For 2015 tax returns, individuals and their tax advisers continue to gain familiarity with the premium tax credit, individual mandate, and a few earlier provisions such as the net investment income tax. This article summarizes the significant items in the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, that affect individuals this filing season and those relevant to tax year 2016.
Premium tax credit
Basics: The premium tax credit (PTC), a refundable tax credit that can be paid to qualifying taxpayers in advance, applied beginning in 2014. It is intended to make health insurance affordable for individuals who do not have coverage from other sources, such as an employer or the government. The PTC amount is computed using the cost of the second lowest cost silver plan (SLCSP) less the amount the insureds are deemed to be able to contribute based on their income (as computed under Sec. 36B). Most eligible individuals will claim the PTC in advance (advance PTC) through reduced monthly insurance premiums.
Under Sec. 36B and its regulations, to qualify for the PTC, a taxpayer:
- Must have purchased coverage through a health insurance marketplace (also referred to as an exchange). The individual will receive Form 1095-A, Health Insurance Marketplace Statement.
- Must have household income (Sec. 36B(d)(2)) of at least 100% of the federal poverty line (FPL) and not more than 400% of the FPL. The FPL figures are included in the instructions to Form 8962, Premium Tax Credit, and are also provided by the Department of Health and Human Services (HHS). The prior year FPL figures are used.
- Must not have minimum essential coverage (Sec. 5000A(f)) offered by the employer (that also had minimum value (Sec. 5000A(c)(2)(C)(ii)) that is affordable. For 2015, affordable means the self-only coverage offered cost the employee no more than 9.56% of household income (Rev. Proc. 2014-37) (for 2014, the affordability factor was 9.5%, but it is inflation-adjusted). If the employer also offered coverage to other family members, they are not eligible for the PTC if the self-only coverage for the employee was affordable.
- Did not obtain employer-provided coverage even if defined as unaffordable.
- Is not eligible for government-sponsored coverage, such as Medicare.
- Is not a dependent.
- If married, files jointly unless the abused spouse rule applies (Temp. Regs. Sec. 1.36B-2T(b)(2)).
Example: J, age 30, meets the PTC eligibility requirements. Her household income for 2015 is $30,000. She purchased a silver plan from the marketplace that cost $348 per month. The cost of her SLCSP (also referred to as the benchmark plan) was $312 per month. J’s income was 257% of the FPL ($30,000 ÷ $11,670). Using this figure, she determines that her applicable percentage is 8.30% (see the Form 8962 instructions and Rev. Proc. 2014-37, which provide the updated amounts for 2015).
This means that J is deemed able to contribute $207.50 per month to the cost of the SLCSP (one-twelfth of $30,000 × 8.30%). The balance of the cost of the SLCSP represents her PTC of $104.50 per month ($312 ‒ $207.50). J’s 2015 Form 1095-A provides the following information for each month: (1) cost of the insurance she actually purchased, (2) SLCSP cost, and (3) advance PTC (if any). J uses this information to compute and reconcile her correct PTC on Form 8962. Assuming she claimed $80 per month as advance PTC, her 2015 Form 8962 would show the following:
Cautions: While for many individuals, reconciliation of the actual PTC on Form 8962 will be straightforward, for others, there may be some complications. Consider some of the following cautions and reminders:
- Be sure to ask all individual clients if they received Form 1095-A for themselves or anyone in their family so you know if they purchased insurance from the marketplace and if they have to reconcile any advance PTC using Form 8962 (or to claim one for the first time on Form 8962). Practitioners should also ask individuals if they purchased insurance through the marketplace in case they did but did not receive their Form 1095-A. See this HHS website for assistance with a missing Form 1095-A.
- A shared policy allocation or alternative PTC calculation may be needed if individuals married or divorced during the year or a covered dependent is claimed by someone else. See the instructions to Parts IV and V of Form 8962 and IRS Publication 974, Premium Tax Credit.
- If the individual with marketplace coverage did not alert the marketplace that he or she moved or the family size changed, the SLCSP information on Form 1095-A is likely incorrect and needs to be revised. The HHS website provides assistance with this problem, including a link to a “tax tool” to help find the correct SLCSP information.
- An individual may have received an advance PTC that is too high and have to repay all or a portion of it. That repayment liability may result in an estimated tax penalty. For 2014, the IRS provided relief from this penalty (Notice 2015-9); as of Feb. 11, 2016, no such relief has been offered. (Note: Repayment of excess advance PTC means that the individual’s household income was greater than originally estimated. Individuals obtaining insurance from the marketplace should notify the marketplace of changes in income when they occur so that adjustments to the advance PTC can be made going forward.)
- An individual must repay all of the advance PTC if household income exceeds 400% of the FPL, which is the “cliff” after which a taxpayer will not qualify for the PTC. Exceeding the cliff might be caused by unexpected income such as a year-end bonus or gambling winnings. To avoid this result, determine if the individual can make a deductible IRA contribution by the original due date of the return to lower household income to qualify for the PTC.
- Individuals claiming the advance PTC who expect to continue to do so for 2017, should file their 2015 return before the extended due date of Oct. 17, 2016 (Oct. 15 is a Saturday). The marketplace needs the return information as part of the open enrollment process that starts in the fall (see IRS Letter 5591).
- A self-employed individual claiming the PTC faces a circularity problem in calculating the PTC because the PTC is based on modified adjusted gross income (AGI), which, in turn, is affected by the self-employed insurance deduction. Rev Proc. 2014-41 provides a solution.
- New for 2015 is Form 1095-C, Employer-Provided Health Insurance Offer and Coverage Insurance. This form, which is issued to full-time employees (30 or more hours per week) by “applicable large employers” (those with 50 or more full-time and full-time equivalent employees), helps the IRS determine which employers owe the employer assessable payment under Sec. 4980H. It also informs the employee and IRS of whether the worker had coverage for every month of the year. Line 15 reports for each month the employees’ cost of the lowest cost, self-only coverage offered to them. This information might also be relevant for individuals to know to determine if they are eligible for a PTC (assuming they purchased coverage from the marketplace). Recall that one of the eligibility factors for the PTC is that employer-offered coverage is not affordable. What if the information on line 15 indicates it was affordable? The marketplace used estimated household income in determining eligibility. Per the Form 8962 instructions, obtaining the PTC indicates that the coverage was not affordable. These instructions also refer to the individual providing “accurate information” to the marketplace. Thus, it seems that an assumption can be made that if the marketplace gave the taxpayer an advance PTC, it determined the taxpayer was eligible. Also see information and examples in IRS Publication 974. Additional guidance from the IRS would be helpful to know when, if ever, individuals or preparers are to use Form 1095-C information to determine eligibility for the PTC that was claimed in advance.
- Individuals who obtained coverage in the marketplace who are also eligible for the health coverage tax credit (Sec. 35) must review Notice 2016-2 for guidance on the interaction of these provisions. See here for a discussion.
2016 changes: Several elements of PTC eligibility and computation change annually. For example, the FPL amounts change annually, as do the “applicable percentage” and the affordability factor. For 2016, a policy offered by an employer will be considered unaffordable if it costs the employer more than 9.66% of household income (Rev. Proc. 2014-62).
Errors and IRS activities: IRS review of the PTC will likely continue or even accelerate. An individual who receives an advance PTC must file a return (Form 1040-A or 1040) to reconcile it to the actual PTC. The IRS should be able to easily find these problems because Form 1095-A indicates who received an advance PTC and needs to file a return. The IRS website notes the following two possible notices related to the PTC:
- CP06: “We’re auditing your tax return and need documentation from you to verify the Premium Tax Credit (PTC) that you claimed. We are holding all or part of your refund, pending the result of this audit, because of this discrepancy with your PTC.”
- CP06A: “We’re auditing your tax return and need documentation from you to verify the Premium Tax Credit (PTC) that you claimed.”
The National Taxpayer Advocate Annual Report to Congress, 2015 (released in January 2016) suggests that one PTC matter is a “serious problem.” The report describes one of the PPACA problems as follows:
[T]he pre-refund Automated Questionable Credit (AQC) procedures for PTC mismatches are identical to and impose the same burden as post-refund PTC examinations, yet the IRS maintains it can conduct both a pre-refund AQC review and a post-refund audit of another issue, thereby undermining the important statutory protection against multiple audits.”
Another recent development relevant to the advance PTC comes from the Consolidated Appropriations Act, 2016, P.L. 114-113. Among its many tax changes is a reversal of the Rand decision (141 T.C. 376 (2013)) (P.L. 114-113, Division Q, §209). Now an understatement of tax subject to penalty can include an erroneous refund of the PTC (see Sec. 6664, JCX-144-15 (pp. 138–140), and CC-2016-004).
Individual shared-responsibility provision
Basics: Sec. 5000A imposes a penalty on individuals who do not have health coverage for any month of the year and are not exempt for that month. This payment, first effective in 2014, is referred to as the individual shared-responsibility provision (ISRP) on the IRS website. To comply with the ISRP:
- Determine whether all members of the “shared responsibility family” (Regs. Sec. 1.5000A-1(d)(4)) had coverage for all months of 2015. If yes, check the box on line 61 of Form 1040 (or equivalent on Form 1040-A or 1040-EZ), and nothing more is needed.
- For any months when someone did not have coverage, determine whether an exemption is met. If yes, complete Form 8965, Health Coverage Exemptions, and file it with the return. The exemptions are described in Sec. 5000A and the regulations, in a table on the IRS website, and in the Form 8965 instructions. In addition, interactive tools about exemption qualification are provided by the IRS and HHS. A few of the exemptions require an application and certificate number from HHS.
- For any month with no coverage or exemption, a payment is owed. The payment amount is phased in for 2014 and 2015. The penalty calculation is the greater of (A) or (B) below. Form 8965 includes worksheets for computing the penalty, which is reported on line 61 of Form 1040 (or equivalent on Form 1040-A or 1040-EZ). The maximum penalty amount is capped at the national average bronze premium amount. For 2015, this amount is $207 per individual per month (Rev. Proc. 2015-15).
2017 and beyond
(A) Flat dollar amount
(limited to 3 times the flat dollar amount)
(50% if under age 18)
(50% if under age 18)
(50% if under age 18)
Dollar amount is adjusted for inflation each year
(B) Percentage of household income less the filing threshold
The National Taxpayer Advocate website has a calculator for the penalty.
New for 2015: In addition to a higher possible penalty for 2015, also new are reporting forms individuals will receive about their health coverage. As noted earlier, full-time employees who worked for an “applicable large employer” (ALE) in 2015 will receive Form 1095-C. If an ALE self-insures, all covered employees will receive Form 1095-C. In addition, anyone with insurance (other than from the marketplace) will receive Form 1095-B, Health Coverage. These forms indicate who had health insurance during the year. Thus, they are useful in answering the Form 1040, line 61, question about whether the family had health coverage.
Like Form 1095-A, Forms 1095-B and 1095-C are due to the individual by the end of January. However, just for 2015 forms, the IRS gave issuers of the Forms 1095-B and 1095-C additional time to file. Under Notice 2016-4, Forms 1095-B and 1095-C are due to individuals by March 31, 2016. The IRS notes that individuals need not wait to receive these forms before filing (also see IRS website on the 1095 forms). There are other ways practitioners can verify if a client has coverage (as was done in filing 2014 returns).
New for 2016: The Sec. 5000A penalty will be fully phased in for 2016. As of this writing, the IRS had not published the penalty cap (lowest cost national average bronze level plan). After learning of a Sec. 5000A penalty amount for 2015, an individual might decide to obtain insurance to reduce his or her penalty amount for 2016. In early 2015, the marketplace open enrollment period was extended to April 15, 2015. In a Dec. 7, 2015, blog post, HHS indicated that the extension would not be repeated and the open enrollment period for healthcare.gov would end Jan. 31, 2016.
An exemption that applies to many uninsured individuals is affordability. This exemption is met if the cost of coverage exceeds a specified percentage of household income (as measured per Sec. 5000A(e)). The percentage is adjusted annually. It was 8.0% for 2014, 8.05% for 2015 (Rev. Proc. 2014-37), and 8.13% for 2016 (Rev. Proc. 2014-62).
Errors and IRS activities: IRS review of returns will indicate if the filer failed to attach Form 8965 or pay the penalty (line 61 is blank and there is no Form 8965) or paid too much penalty. IRS Notice 5600C lets a filer know he or she may have paid a higher Sec. 5000A penalty than required (the IRS may have determined that either the affordability or income below the filing threshold exemption was met). (Also see discussion on this issue in the National Taxpayer Advocate Annual Report to Congress, 2015 (page 170).)
Additional notices the IRS has for the ISRP:
- CP14H: “We sent you this notice because you owe money on an unpaid shared responsibility payment.”
- CP15H: “Your shared responsibility payment (SRP) assessment is due to a recalculation based on changes to your income tax liability. Your examination results are addressed in a separate correspondence.”
Net investment income tax
The net investment income tax (Sec. 1411) has been in effect since 2013 with no changes. In addition, the threshold amounts are not adjusted for inflation. A few reminders:
- Tax planning considerations must include the net investment income tax as an increase in AGI might make an individual subject to the net investment income tax.
- Per Regs. Sec. 1.469-11(b)(3)(iv), in the first year an individual is subject to the net investment income tax, he or she has a one-time opportunity to regroup his or her passive activities (per Regs. Sec. 1.469-4). Practitioners should determine if their tax prep software asks this question so they are sure not to miss what might be an excellent and rare regrouping opportunity for the client.
- Proposed regulations on dispositions of certain interests in passthrough entities remain to be finalized (Prop. Regs. Sec. 1.1411-7). The preamble, though, notes earlier application:
“To coordinate these proposed regulations with the 2013 Final Regulations [T.D. 9645 (11/29/13)], the proposed regulations are proposed to have the same effective date as the 2013 Final Regulations. However, any provisions adopted when these proposed regulations are finalized that are more restrictive than these proposed regulations would apply prospectively only. Taxpayers may rely on these proposed regulations for purposes of compliance with section 1411 until the issuance of these regulations as final regulations. See §1.1411-1(f)” (see REG-130843-13 (12/2/13).
The following websites have helpful resources for PPACA matters.
- AICPA: aicpa.org/Research/HCR/Pages/Health-Care-Reform.aspx
- IRS: irs.gov/Affordable-Care-Act
- National taxpayer advocate: taxpayeradvocate.irs.gov/get-help/aca
- HHS: hhs.gov/healthcare
Relative to other individual tax rules, the PTC and ISRP are fairly complex provisions that have numerous definitions, exceptions, and special rules. And these topics involve more than tax rules—they involve health insurance and various eligibility rules. As with last filing season, there may be more IRS guidance addressing problem areas (such as Notice 2016-4 extending the due date for Forms 1095-B and 1095-C). Will it be easier this filing season? Time will tell.
Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and maintains the 21st Century Taxation blog.