CLAIMING HEALTH COVERAGE EXEMPTIONS BY FILING FORM 8965
The Affordable Care Act, through the Federal individual mandate, required you to obtain a health coverage insurance plan (minimum essential coverage) failing which you had to cough up a penalty tax called the shared responsibility payment. The intention behind prescribing the penalty was to encourage everyone to obtain insurance coverage if you are not eligible for the cover through your employer or a government-sponsored program. You paid the shared responsibility amount at the time of filing your tax in case you were not covered for all the months of the tax year. If you had valid reasons to not obtain the coverage, you could seek exemption from the mandate. You would have used Form 8965 not only to report the details of the plan you had subscribed to but also availed yourself of any exemptions you were eligible for. From the tax year 2019 onwards, the shared responsibility payment was reduced to zero at the Federal level thus obviating the need to seek exemptions. But, at the State level, you are still required to pay the penalty tax in case you failed to obtain the required coverage. It would be therefore instructive to learn how you could obtain exemptions – which you could claim when you filed your federal tax return earlier. You would also need to know these if you need to file 2018 and earlier tax year returns.
You could get exemption from the individual mandate plan two ways at the Federal level. The States which insist on charging you a penalty tax have exemptions broadly on the lines of the Federal exemptions. You could directly claim these when you filed your federal tax return by furnishing Form 8965 or you get prior approval through the Health Insurance Marketplace and report it on Form 8965.
You could claim the following exemptions on Form 8965:
- Income-related: Your income is below the tax filing threshold.
- Affordability: The insurance plan available to you costs more than 9.83% of your household income (for the tax year 2021).
- Short coverage: You did not have insurance coverage for a period of fewer than three months during the tax year. Also, the State in which you live does not have an expanded Medicaid program and your income is below 133% of the Federal poverty line.
- Membership: If you were a member of a federally recognized Indian tribe or you are eligible for services of an Indian Health Service Provider; you were part of a health care ministry where members of the religious group pay for each other’s medical bills.
- Incarceration: You were incarcerated during the year (except when pending disposal of charges).
- Residence: You were outside the US for a period of at least 330 days during the tax year.
You will need to seek prior approval through the Health Insurance Marketplace and obtain an Exemption Certificate Number for the following exemptions:
- If you are a member of a religion or sect which does not believe in obtaining insurance in any form including social security, Medicare, or Obamacare.
- If you faced a general hardship resulting in your not being able to obtain coverage. These can include bankruptcy, a victim of domestic violence, death of a close family member, eviction or foreclosure, high debt from medical bills, etc.
- You did not have access to a plan which was affordable given your household income.
- You were covered by short cover insurance or a self-funded insurance plan through AmeriCorps, VISTA, etc.
These exemptions are granted by the Government on a case-to-basis and so you need to apply for the same much earlier than the start of the enrolment period.
States which require you to have health insurance
Five States viz., California, Massachusetts, New Jersey, Rhode Island, Vermont, and the District of Columbia, Washington require you to have health insurance coverage. I do not have the necessary coverage, be prepared to pay the penalty if you are living in any of these places. You will find below the details of the individual mandates of the five States where you have to pay a penalty for not having health insurance coverage despite being able to afford it. Except for Washington DC and Vermont, these States provide subsidies for lower-income residents.
The individual mandate provisions came into effect on January 1, 2020. Broadly, as a California resident, you are eligible for exemptions on the lines of the Federal exemptions. Penalties for not having health insurance in the tax year 2021 are the higher of a flat amount of $800 per adult and $400 per child in your household or 2.5% of the amount exceeding the filing threshold for your filing status. The penalty you would have to pay however is capped at the average premium of the bronze level i.e., the lowest insurance plan offered by the California exchange. The other plans are silver, gold, and platinum. Bronze through platinum plans ranges between the least comprehensive coverage and the most comprehensive.
Massachusetts was the first US State to introduce the individual mandate as far back as January 1, 2006, and it is believed that the individual mandate under the Affordable Care Act was based on the Massachusetts plan. You will have to subscribe to a health insurance coverage plan considered affordable by the Massachusetts Health Connector. Exemptions are broad as per the Federal exemptions including religious beliefs and hardships. You will not be penalized for not having insurance if no affordable insurance plan is available as per the State affordability schedule. Also, you will not be penalized if your income is at or below 150% of the federal poverty level. The penalty you will have to pay cannot be more than 50% of the least monthly premium of the plan you would qualify for through the Health Connector. If your income is between 150.1% and 300% of the federal poverty line, your penalty will be 50% of the lowest monthly premium of the insurance plan available for your income level. If your income level exceeds 300% of the federal poverty line, you will need to pay a penalty equal to 50% of the cost of the lowest bronze plan.
The individual mandate came into effect in New Jersey on January 1, 2019. Exemptions from obtaining insurance cover are almost the same as the Federal exemptions. The penalty is higher of the per-person charge or 2.5% of your household income. This penalty is capped at the average annual premium of the bronze plans offered by the Insurance Marketplace.
Rhode Island’s individual mandate came into effect from January 1, 2020. Exemptions you can claim are basically the same as the Federal ones. Penalties are higher of the per-person charge or 2.5% of your household income (calculated as modified adjusted gross income minus the federal standard deduction). The penalty cannot exceed the average annual premium of the bronze plan of Rhode Island.
The individual mandate was introduced in Washington DC with effect from January 1, 2019. If you do not have an ACA-compliant health insurance cover, you will be penalized when you file your income tax return. The penalty would be higher of $695 for adults and $347.50 for children (limited to $2,085 for a family) or 2.5% of the household income in excess of the filing threshold. The maximum penalty is, like other states, limited to the average annual premium of the bronze plan. Washington provides exemptions on the lines of the federal health insurance exemptions.
The individual mandate came into effect in Vermont on January 1, 2020. However, unlike the other States, Vermont does not a monetary penalty if you do not have insurance. You are only required to report the details of the insurance plans you have subscribed to at the time of filing your tax return. Apparently, the intention is to gather data about insurance coverage among taxpayers and consider incentivizing or penalizing recalcitrance.
Position in other States
Some other states like Connecticut, Hawaii, Maryland, Minnesota, and Washington are taking steps to introduce the individual mandate.
Maryland has introduced The Maryland Easy Enrollment Insurance Program. If you are a Maryland resident, you will be required to report your insurance coverage status. The Maryland Health Benefit Exchange will try to persuade the non-insured to seek minimum insurance coverage. However, reporting requirements for the tax year 2021 have not yet been released.
Connecticut made three attempts to introduce some form of insurance coverage plan mainly requiring employers to arrange insurance cover for their employees. However, these bills were not passed.
Hawaii Senate passed a bill in March 2018 to introduce an individual mandate on the lines of the Affordable Care Act including a penalty. However, this was not passed out by the House Finance Committee.
Washington Senate passed a bill in February 2018 to form a task force to implement and enforce a state-level requirement for minimum insurance coverage. But this bill could not be passed before the closure of the House.
You will observe from the above that several States are attempting to replace the ACA individual mandate with their own individual mandates. There is also speculation that the Biden administration may re-introduce the tax penalty for not having insurance coverage.
To help you with your tax planning and insurance-related matters, you could also look up our article on Premium Tax Credit. Whenever matters such as health insurance exemptions and state/federal level healthcare taxation come into the picture, it is also a good idea to take the aid of professional CFO USA services.