On February 1, 2013, the U.S. Department of Treasury and Internal Revenue Service (“IRS”) and the U.S. Department of Health and Human Services (“HHS”) released a set of proposed rules addressing the Affordable Care Act (“ACA”) minimum essential coverage requirement. The proposed rules provide guidance regarding the ACA individual shared responsibility provision, which requires each individual to maintain basic health coverage (i.e., minimum essential coverage), qualify for an exemption, or make a shared responsibility payment when filing federal income tax returns.

According to the Centers for Medicare and Medicaid Services, the set of proposed rules should “ease implementation and help to ensure that the [shared responsibility] payment applies only to the limited group of taxpayers who choose to spend a substantial period of time without coverage despite having ready access to affordable coverage.”  This article explains the shared responsibility provision and outlines the eligibility rules and process for receiving and exemption.

Minimum Essential Coverage

Under the ACA, beginning in 2014, nonexempt individuals must have minimum essential coverage or make a shared responsibility payment with their federal income tax return for the taxable year. The IRS proposed rules define minimum essential coverage as one of the following:

1. Coverage under a specified government sponsored program, e.g., Medicare, Medicaid, Children’s Health Insurance Program (“CHIP”) coverage, and certain types of veterans health coverage including TRICARE;
2. Coverage under an eligible employer-sponsored plan, e.g., group health plans (including COBRA coverage and retiree coverage);
3. Coverage purchased in the individual market;
4. Coverage under a grandfathered health plan; and
5. Other health benefits coverage recognized by the HHS as meeting the minimum essential coverage requirements, i.e., the sponsor follows the HHS process for recognition as minimum essential coverage.

The other health benefits coverage, specified in number five above, recognized by HHS as meeting the minimum essential coverage requirements include:

1. Student health coverage offered by an institution of higher education when the institution assumes risk for payment of claims;
2. For non-citizens residing in the US, coverage provided by their home country;
3. Federal refugee medical assistance from the Administration for Children and Families;
4. Medicare Advantage plans;
5. State high risk pools, subject to review by the Secretary of the U.S. Department of Health and Human Services (“Secretary”);
6. Coverage provided to AmeriCorp volunteers; and
7. “Other coverage” that the Secretary recognizes as minimum essential coverage.  Sponsors of “other coverage” must meet criteria at the discretion of HHS and must meet substantially all of the requirements of non-grandfathered, individual health insurance coverage contained in the ACA.

The IRS proposed rules explain that partial-month coverage counts for the month.  This means that an individual is considered to have minimum essential coverage for any month in which the individual is enrolled in and entitled to receive benefits under a qualifying program or plan for at least one day in the month.

Exemptions

The proposed rules outline exemptions for both individuals and specific benefit types.

Certain individuals are exempt from the requirement to obtain minimum essential coverage. Exempt individuals include:

1. Members of recognized religious sects who have effective religious conscience exemption certificates, which certify that the individual is a member of the particular sect and adheres to the tenets or teachings of the sect;
2. Members of health care sharing ministries who share ethical or religious beliefs and medical expenses according to their beliefs;
3. Exempt noncitizens, including nonresident aliens and individuals not legally in the US;
4. Incarcerated individuals;
5. Individuals without access to affordable coverage (roughly meaning eight percent of that person’s household income);
6. Members of Indian tribes;
7. Individuals with a hardship exemption certification, meaning that the person suffered a hardship that inhibited him or her from obtaining minimum essential coverage;
8. Taxpayers with income below the filing threshold; and
9. Individuals with short coverage gaps of up to three months.

The HHS proposed rules outline the procedure that exchanges will use to conduct eligibility determinations and grant certificates of exemption.

The proposed rules also outline the following four categories of health care coverage, known as “excepted benefits,” that are not considered minimum essential coverage:

1. Accidental death and dismemberment coverage, disability insurance, general liability insurance, automobile liability insurance, workers’ compensation, credit-only insurance (e.g., mortgage insurance), and coverage for employer-provided on-site medical clinics;
2. Limited-scope dental or vision benefits, long-term care benefits, and benefits provided under certain health flexible spending arrangements;
3. Coverage only for a specified disease or illness (e.g., cancer-only policies) or fixed indemnity insurance (e.g., $100 per day of hospitalization regardless of the amount of medical expenses incurred), unless such coverage is coordinated with a group or individual health plan maintained by the same plan sponsor; and
4. Medicare supplemental policies, TRICARE supplemental policies, and similar supplemental coverage under a group plan, unless such coverage is coordinated with the primary health coverage.

Liability for Dependents and Spouses

The proposed rules address liability for a dependent’s lack of minimum essential coverage. An individual is considered a dependent of a taxpayer for a taxable year if the individual satisfies the definition of dependent under federal tax law, regardless of whether the taxpayer claims the individual as a dependent on a federal income tax return for the taxable year.

Dependent liability is addressed as follows:

• If a nonexempt individual who is a dependent does not have minimum essential coverage, the taxpayer who may claim the dependent is liable for the shared responsibility payment attributable to the dependent’s lack of coverage.
• If an individual may be claimed as a dependent by more than one taxpayer in the same calendar year, the taxpayer who claims the individual as a dependent for the taxable year is liable for the shared responsibility payment.
• If more than one taxpayer may claim an individual as a dependent in the same calendar year, but no one claims the individual as a dependent, the taxpayer with priority under federal tax law to claim the dependent is liable for the shared responsibility payment.

Under the proposed rules, married individuals who file a joint return for a taxable year are jointly liable for any shared responsibility payment.

The Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage

If a taxpayer does not maintain minimum essential coverage for either the taxpayer or a dependent, then the taxpayer is obligated to pay the lesser of: (1) the sum of the monthly penalty amounts (the “MPA”) for each family member or (2) the sum of the monthly national average bronze plan premiums for the individual or family.

The MPA is one-twelfth of the greater of the flat dollar amount or excess income amount. The flat dollar amount is the lesser of the sum of the applicable dollar amount for all family members or three times the applicable dollar amount. For 2014, the applicable dollar amount is $95 and increases to $325 in 2015 and $695 in 2016. After 2016, the amount is pegged to a cost-of-living adjustment. The excess income amount is the taxpayer’s income over the amount of income that triggers the taxpayer to file an income tax return multiplied by a specific income percentage. For 2013, the income percentage is one percent. The percentage increases to 2.5 percent after 2015.