IRS Issues Final Regulations on Individual Healthcare Mandate and Exemptions

Sept. 5, 2013

Under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, beginning in 2014 individuals who do not maintain adequate health insurance coverage, or who do not receive a certain level of coverage, will be subject to a penalty (referred to as a “shared responsibility payment”). In 2014 the penalty cannot be less than $95 and cannot exceed 1 percent of taxable income. The penalty rises to $325 and a maximum of 2 percent of taxable income in 2015. In 2016 and later years the penalty rises to $695 and a maximum of 2.5 percent of taxable income. In no circumstance can the penalty exceed the cost of health insurance coverage. Individuals who receive health insurance from their employer may still be subject to the penalty if the employer-provided coverage does not meet minimum standards. 

On Aug. 30, 2013, the IRS issued final regulations providing guidance on the application of the penalty to individual taxpayers. In addition to clarifying a number of definitions, the regulations also establish a group of nine classes of individuals who are exempt from the penalty:

  • Members of recognized religious sects or divisions objecting on religious grounds
  • Members of healthcare sharing ministries
  • Exempt noncitizens (individuals who are not citizens or nationals of the U.S. if they are either nonresident aliens or otherwise not lawfully present in the United States)
  • Incarcerated individuals
  • Individuals whose required contribution to purchase health insurance exceeds 8 percent  of household income
  • Taxpayers with incomes below the tax return filing threshold
  • Members of Indian tribes
  • Individuals with short gaps in coverage, generally less than three months
  • Other individuals who qualify for hardship exemptions

Several issues are left open to future guidance, including whether contributions made by an employer under a health reimbursement arrangement, a wellness program, or certain other employer healthcare arrangements qualify toward the minimum employer-provided coverage requirement.

The impact of these regulations is substantial not only for individuals but also for employers seeking to make sure their health insurance offerings will meet the minimum coverage standards. All employers should review their health insurance offerings in light of the new regulations.

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