The IRS released final regulations Tuesday on the Sec. 5000A shared-responsibility payment—the penalty or tax imposed on individual taxpayers who do not obtain minimum essential health care coverage beginning in 2014 (known as the “individual mandate”) (T.D. 9632).
The final rules adopt the proposed regulations issued in January with a few clarifications (REG-148500-12). They also cross-refer to rules issued July 1 by the Department of Health and Human Services governing eligibility for and granting certain exemptions from the shared-responsibility payment, which include circumstances in which insurance exchanges will grant hardship exemptions from the requirement to obtain minimum essential health care coverage (78 Fed. Reg. 39494 (July 1, 2013)).
On Tuesday, the Treasury Department also released a fact sheet discussing the final rules.
Under Sec. 5000A, starting next year, a taxpayer will be liable for the shared-responsibility payment if the taxpayer or any nonexempt individual whom the taxpayer may claim as a dependent for a tax year does not have minimum essential coverage in a month included in that tax year. Married taxpayers filing a joint return are jointly liable for the payment.
The regulations cover the following topics:
- Maintenance of minimum essential coverage and liability for the shared-responsibility payment. Regs. Sec. 1.5000A-1 defines minimum essential coverage and liability for the shared-responsibility payment, including for dependents.
- Minimum essential coverage. Regs. Sec. 1.5000A-2 defines the different types of health plans that qualify as minimum essential coverage.
- Exempt individuals. Regs. Sec. 1.5000A-3 defines who is exempt from the payment.
- Computation of the shared-responsibility payment. Regs. Sec. 1.5000A-4 contains rules for computing the amount of the payment.
- Administration and procedure. Regs. Sec. 1.5000A-5 includes when the payment is due, the prohibition against liens or levies for nonpayment, no criminal fines, and the IRS’s authority to offset overpayments of tax to collect the payment.
Minimum essential coverage is defined as coverage under a government-sponsored program (Medicare, Medicaid, Tricare, the Children’s Health Insurance Program, etc.), an eligible employer-sponsored plan (defined in Regs. Sec. 1.5000A-2(c)), a plan in the individual market (generally insurance through a health care exchange), a health plan grandfathered under the health care acts (the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, and the Health Care and Education Reconciliation Act, P.L. 111-152), or other health benefits coverage that has been recognized as minimum essential coverage by the Secretary of Health and Human Services (Regs. Sec. 1.5000A-2). Exempt individuals include:
- Members of a religious sect whose members oppose government insurance benefits (Regs. Sec. 1.5000A-3(a));
- Members of health care sharing ministries, which are groups that share a common set of ethical or religious beliefs and share medical expenses among themselves (Regs. Sec. 1.5000A-3(b));
- Exempt noncitizens, meaning noncitizens, nonresident aliens, and people who are unlawfully present in the United States (Regs. Sec. 1.5000A-3(c));
- People in jail (Regs. Sec. 1.5000A-3(d));
- An individual who lacks affordable coverage (meaning the individual’s required contribution for minimum essential coverage exceeds 8% of the individual’s household income) (Regs. Sec. 1.5000A-3(e));
- Individuals whose household income is below the filing threshold in Sec. 6012(a)(1) (Regs. Sec. 1.5000A-3(f));
- Members of Indian tribes (Regs. Sec. 1.5000A-3(g));
- Individuals who obtain a hardship exemption certificate certifying that they have suffered a hardship that prevents them from obtaining coverage (Regs. Sec. 1.5000A-3(h)); and
- Individuals who were without coverage for less than three consecutive months (Regs. Sec. 1.5000A-3(j)).
The final regulations were changed from the proposed rules to clarify that medical coverage offered to employees by an organization acting on an employer’s behalf qualifies as an employer-sponsored plan. The final rules also add to the definition of government-sponsored plans that qualify for minimum essential coverage the Nonappropriated Fund Health Benefits Program offered by the Defense Department, and Treasury is considering whether other government programs might qualify. And the final regulations clarify that a self-insured health plan is an eligible employer-sponsored plan, regardless of whether it could be offered in a large or small group market in a state.
Generally, health plans must be offered through an exchange in one of the 50 states or the District of Columbia. However, PPACA permits territories of the United States to create exchanges. Accordingly, the final regulations provide that a qualified health plan offered through an exchange in a U.S. territory meets the definition of a plan in the individual market within a state.
A number of suggestions that the IRS received about the proposed rules were not incorporated into the final regulations, but the IRS will be issuing further guidance or is reserving space in the regulations for that guidance. For example, a rule in the proposed regulations provided for an irrevocable election for taxpayers to use a simplified method to determine the cost of a health plan in the rating area where the taxpayer resides. In response to a request to make the election revocable, the IRS removed the election and reserved the space to offer a different rule. The regulations apply to months beginning after Dec. 31, 2013, when the Sec. 5000A penalty first applies. In 2012, the individual mandate was upheld by the U.S. Supreme Court as a permissible exercise of Congress’s taxing powers under the Constitution ( National Federation of Independent Business v. Sebelius, Sup. Ct. Dkt. No. 11-393 (U.S. 6/28/12)).