Beginning with tax year 2020, the state of California requires residents and their dependents to obtain qualifying health care coverage, also referred to as Minimum Essential Coverage (MEC). Individuals who fail to maintain MEC for any month will incur an Individual Shared Responsibility Penalty unless they claim an exemption. The penalty for not having full-year MEC is calculated using the worksheets in the instructions for Form 3853, Health Coverage Exemptions and Individual Shared Responsibility Penalty, along with the exemption information provided in the form itself.
The form has three parts:
- Part I lists the applicable household members along with their modified AGI and Exemption Certificate Number (ECN) from Covered California, the California Healthcare marketplace, if any.
- Part II consists of a single check box to be checked if the taxpayer is claiming a coverage exemption because their applicable household income or gross income is below the filing threshold.
- Part III lists for each member of the household and for each month of the year whether or not they were either covered by MEC or had an exemption.
Preparing Form 3853 may entail the use of one or both of two affordability worksheets in the Form 3853 instructions. The two worksheets have similar sounding names but have different purposes:
- Affordability Worksheet - This worksheet is used to determine whether coverage for each individual in the taxpayer's applicable household is considered unaffordable for the purpose of claiming exemption code A or B.
- Marketplace Coverage Affordability Worksheet - This worksheet is used to calculate an individual’s required contribution for any month in which the individual is not eligible for employer-sponsored coverage and who does not otherwise have a coverage exemption. If used, this worksheet produces the annualized required contribution to be plugged into each month in the affordability worksheet.
Depending on the household, a return might need to utilize one, both, or neither of the affordability worksheets.
Overview of the Form 3853 menu:
Part I - Marketplace-Granted Coverage Exemptions - If anyone in the household has an ECN from Covered California, enter it here and indicate the months covered by that exemption. Space for up to three ECNs is provided for an individual. (If an ECN has been applied for but the application is still pending, enter PENDING in the Exemption Certificate Number field.)
There are fifteen exemptions to the penalty, but three of them can only be granted by Covered California. If the taxpayer is indicating one or more coverage exemptions on Form 3853, these three can only be chosen if the taxpayer has a corresponding ECN from Covered California or has a pending application for an ECN:
- General hardship (exemption code K)
- Members of certain religious sects (exemption code L)
- Coverage considered unaffordable based on projected income (exemption code M).
Household or Gross Income Below Filing Threshold - If the return's household income or gross income is below the filing threshold, that will be indicated on this line and the check box in Part II will be checked. (This menu line is not editable.)
Coverage Affordability Worksheet Currently Being Used - When Form 3853 is initially begun, the Coverage Affordability Worksheet is not being used. If you need to use it, select this line.
The Coverage Affordability Worksheet is used to determine if the return qualifies to use exemption code A, "Coverage considered unaffordable" or B, "Aggregate self-only coverage considered unaffordable". Marketplace coverage or employer-based coverage is considered unaffordable for an individual in the household if the individual’s required contribution is more than 8.24% of applicable household income.
Part III - Coverage Exemptions - Use this to enter coverage exemption codes for each individual in the return, if any, for months in which the individual had no health care coverage but qualifies for one of the exemption codes. See the Form 3853 instructions for the available codes.
Note: Exemption code M is not the same as "Coverage considered unaffordable" (exemption code A) which is a determination based on actual household income calculated at the end of the tax year. Nor is it the same as "Aggregate self-only coverage considered unaffordable" (exemption code B) which is a determination that coverage is unaffordable due to either the aggregate cost of self-only employer-sponsored coverage for two or more household members, or the cost of any available employer-sponsored coverage for the entire applicable household, is more than 8.24% of household income.
Shared Responsibility Payment - In addition to showing the penalty calculation, this menu contains two important submenus:
- Household Income - Use this menu to include in the affordability threshold calculation dependent income and premiums paid through a salary reduction arrangement. Note: See the instructions to determine whether or not a dependent's income needs to be included in the Household Income calculation.
- Edit Shared Responsibility Payment Individuals - This menu line is used to indicate for each individual in the household the months where they had no coverage and no exemption. The information here flows to Worksheet A. Note: If you've already indicated in the Part I menu the months covered by a marketplace-granted exemption with an ECN, you don't need to indicate those months here.
Under this menu is also a line with a yes/no question, "Elected Not to Claim a Dependent You could have Claimed". This question is for informational purposes, and the answer doesn't affect the Shared Responsibility Penalty calculation and isn't reflected on the form itself.
Entering Information into TaxSlayer Pro
Form 3853 isn't needed if everyone in the household had MEC for the entire year. To indicate that everyone was covered by MEC, from the California Tax Return Menu select:
- Personal Information
- Other Categories
- Taxpayer has Full year minimum essential health care coverage for [year]? - Answer Yes.
Otherwise, to access Form 3853 to calculate the penalty and/or indicate coverage exemptions, from the California Tax Return Menu select:
- Refund or Amount Due (whichever is specified)
- Health Care Shared Responsibility Tax - This will open the Form 3853 menu:
- Part I - Marketplace-Granted Coverage Exemptions - If anyone has an exemption granted by Covered California with an ECN, select this menu and enter the information.
- Coverage Affordability Worksheet Currently Being Used - If the taxpayer is claiming exemption code A or B, select this line to complete the Affordability Worksheet.
- Edit Shared Responsibility Individuals - Select this line and for each individual in the return indicate the months in which they had no coverage and no exemption. (Months in which they either had coverage or an exemption should be unchecked.)
- Household Income - If the household income needs to be adjusted for dependent income or premiums paid through a salary deduction arrangement, select this line and adjust as needed.
- Edit Household Required Annualized Contribution Amounts - For the taxpayer and spouse on MFJ returns, enter for each their required annualized contributions.
- Marketplace Coverage Affordability Worksheet - Select and enter the monthly premiums for the lowest cost bronze plan and the second lowest cost silver plan. The menu includes a link to Covered California to look up these two amounts.
- Part III - Coverage Exemptions - Everyone in the return needs to have an entry in this menu, indicating either that they (a) had health coverage (code Z), (b) had no coverage and no exemption (code X), or (c) are claiming an exemption (codes A - N).
To create an entry for each individual in Part III:
- Select New.
- Select the individual from list.
- Indicate the appropriate code for each month.
Note that exemption code A won't be in this menu if you have indicated that the Affordability Worksheet is being used.
- Shared Responsibility Payment - This menu line displays the calculated shared responsibility. Select it for several important submenus.
- Elected Not to Claim a Dependent You could have Claimed - Answer Yes if appropriate.
- Household Income - Select and edit if needed.
- Edit Shared Responsibility Payment Individuals - For each individual in the return, indicate the months they had no health care coverage and no exemption. (Months in which they either had coverage or an exemption should be unchecked.) Note: If you completed the Affordability Worksheet, this information will already have been entered there.
Note: This article is intended to assist in the preparation of California Form 3853 in the TaxSlayer Pro program. It is not intended as tax advice.