage” under the new rule means any employer plan that covers related individuals other than the employee (including self-plus-one plans).  The regulations would also create a separate minimum value rule for family members, so that they would not lose premium tax credit eligibility if the employer plan did not provide minimum value to the family members (regardless of its cost).  The regulations are effective for tax years beginning in 2023 and beyond.

4. The taxpayer must be ineligible for government-sponsored health care programs, such as Medicaid and Medicare.

Planning Point: IRS proposed regulations clarify that Medicaid coverage that is limited to COVID-19 testing and diagnostic services under section 6004(a)(3) of the Families First Coronavirus Response Act (FFCRA) does not constitute “minimum essential coverage” under a government-sponsored program.²

5. Generally, a taxpayer who is married must file a joint return (though exceptions exist for certain victims of domestic violence).³
6. No other person may claim a dependency exemption with respect to the taxpayer for the tax year.

Planning Point: IRS final regulations confirmed that the reduction of the personal exemption to zero dollars between 2018 and 2026 does not impact a taxpayer’s ability to claim the premium tax credit. Under the regulations, taxpayers are treated as though they claimed a personal exemption deduction if the taxpayer files a federal income tax return and does not qualify as a dependent of another taxpayer. Taxpayers are also considered to have claimed a personal exemption deduction for any other qualifying dependent, as long as the taxpayer lists the dependent’s name and taxpayer identification number on their Form 1040 for the year.

Individuals with household income (see Q 8850) that falls between 100 and 400 percent of the poverty line (as adjusted based on family size) may be eligible for the premium tax credit. The federal poverty guidelines that exist as of the first day of the annual open enrollment period are used to determine whether an individual is eligible for the credit, so that the 2023 guidelines are used to determine a taxpayer’s credit for 2024.⁴

In 2023, the federal poverty guidelines for the 48 contiguous states (including Washington, D.C.) that determine eligibility in 2023 are:

• $14,580 (100 percent) to $58,320 (400 percent) for an individual;
• $19,720 (100 percent) to $78,880 (400 percent) for a family of two;
• $24,860 (100 percent) to $99,440 (400 percent) for a family of three; and
• $30,000 (100 percent) to $120,000 (400 percent) for a family of four.⁵

In 2022, the federal poverty guidelines for the 48 contiguous states (including Washington, D.C.) that determine eligibility in 2023 are:

• $13,590 (100 percent) to $54,360 (400 percent) for an individual;
• $18,310 (100 percent) to $73,240 (400 percent) for a family of two;
• $23,030 (100 percent) to $92,120 (400 percent) for a family of three; and
• $27,740 (100 percent) to $111,000 (400 percent) for a family of four.

The federal poverty line is modified for taxpayers living in Alaska and Hawaii. If a taxpayer’s primary residence during the tax year changes to a state with a different federal poverty line, or if married taxpayers reside in states with different federal poverty lines, the poverty line that applies is the higher of the two guidelines.⁶ Proposed regulations provide that if a taxpayer’s household income is below 100 percent of the federal poverty line, so that he or she would generally be eligible to claim the premium tax credit, eligibility will be lost if the taxpayer intentionally or recklessly disregards the facts and provides incorrect information regarding household income to the exchanges.⁷

If a retired individual is offered health coverage, he or she may decline the offer of coverage and remain eligible for premium tax credit assistance if he or she is otherwise eligible based on household income. As discussed above, an active employee does not qualify for premium tax credit assistance if he or she is offered employer-sponsored health coverage that is affordable and provides minimum value, even if the employee declines the offer of coverage. A retiree is not considered to be eligible for employer-sponsored coverage unless he or she actually enrolls in the health plan. Further, family members of the retiree who are eligible to enroll in the health plan are not considered eligible for coverage unless they actually enroll in the plan.⁸

The U.S. Supreme Court, in King v. Burwell, held that the premium tax credits are available to all individuals who purchase insurance through an exchange, even if the individual purchased insurance through an exchange established by the federal government.⁹

The amount of the allowable premium assistance tax credit varies based upon a taxpayer’s annual household income and family size. If either the household income level or family size change throughout the tax year, the taxpayer’s allowable credit will increase or decrease accordingly. This becomes important when a taxpayer has chosen to take the premium tax credit in advance (where the credit is paid directly to the insurance company to reduce premiums), rather than retroactively (where the credit is claimed on the taxpayer’s federal income tax return for the year).¹

If the actual allowable credit is less than the advance credit claimed, the difference will be deducted from the taxpayer’s overpayment (tax refund) or added to the amount that the taxpayer owes to the IRS if no tax refund is forthcoming. If the actual allowable credit is more than the advance credit claimed, the reverse is true, so that the difference will be added to the taxpayer’s refund or subtracted from the balance due to the IRS.²

The IRS has released guidance that advises taxpayers to notify the health insurance exchanges if any changes in circumstances have occurred that will alter the amount of the allowable credit in order to reduce the significance of the difference between the advance credit and actual allowable credit.³ Changes in circumstances that can give rise to such a difference include the following:

1. Increases or decreases in household income
2. Marriage
3. Divorce
4. Birth or adoption of a child
5. Gaining or losing eligibility for government or employer-sponsored health insurance⁴

See Q 8850 for a discussion of how household income is calculated for purposes of the premium assistance tax credit.

Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed.

Yes, in some instances. Whether a taxpayer who was otherwise exempt from the shared responsibility penalty remained eligible to claim the premium assistance tax credit depended upon the type of exemption that applied. According to IRS guidance, taxpayers who were exempt because they are incarcerated or not lawfully present in the U.S. are not eligible to claim the premium tax credit. This is the case, however, because these exempt individuals are not permitted to enroll in a health plan through the health insurance exchanges. Individuals who were exempt for other reasons, such as because a religious exemption or affordability exemption applied, would remain eligible to claim the premium tax credit if they otherwise met the requirements for eligibility.¹

See Q 8847 for a detailed discussion of the various exemptions. See Q 8849 for a discussion of the qualification requirements for determining whether a taxpayer is generally eligible to claim the premium tax credit.

Generally, no. According to IRS guidance, a taxpayer is not eligible to receive a premium assistance tax credit even if enrolled in an employer-sponsored plan that is unaffordable or fails to provide minimum value.¹

However, proposed regulations provide that if an individual declines to enroll in employer-sponsored coverage for the year, and does not have an opportunity to enroll in that coverage for one or more succeeding plan years, the individual is treated as ineligible for coverage in the years for which there is no enrollment opportunity (so that he or she will be eligible to claim the premium tax credit). Further, enrollment in an employer-sponsored plan that provides only excepted benefits will not disqualify an individual from receiving the premium tax credit because the individual must also be eligible for minimum essential health coverage (a plan providing only excepted benefits does not qualify as minimum essential coverage).²

Note that if an individual is receiving advance payment of the premium tax credit, he or she will be responsible for notifying the exchange if and when the individual becomes eligible to receive coverage from another source (such as an employer, or through a government sponsored program). Circumstances may exist where the individual notifies the exchange after the time that the exchange can discontinue the advance credit payment for the next month. In this case, the individual will be treated as eligible for the alternative coverage no earlier than the first day of the second month beginning after the month that the individual may enroll in the alternative coverage.³

When a taxpayer applies for health coverage through an exchange, the exchange itself estimates the amount of credit that the taxpayer may be eligible to claim. The taxpayer then determines whether to apply the credit in advance (meaning that it is sent directly to the insurance company in order to offset premium payments) or retroactively (meaning that the taxpayer claims the premium credit on the federal tax return for the year).¹

A taxpayer who receives a premium tax credit is required to file a federal tax return for the year in order to claim the credit. This is true even if the taxpayer would not otherwise be required to file a return because income does not exceed the applicable filing threshold (see Q 8501) for the tax year.²

On this return, the taxpayer must report the amount of premiums paid and any advance premium tax credit payments that have been forwarded to the insurance company on the taxpayer’s behalf. If the taxpayer enrolls in a health insurance plan through the exchanges, the exchange will send the taxpayer a document that shows the amount of the taxpayer’s annual premiums and any advance credit payments by January 31 of the year following the year of coverage.³

Generally, the regulations provide that when determining whether employer-sponsored health coverage is affordable to an employee (so as to determine premium tax credit eligibility), the employee’s required contribution to coverage is considered, and includes the amount by which the employee’s salary would be reduced to enroll in the coverage.¹

IRS has proposed regulations address the impact of an offer of additional compensation in lieu of health coverage under a group health plan (known as “opt out” payments) on premium tax credit eligibility. The proposed regulations provide that if the opt out arrangement is unconditional, the amount made available pursuant to the arrangement increases the employee’s required contribution for premium tax credit eligibility purposes.² This rule recognizes that the promise of additional compensation in exchange for foregoing health coverage is analogous to a salary reduction made in order to obtain coverage.

However, the regulations provide that amounts made available under a conditional opt out arrangement that is an “eligible opt out arrangement” are disregarded. An eligible opt out arrangement is one under which the employee’s right to payment is conditioned on (1) the employee declining to enroll in employer-sponsored coverage, and (2) the employee providing reasonable evidence that he or she, and any dependents, will have coverage other than coverage obtained in the individual market (for example, a spouse’s employer-sponsored coverage) for the year in question.

An employee’s attestation that he or she has alternative coverage is considered reasonable evidence. An eligible opt out arrangement fails to be eligible, however, if the employer knows, or has reason to know, that the employee does not have the alternative coverage. The employer must obtain this reasonable evidence no less often than each year to which the eligible opt out arrangement applies (i.e., as part of the annual open enrollment process).³

Editor’s Note: The ACA individual mandate was repealed for tax years beginning after 2018. However, certain taxpayers may now be impacted by state-level mandates that mirror the ACA mandate.

A taxpayer is treated as having minimum essential health coverage for the month if covered for at least one day during that month. Therefore, if the coverage gap is less than one month, the taxpayer will not be treated as having a gap in coverage and will not be subject to the shared responsibility penalty.¹

Further, an individual will not be subject to the shared responsibility penalty if the gap in coverage lasts for less than three months (see Q 8847). However, this exemption applies only to the first three-month gap in the tax year. If the taxpayer has more than one three-month coverage gap in the same tax year, he or she will be subject to the shared responsibility penalty with respect to the second coverage gap.²

Editor’s Note: The ACA individual mandate was repealed for tax years beginning after 2018. However, certain taxpayers may now be impacted by state-level mandates that mirror the ACA mandate.

In general, yes. However, a taxpayer may be exempt if he or she qualifies for the foreign earned income exclusion under IRC Section 911. Therefore, if a U.S. citizen who is living abroad has not been physically present in the U.S. for at least 330 full days within a twelve month period, the individual will be treated as having obtained minimum essential coverage for that twelve month period. Further, U.S. citizens who are bona fide residents of foreign countries for an entire tax year will be treated as having obtained minimum essential coverage for the year.¹

U.S. citizgens who do not meet the tests outlined above are required to maintain minimum essential health coverage (which can include group health coverage provided by a foreign employer), qualify for an otherwise applicable exemption (see Q 8847) or make the shared responsibility payment.