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 the 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.
Additionally, there are two affordability worksheets in the Form 3853 instructions with similar sounding names, but they have different purposes:
- Coverage Affordability Worksheet - This worksheet is used to determine whether coverage for each individual in the taxpayer's applicable household is considered unaffordable.
- 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.
Depending on the household structure, a return might need to utilize both affordability worksheets.
To access Form 3853 to calculate the penalty and/or indicate coverage exemptions, from the California Tax Return Menu (Form 540 or 540NR) select:
- Refund or Amount Due (whichever is specified)
- Health Care Shared Responsibility Tax
Overview of the Form 3853 menu:
Part I - Marketplace-Granted Coverage Exemptions - If anyone in the household has an ECN from Covered California, the California healthcare marketplace, 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 the Marketplace. 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 Exemption Certificate Number (ECN) from the Marketplace 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 the exemption code A, "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.
California FTB: Form 3853 instructions (instructions may not yet be published to the website)