Affordable Care Act - Overview What is the Affordable Care Act?
The Patient Protection and Affordable Care Act (ACA) was enacted on March 23, 2010. The intended purpose of the ACA, (among many other items), was to expand health care coverage by imposing a mandate on individuals to maintain minimum essential health coverage and create a federal subsidy for the health care premiums for certain individuals that qualify. The Affordable Care Act (ACA) impacts taxpayers primarily in the following ways.
- it creates a requirement (known as the individual mandate) that all persons covered by the ACA either have minimum essential health coverage or an exemption from that coverage or be subject to a shared responsibility payment;
- it requires any person (taxpayer, spouse or dependent(s)), who acquired their health coverage through the Federal Marketplace or a state-run exchange to reconcile any subsidy that they received towards paying for the health insurance premiums;
- it added certain taxes on some investments (Net Investment Tax) and raised the adjusted gross income percentage limitations on Schedule A, Form 1040 medical deductions.
How does the Affordable Care Act affect the tax return?
The tax return (Form 1040) is where individuals covered by the ACA whose gross income exceeds the threshold for filing a tax return are required to report if they have full-year minimum essential health care coverage for every person (taxpayer, spouse and dependent(s)) listed on the tax return. Any covered individual that does not have full-year minimum essential health care coverage will have to account for any lack of coverage, any exemption from coverage, and/or calculate any shared responsibility payment (aka penalty) on the tax return.
Also, when any person on the return (taxpayer, spouse or dependent(s)) regardless of filing threshold requirements, acquired their health coverage through the Federal Marketplace or a state-run exchange, it is on the tax return that they reconcile any Premium Tax Credit that they may have received.
What are the primary ACA tax forms that are filed with the Form 1040?
The two forms that may need to be filed with the Form 1040 involving the Affordable Care Act are:
- Form 8965 - Health Coverage Exemptions/Responsibility Payments. See: Instructions for Form 8965 - Health Coverage Exemptions. (The Tax Cuts and Jobs Act of 2017 eliminated the responsibility payment after tax year 2018, therefore calculation of a penalty on Form 8965 is only required for tax years 2014 through 2018.)
- Form 8962 - Premium Tax Credit. See: Instructions for Form 8962 and Publication 974 - Premium Tax Credit.
What are the health care tax forms sent to the Taxpayer?
The three forms that may be sent to a taxpayer involving the Affordability Care Act are:
- 1095-A - Health Insurance Marketplace Statement. This is sent when the taxpayer purchased health coverage through the Marketplace or state exchange. See: 1095-A - Health Insurance Marketplace Statement.
- 1095-B - Health Coverage. This is sent to the taxpayer from the Insurance Company and/or Employer and contains information about the health coverage that the taxpayer had during the year. See: Form 1095-B Health Coverage.
- 1095-C - Employer Provided Health Insurance Coverage and Offer. This is sent to the taxpayer from the Employer and contains information about the health coverage that the taxpayer had or was offered during the year. See Form 1095-C - Employer Provided Health Insurance Offer and Coverage.
What Constitutes Full-year Minimum Essential Health Care Coverage?
One of the requirements of the Affordable Care Act is that everyone (Taxpayer, Spouse and each Dependent) on a tax return has to have minimum essential health care coverage or an exemption from coverage for every month of the year or the taxpayer will have a Shared Responsibility Payment.
Minimum essential health coverage consists of employer provided health care coverage, health insurance purchased through the Health Insurance Marketplace, Medicare, most Medicaid coverage, state run Children Health Insurance Programs and most health care coverage provided to veterans and active duty service members. See: HealthCare.Gov - Types of health insurance that count as coverage.
What is the Responsibility Payment or penalty?
When ANY person on the tax return (Taxpayer, Spouse or any dependent) does not have minimum essential health care coverage or an exemption for every month of the year, Form 8965 - Health Coverage Exemptions/Responsibility Payments must be completed to determine if they will be assessed a Responsibility Payment. The taxpayer may owe a Responsibility Payment for any month that the taxpayer, spouse or any dependent on the return does not have coverage or an exemption.
Who is subject to the Shared Responsibility Payment?
Prior to 2019, all U.S. citizens were subject to the individual shared responsibility provision, as were all non-U.S. citizens who were in the U.S. long enough during a calendar year to qualify as resident aliens for federal income tax purposes. Foreign nationals who lived in the U.S. for a short enough period that they did not become resident aliens for tax purposes were exempt from the individual shared responsibility provision even though they may have had to file a U.S. income tax return.
Beginning in 2019, the individual shared responsibility payment no longer applies.
How was the responsibility payment or penalty calculated?
Prior to 2019, taxpayers owed 1/12th of the annual Shared Responsibility Payment for each month they or their dependent(s) did not have coverage and did not qualify for a coverage exemption.
The annual Shared Responsibility Payment amount was the greater of the following:
- 2.5% of the household income that was above the tax return filing threshold for the taxpayer’s filing status, or
- The family’s flat dollar amount: $695 per adult and $347.50 per child under age 18 (50% of the adult amount). See: Shared Responsibility Overview.
What was the maximum Responsibility Payment or Penalty that a taxpayer can be assessed?
Prior to 2019, the Shared Responsibility Payment was capped at the national average premium for a bronze level qualified health plan available through the Marketplace that would cover everyone in the tax household who does not have coverage and does not qualify for a coverage exemption. See: Publication 5187 - Affordable Care Act.
What types of exemptions exist to the coverage requirements of the ACA?
There are three basic types of exemptions that an individual can claim to avoid the coverage requirements and the Shared Responsibility Payment. These exemptions are:
- Marketplace-Granted Coverage Exemptions, granted by the Marketplace or state exchange;
- Coverage Exemptions the taxpayer may elect if they meet certain qualifying conditions; and
- Filing Threshold Exemptions, based on the income on the return or in the household.
Most exemptions are reported on the tax return, although the taxpayer is automatically exempt from the ACA coverage requirements if he/she does not file a return because their income is below their filing threshold. See: Instructions for Form 8965.
What are filing threshold exemptions?
There are two different filing threshold exemptions that are available for taxpayer. A taxpayer is exempt from the requirement to have minimum essential health care coverage and is not subject to the Shared Responsibility Payment if either their Household Income or their Adjusted Gross Income is deemed below the filing threshold for their applicable filing status. For information on the filing threshold amounts and/or how to claim a filing threshold exemption in TaxSlayer Pro, see: Filing and Income Threshold Exemptions.
What are Marketplace exemptions?
Marketplace-Granted Coverage Exemptions can only be issued by a state exchange or the Federal Marketplace. See: Marketplace-Granted Coverage Exemptions. Marketplace-Granted Coverage Exemptions are for specified reasons and the taxpayer must have applied for the exemption with the Marketplace or state exchange. Each individual on the tax return is treated separately and each person on the tax return must apply for a Marketplace-Coverage Exemption. When approved by the federal Marketplace or state exchange, the taxpayer will be issued a 5, 6 or 7-digit Exemption Certificate Number, which they will have to enter on Part I of Form 8965 of their tax return. If their application for the exemption has not been determined yet, they can submit their return by entering PENDING instead of the 5, 6 or 7-digit code.
Marketplace-Granted Coverage Exemptions include the following:
- Members of Health Care Sharing Ministries
- Members of Indian Tribes
- Members of certain religious sects
- U.S. citizen living abroad, non-citizen, not lawfully present
- Being ineligible for Medicaid in a state that does not expand Medicaid coverage
- General Hardship
- Marketplace Coverage Being Deemed Unaffordable
- Job-based Coverage Being Deemed Unaffordable
What if the taxpayer (spouse or dependent) only had health coverage for part of a year or only some of the members of the tax household have coverage or an exemption?
A common scenario that occurs when addressing the Shared Responsibility Payment is when one or more individuals on the tax return (Taxpayer, Spouse, or Dependent) has a Coverage Exemption or has minimum essential health coverage (such as Medicaid or enrollment in a state run Children Health Insurance Program), but not everyone on the return has minimum essential health care coverage for all or part of the year. When this occurs the Taxpayer is required to complete Form 8965 and must account for the monthly health care coverage or coverage exemptions for each person on the tax return. Since the Shared Responsibility Payment is calculated by each month that each person on the tax return lacks minimum essential coverage or a coverage exemption, each person's monthly coverage or exemption has to be accounted for and addressed on the return. See: When not everyone on the return has coverage.
What are advance payments of the Premium Tax Credit?
Qualifying taxpayers who enroll in health insurance through a Marketplace can receive advance payments of the premium tax credit. The Marketplace makes the advance credit payment directly to the health insurance company to reduce the out-of-pocket cost of the taxpayer’s premiums. The Marketplace determines eligibility for advance credit payments when the taxpayer enrolls or enrolls a family member in Marketplace health insurance. The Marketplace estimates the amount of premium tax credit a taxpayer will qualify for using the taxpayer’s estimated household income and family size. The estimated premium tax credit is the maximum amount of advance credit payments for which the taxpayer is eligible. The taxpayer then chooses to have all, some, or none of the advance credit payments paid to the insurance provider.
Taxpayers who receive advance credit payments must reconcile their advance credit payments to the actual premium tax credit they are allowed for the year. This reconciliation is done on Form 8962. See: Instructions for Form 8962; Publication 974 - Premium Tax Credit.
Who is eligible for the Premium Tax Credit?
In general, the taxpayer may be allowed a premium tax credit if they meet all of the following:
The taxpayer or a family member enrolled in health insurance coverage through the Marketplace for one or more months of the year in which the enrolled individual is not eligible for non-Marketplace health coverage. The premium tax credit is not available to any taxpayer who acquires their health coverage outside of the Marketplace or state health care exchange.
The taxpayer's health insurance premiums for one or more of those same months are paid by the due date of your return, either through advance credit payments, payment by the taxpayer, or payment by someone else.
The taxpayer is within certain income limits. Generally, the tax household income must be at least 100% and less than 400% of the federal poverty limits. Individuals whose income is less than 100% of the federal poverty limits are not eligible for any premium tax credit but should be eligible for other health care programs such as Medicaid.
The taxpayer cannot file a married filing separately tax return, unless the taxpayer meets certain criteria which allow certain victims of domestic abuse and spousal abandonment to claim the premium tax credit as married filing separately. See: Instructions for Form 8962.
The taxpayer cannot be claimed as a dependent by another person.
What happens when the taxpayer’s advance credit payments are less than his or her premium tax credit?
The taxpayer will get the benefit of the increased tax credit when they file their Form 1040. This difference will appear on the Form 1040 as payment and is would be applied towards the tax liability or become refundable to the taxpayer. See: Premium Tax Credit - How the Credit is Calculated.
What happens if a taxpayer’s advance credit payments are more than his or her premium tax credit?
The taxpayer must typically repay any excess advance credit payments that they received and the reconciliation of the advance credit payments will occur on Form 8962. However, the amount of the repayment may be limited for taxpayers with household income of less than 400 percent of the federal poverty line for their family size. See: Publication 5187 - Affordable Care Act; Instructions for Form 8962; and Premium Tax Credit - How the Credit is Calculated. The repayment amount is not limited for taxpayers with household income of 400 percent or more of the federal poverty level for their family size and such taxpayers will have to repay all of the advance credit payment that they received.
What happens if a taxpayer understates their estimated household income when applying for the advance credit payments at the time that they acquired insurance through the Marketplace?
Any taxpayer that understates their income when they applied for health coverage through the Marketplace runs the risk of receiving an advance credit payment that they were not entitled to receive. As a result, they may have to repay some or all of any advance credit payments they received when they file their tax return. Specifically, taxpayers with household income in excess of 400 percent of the federal poverty line are not entitled to any premium tax credit and these taxpayers will have to repay any advance credit payments that were applied towards their health insurance premium. Most estimates of household income are not radically different than the actual income reported on the return and should only result in minor adjustments to the premium tax credit that a taxpayer will receive. However, at time taxpayers grossly understate their income because they either fail to include certain items in their estimated income such as withdrawals from IRA's or pension plans, gambling winnings, self-employment income, tax exempt income or the non-taxable portion of social security benefits for the taxpayer, spouse and/or dependents on the return or their circumstances changed during the year and they have realized more income and failed to make any adjustments with the Marketplace.
A large difference between the estimated and actual household income can result in a significant repayment of the advance credit payments. Typically such differences in the estimated and actual household income are due to the taxpayer's misunderstanding of what their responsibilities are when applying for the premium subsidy and then taking an inflated advance premium tax credit towards their health insurance premiums.
What is the Form 1095-A?
A Form 1095-A is sent when the taxpayer or a family member enroll in health insurance coverage through the Health Insurance Marketplace. Form 1095-A provides the information the taxpayer needs to complete Form 8962. If the taxpayer or a family member enrolled in the Marketplace in more than one qualified health plan policy, you’ll receive a Form 1095-A for each policy. See: 1095-A - Health Insurance Marketplace Statement.
What do the different columns in Part III of Form 1095-A represent?
There are three columns in Part III of Form 1095-A which contain information that is necessary for the taxpayer to calculate the Premium Tax Credit.
- Column A represents the actual premiums charged by the insurance company for the month(s) in which any individual on the tax return was enrolled in one or more qualified health plans.
- Column B represents the Applicable Second Lowest Cost Silver Plan (SLCSP) that applies to the individual(s) receiving the 1095-A. It’s not necessarily the plan which the individual(s) were enrolled in but it is used to determine Net Premium Credit. Certain 1095-A's issued to policyholders do not have an amount listed for the SLCSP because the taxpayer did not request financial assistance at the time that they purchased the policy.
- Column C represents the Advance Payment of the Premium Tax Credit (APTC) which the policyholder received during the year. The actual out of pocket amount that was paid by the taxpayer for their health insurance during the year is obtained by subtracting the amount in Column C from the amount in Column A.
When you get multiple Form 1095-A, how are they treated on Form 8962?
A separate 1095-A will be issued for each policy that a person on the tax return (taxpayer, spouse or dependent) had coverage during the year. These amounts will be accounted for on Form 8962. The amount that is found in Column A on the separate 1095-A's which represents the actual premiums charged by the insurance company and the amount that is found in Column C on the separate 1095-A's which represents the APTC, should be combined for entry in the Form 8962 entry screen. (Do not combine the amounts in Column B, which should be the same across all the Forms 8962.) To determine the amount that is entered on Form 8962 for the SLCSP, the taxpayer should review Monthly Calculation section found in the Instructions for Form 8962. Also see: 1095-A - Health Insurance Marketplace Statement.
What is a Shared Policy?
A Shared Policy occurs when a qualified health plan has been purchased from the Marketplace or from a state health care exchange and it covers at least one individual on the tax return and at least one individual not on the tax return. See: Shared Policy & Shared Policy Allocation. A shared policy is not a policy that simply covers more than one individual when all of the people covered on the policy are also on the tax return as a taxpayer, spouse or dependent.
How do you allocate the premium on a Shared Policy?
When the taxpayer has a Shared Policy, that taxpayer will need to allocate the three amounts reported on Form 1095-A (enrollment premiums, SLCSP premiums, and/or APTC) between the taxpayer's tax return and the tax return of the other individual(s) who is not on this tax return and is filing their own return. This is known as a Shared Policy Allocation. The actual amounts to be allocated between the parties can be agreed upon between the parties. However, if the parties cannot agree upon how they will allocation the amounts reported on Form 1095-A, then the policy amounts reported on the Form 1095-A should be allocated proportionally based on the number of covered individuals on the policy that are being claimed on the tax return.
What is the Form 1095-B?
Form 1095-B provides details about an employee’s insurance coverage, including who in the worker’s family was covered. This form is sent out by the Insurance Company. In cases where the employer is self-insured, that employer and not the insurance company will also send out the 1095-B and it may appear in a combined form with Form 1095-C.
The information contained on Form 1095-B is informational only and allows the preparer to verify coverage regarding the taxpayer and any dependents. It can also be used to assist the preparer in the entries to the Coverage Exemptions on Form 8965, but the Taxpayer is not required to have the 1095-B to complete the tax return and the preparer can use other information to complete the Coverage Exemptions. See: Form 1095-B Health Coverage.
What is the Form 1095-C?
Every employer that has 50 or more full-time employees who are eligible for insurance coverage should provide their employees with Form 1095-C which is a statement of the Employer Provided Health Insurance Offer and Coverage. Eligible employees who decline to participate in their employer’s health plan will still receive a 1095-C which shows the coverage that they could have obtained. Form 1095-C identifies, the employee's name and the employer; which months during the year the employee was eligible for coverage; and the cost of the least expensive monthly premium the employee could have paid under the plan. This information can be used to verify coverage and when the employee declines to participate in employer provided coverage determine if the unaffordable exemption may be available to the employee/taxpayer. See Form 1095-C - Employer Provided Health Insurance Offer and Coverage.
NOTE: This is a guide to general questions about the Affordable Care Act. While TaxSlayer Pro strives to make the information and links contained on this page as timely and accurate as possible, TaxSlayer Pro makes no promise or guarantee about the timeliness, accuracy, or completeness of the contents of this page. This is not intended as tax advice.