Health Insurance Reporting Gap May Hurt Wealthy Clients

Editor: Valrie Chambers, Ph.D., CPA

Individuals

Many practitioners may be under the impression that the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, is not going to affect their individual clients. The clients represented by practitioners may already have health insurance for themselves and for their dependents through their employer or purchased individually.

As of the date of this writing, however, questions of substantiating coverage for 2014 remain unanswered, meaning practitioners and their clients should be taking action to avoid substantial potential penalties under PPACA.

Implementation of PPACA’s “employer mandate” to provide “minimum essential coverage” to employees was delayed by the Obama administration from 2014 to 2015. However, the so-called individual mandate was not delayed—the requirement that individuals maintain minimum essential coverage for themselves and their dependents, purchased either via an employer or individually. Accordingly, for each month in 2014, individuals who do not maintain minimum essential health care coverage under PPACA may be subject to a potentially significant penalty.

That penalty, for a full year of noncompliance, is the lesser of (1) the national average premium for “bronze-level” coverage offered through PPACA exchanges for the applicable family size, or (2) the greater of (a) 1% of household modified adjusted gross income above the applicable income tax filing threshold, or (b) $95 multiplied by the number of family members without coverage (but not above three). A bronze plan pays 60% of total average costs of benefits it covers. Note that the penalty amount grows to $325 in 2015 and $695 in 2016 and after, and the excess household income percentage increases to 2% in 2015 and 2.5% in 2016 and thereafter.

Wealthy clients usually have health insurance that meets or exceeds the minimum essential coverage threshold. However, the potential problem is documentation and evidence of coverage.

Beginning in 2015, under PPACA, insurance companies and certain other carriers and sponsors will be required to report the coverage provided to insureds on Form 1095-B, Health Coverage, and employers subject to the employer mandate will report offering minimum essential coverage to their employees on Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. But the delay of the employer mandate to 2015 also delayed the requirement that these two forms be issued to the IRS and insured individuals. As a result, for all of 2014, there is a reporting gap during which neither employers nor insurers nor any other third party is required to report that they offered or provided minimum essential coverage to individuals.

This raises the question: If a 2014 federal income tax return is examined by the IRS, what documentation will be required to prove that the individual had coverage for all 12 months of 2014? Given the absence of Form 1095 reporting, an individual is at risk of being charged the penalty if appropriate documentation is not retained. At 1% of household income above the filing threshold (or the average bronze-level premium), the penalty could obviously be substantial. Under Rev. Proc. 2014-46, for 2014 the maximum monthly national average bronze plan premium is $1,020 for a “shared responsibility family” with five or more members, or $12,240 a year.

Of course, each taxpayer is responsible for retaining documentation that appropriately supports income and deductions. Clients represented by practitioners are, in general, aware of this requirement and dutifully maintain such records. However, most individuals are probably unaware of the 2014 reporting gap as well as the associated recordkeeping requirements regarding the maintenance of coverage for themselves and their dependents.

At this time, no information has been provided by the IRS’s Affordable Care Act office on how health care coverage can be substantiated by individuals in 2014. Notwithstanding this lack of guidance, it is probably prudent to inform clients that they should gather information regarding their 2014 health insurance coverage now, such as the terms of their policies, whom the policy covers, and the period that the policy covers in 2014. Clients who leave their employers during or after 2014 may not be able to obtain their 2014 coverage information via employer websites, as they may no longer have access to them.

Practitioners will likely need to ask clients to attest to PPACA compliance, much as they now ask clients to disclose on an annual tax organizer or questionnaire whether they owned any foreign bank accounts.

The AICPA Tax Division will be working closely with the IRS and will provide guidance when it is available.