Prop regs fix a PTC issue 7 years later

The Affordable Care Act enables individuals to not only purchase insurance on an exchange but to also get a subsidy for it if they qualify. That subsidy is the Premium Tax Credit (PTC). There are eligibility criteria such as purchasing the coverage on an exchange (such as Covered California), if the person is employed the employer does not offer affordable coverage and the household income is below 400% of the federal poverty level.

When regs were issued in 2014 at the start of the PTC, section 36B(c)(2)(C)(i) that includes this clause:

"This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee."

Reg. 1.36B-2(c)(3)(v)(A)(2) interpreted that clause to mean that if the coverage offered to the employee was affordable, no one in that employee's household would qualify for a PTC even if the coverage offered to the family was not affordable.

I always thought that was an odd interpretation of the vague clause and contrary to the purpose of the ACA - to help more people get affordable coverage.  I think a possible reason for the odd interpretation is that the ACA is designed to encourage employers to offer affordable coverage to employees AND family members. So perhaps the thought was that employees would encourage employees to ask the employer to provide affordable coverage. Unfortunately, that is unrealistic, particularly where employees are low paid (such that their household income if below 400% of the federal poverty level (about $43K for a single person)).

Well, this month, the IRS issued proposed regs to fix this (REG-114339-21 (4/7/22)). A 4/5/22 Tweet from the Treasury Dept indicates that this change should enable about 1 million people to save hundreds of dollars per month on their coverage. Why is this finally being fixed? Apparently it is Executive Order 14009 (1/29/21) where Treasury was directed to find ways to strengthen the ACA via administrative actions. This is a good fix.

What about other needed fixes? One major one is that the PTC includes a cliff rather than a phaseout. So once household income exceeds 400% of the FPL, the taxpayer must pay back all of the PTC it received for that year. That can easily be $1,000 to over $10,000. That is harsh.  Also, the measure of household income is based on the entire year. So, if someone is out of work, say for the first 7 months of the year and can't afford health insurance, they can get the PTC, but if the job they get for the last 5 months of the year puts them above 400% of the FPL, they have to pay back the PTC even though they needed it for the first 7 months to buy health insurance.

That will need a legislative fix though.

And, before I leave this topic, in case anyone is thinking that this PTC subsidy of thousands of dollars is too good of a tax break, millions of individuals get tax breaks on health insurance. About 65% of employees have an employer who pays all or some portion of their health insurance. That benefit is tax free to the employees. So, if someone's employer contributes $10,000 to their health insurance and is in the 24% tax bracket, they save $2,400 in taxes. BUT, they also save shelling out $10,000 for the coverage paid by the employer. This is the most expensive tax break in the tax law in terms of reduced tax collections (see page 33 of this JCT tax expenditure report). And not all employees get this subsidy and it is worth more to those in a higher tax bracket.

What do you think?

#letsfixthis

Dueling Health Plans in Senate

The drama on what, if anything, to do with the Affordable Care Act (ACA) aka Obamacare continues. There are two very different new proposal in the Senate. The GCHJ proposal might be voted on the week of September 25. We'll see what happens.  I have a description of both the Republican GCHJ proposal and Senator Sanders' S. 1804, Medicare for all Health Insurance bill below.

Graham-Cassidy-Heller-Johnson (GCHJ) Proposal, introduced on 9/13/17 as an amendment to H.R. 1628, would repeal the ACA and instead offer block grants (run through CHIP) to states. Sponsors claim the proposal treats everyone the same regardless of where they live.

·         Text (140 pages)

·         FAQs

·         Additional Information and Links

S. 1804 (Sanders)- Medicare For All Health Insurance Proposal introduced in September.

Per Senator Sanders: “would create a federally administered single-payer health care program. Universal single-payer health care means comprehensive coverage for all Americans. Bernie’s plan will cover the entire continuum of health care, from inpatient to outpatient care; preventive to emergency care; primary care to specialty care, including long-term and palliative care; vision, hearing and oral health care; mental health and substance abuse services; as well as prescription medications, medical equipment, supplies, diagnostics and treatments. Patients will be able to choose a health care provider without worrying about whether that provider is in-network and will be able to get the care they need without having to read any fine print or trying to figure out how they can afford the out-of-pocket costs.”

1. Claimed cost savings – Senator Sanders notes that the we spend about $3 trillion annually or about $10,000 per person. He states that his plan will save middle-class families over $5,000 per year and employers over $9,400 per employee.
2. He estimates that the annual cost would be about $1.38 trillion.
3. Senator Sanders proposes to pay for the plan as follows:
1. 6.2% income-based premium paid by employers.
2. 2.2% income-based health care premium on income over $28,800 paid by households.
3. A more progressive income tax system. New marginal rates:

                          37% on income between $250,000 and $500,000.

                          43% on income between $500,000 and $2 million.

                           48% on income between $2 million and $10 million. Per Sanders, this is about 113,000 households or the top 0.08% of taxpayers.

                          52% on income above $10 million, which affects about 13,000 households.

4. Tax capital gains and dividends at ordinary tax rates.
5. For individuals with over $250,000 of income, limit the tax benefit for deductions to 28%. This would replace the AMT, and the phase-out for personal exemptions and itemized deductions.
6. Create more progressive estate tax rates.
7. Savings from the disappearance of health-related tax expenditures such as the income exclusion for employer-provided health care.
3. 16 cosponsors at 9/21/17.

What do you think?

Another large payment owed for incorrect PTC

Another case* addresses a couple receiving an advance Premium Tax Credit (PTC) of a large amount and having to pay it all back. They also note that if they had known they would have to pay it back, they would not have taken the insurance. The cost of the insurance for this California couple was 20%  of pre-tax household income. That's a lot!

For context, if this couple lives in San Jose, rent for a one-bedroom apartment starts at $2,000/month or 33% of the couple's pre-tax income!

The case is a reminder of flaws with the Premium Tax Credit, such as:

• Individuals only get it if they buy insurance on the exchange AND their household income does not exceed 400% of the federal poverty line. For 2016, this is $47,080 for a single person and $63,720 for a family of two.
• The PTC is based on the cost of the second lowest cost silver plan. So, one's age and location are factored in. Insurance costs more as you age. But, despite this fact, the eligibility for the credit is still tied to 400% of the federal poverty line. Since people don't automatically make more money as they age, it makes it less likely that older individuals will be able to obtain affordable insurance (until they are old enough for Medicare).

Despite flaws, the PTC has at least one good point - it offers a tax savings. It's not as good as what about 60% of employees get who work for an employer who subsidizes their health coverage. If your employer pays part or all of your health insurance, it is tax-free income. AND there is no limit on this tax benefit regardless of how much your income exceeds 400% of the federal poverty line. So while the PTC is not as good of a benefit, it is at least of some help for individuals without the employer provided tax-free subsidy.

One proposal for some relief is S. 1529 (115^th Cong.), Addressing Affordability for More Americans Act of 2017. This bill would increase eligibility for the PTC to individuals with household income of 800% or less of the federal poverty line (rather than 400%). The change is proposed starting for 2018. It still isn't as good as the tax-free employer provided subsidy though.

What do you think?

*Here is a summary of the recent case: (see my 7/20/17 post for another case on this topic)

McGuire, 149 TC No. 9 (8/28/17) – The McGuires received an advance Premium Tax Credit (APTC) in 2014 of $591 per month ($7,092 for the year). The monthly premium on their Silver plan was $1,182. This was arranged through Covered California in 2013. Still in 2013, Mrs. M started working and “promptly notified Covered California.” This was a significant change because it caused the couple’s household income to exceed 400% of the federal poverty line (FPL) for 2014 making them ineligible for the PTC. It was not until mid-June 2014 that Covered California (CC) acknowledged their reported change in household income. This letter also stated:

“The Covered California website shows how much your premium assistance lowers your premium. Your premium assistance is based on our records and the income you put on your application that you expect this year. If you take the full premium assistance to pay the premium, and your income is higher, you may have to pay some back at tax time.”

The court noted that it was not clear whether the couple could have changed to a plan with a lower premium. The court also notes that it would not have mattered what was in the letter because the couple never received the letter. Per the court, the couple made several attempts to alert CC about the change in their income, but to no avail. CC also did not react to the couple’s request to change their address. The McGuires also never received Form 1095-A from CC.

On their 2014 Form 1040, the couple checked the box on line 61 to indicate they had coverage for every month of the year. They did not include Form 8962 on the PTC or indicate receiving an APTC of $7,092. The IRS received the Form 1095-A and issued a notice of deficiency.

The court agreed with the IRS. Because the McGuire’s household income exceeded 400% of the FPL, they are not entitled to a PTC and must pay back the APTC. The couple noted that they would not have taken the coverage if they had known they had to cover the entire cost. While the court was sympathetic, it noted that there was nothing it could do. We “are not a court of equity, and we cannot ignore the law to achieve an equitable end.”

The court did waive the negligence penalty and found reasonable cause to waive the substantial understatement of tax penalty. The McGuires did not receive the Form 1095-A and did not receive the APTC directly so were not completely aware of the additional benefit or amount. Also, they attempted a few times to get CC to correct the APTC. In addition, the couple relied on a CPA to prepare their return.

ACA tax hits the court

This is the first case I've seen dealing with application of the Affordable Care Act (ACA). Yes, we had cases in the U.S. Supreme Court dealing with legality of some of the taxes and mandates, but this July 12, 2017 decision from the U.S. Tax Court gets at application of the advance Premium Tax Credit (APTC). When an eligible person purchases health insurance on the exchange (such as Covered California), and their household income is 400% or less of the federal poverty line, they get a credit that can be applied to the monthly premiums (by having the government send the money directly to the insurance provider) or claimed when filing that year's income tax return.

If you get the credit in advance and it turns out your income exceeds 400% of the federal poverty line, you have to pay the entire advance credit back!  That can be a hefty bill, as the Walkers discovered.

In Walker, TC Summary Opinion 2017-50, the court agreed with the IRS that the couple owed $12,924 for 2014 because their modified AGI exceeded 400% of the federal poverty line making them ineligible for the PTC that Covered California provided to them in advance. The IRS had originally also assessed a §6662 penalty of $2,584, but dropped that,

The couple’s monthly premium before the APTC was $1,378 but only $301 with the APTC. On their 2014 return, they reported AGI of $63,417 which included wages, retirement earnings and taxable Social Security income. After the return was filed, the couple separately filed Form 8962 for the PTC reconciliation. That form showed modified AGI of $75,199 (included the non-taxable Social Security income). As this exceeded 400% of the FPL, they were ineligible for the PTC. For 2014, the FPL for a family of two in California was $15,510; 400% of this amount is $62,040.

The couple told the court that if they had known they did not qualify for the PTC, they would not have purchased the insurance. While the court noted that Covered California may have erred in its information provided to the couple, the statute is clear that a taxpayer with income above 400% of the FPL may not claim a PTC.

That's a harsh result, but what the law provides. The exchange is supposed to use past tax return information along with information from the individual to determine eligibility. It sounds like the Walkers are retired (but not on Medicare which would make them ineligible for the exchange and PTC). A good question that should been asked of this couple was whether they might continue to have some earned income despite being retired. That is what may have put them over the 400% of the FPL (wages or perhaps a larger than planned withdrawal from their retirement plan).  They should have been counseled to take a much smaller APTC and to check their income monthly to see if they should be getting an APTC at all.

And note that the Walker's PTC is high because insurance costs more for older couples. However, affordability is still tied to 400% of the FPL even though when insurance costs more, you need much more income to pay for it. The law expects that the Walkers can use 22% of their income here to pay for health insurance! This is one of a few fixable flaws in the PTC.

One small potential consolation that I think is only explained in the  IRS Publication 502 on medical expenses is that the PTC paid back by the Walkers is treated as a health insurance payment rather than a tax. They can deduct it if they have enough to itemized and to the extent their medical expenses exceed 10% of AGI. This might not yield any deduction for them though and doesn't make up for the fact that they would have skipped the insurance if they had know they were not going to get a subsidy to help pay for it.

There are likely many other taxpayers in this situation.  If such individuals filed their return correctly, the payback of excess APTC will show up. If they fail to do the reconciliation, the IRS has enough information from the 1040 and Form 1095-A to determine how much, if any, needs to be paid back.

What do you think? Is there a better way to help a couple like the Walkers? 

ACA has lots of tax provisions

Lots of drama on possible repeal/repair of the Affordable Care Act with the House vote postponed to Friday (March 24) (see CNBC story).  There are a lot of tax provisions in the ACA.  I'll share a list of created of them based on when they went into effect (and the Cadillac tax has not yet gone into effect). And one provision was only added in December 2016 via bi-partisan legislation!

It's a long list so I'll ask my standard question first ...

What do you think?

Affordable Care Act Provision	IRC Section
Effective 2010 (or 2009)
COD income exclusion for certain student loans  (effective starting 2009)	108(f)(4)
10% excise tax on indoor tanning services (started July 1)	5000B
Small business health insurance credit [ACA includes later changes such as a requirement starting in 2014 to obtain coverage through the Small Business Health Options Program (SHOP) Marketplace, and that the credit is only available for two consecutive years.]	45R
Expanded dependent coverage exclusion for employer-provided health plans until age 27	105(b)
Codification of economic substance doctrine	6662 7701(o)
Increase in adoption credit and exclusion increased; refundable credit; temporary	23
Credit for Qualifying Therapeutic Discovery Projects (2009 and 2010 only)	48D
Disclosure allowed for certain information to Health and Human Services for the Premium Tax Credit and cost-sharing	6103
Effective 2011
W-2 reporting of cost of employer-provided health insurance (postponed for all employers for 2011 and indefinitely for employers who issued less than 250 Forms W-2 in the prior year) [Notice 2010-69, Notice 2012-9,  and IRS website]	6051(a)(14)
SIMPLE cafeteria plans allowed for small businesses	125(j)
Restricted definition of “medicine” for certain savings arrangements, such as for an Archer MSA	220, 223
Increased tax on distributions from HSA and Archer MSA	223
Annual fee on manufacturers and importers for certain prescription drug sales [Form 8947, Report of Branded Prescription Drug Information and Notice 2011-9]	Reg. §51.2(d)
Effective 2012
Information reporting for payments of $600 or more made to C corporations [repealed before effective, P.L. 112-9, 2/14/11]	6041
Fee on health plans to fund Patient-Centered Outcomes Research Trust Fund ($1/year, increasing later)	4375
New requirements for §501(c)(3) hospitals	501(c)(3)
Effective 2013
Increase in Hospital Insurance tax (additional 0.9%) for high income individuals	3101(b)
New tax of 3.8% on unearned income of high income individuals, estates and trusts (net investment income tax)	1411
Increase in medical expense deduction threshold to 10% of AGI unless age 65 or older	213
Salary reduction contributions to health FSA capped at $2,500 (adjusted for inflation after 2013)	125(i)
Limit on deduction of certain excessive employee remuneration paid by certain health insurance providers	162(m)(6)
§139A, Federal subsidies for prescription drug plans, changed as follows: “Gross income shall not include any special subsidy payment received under section 1860D-22 of the Social Security Act. This section shall not be taken into account for purposes of determining whether any deduction is allowable with respect to any cost taken into account in determining such payment.”	139A
2.3% excise tax on sales of certain medical devices [moratorium for 2016 and 2017 per P.L. 114-113 (12/18/15)]	4191
Effective 2014
Small business health insurance credit must be offered through SHOP (exchange)	45R(g)(3)
Premium Tax Credit (PTC) available to individuals who obtain coverage on an exchange and meet other eligibility criteria. [Supreme Court holds that individuals in a state without an exchange are eligible for a PTC on the federal exchange. Effect is that individuals in states without an exchange and without coverage must factor in hypothetical PTC to determine if they meet the unaffordability exemption to the individual mandate (King v Burwell, No. 14-114 (6/25/15))]	36B
Individual mandate (penalty) applies if individual and shared responsibility family does not have coverage and does not meet an exemption [Supreme Court found this to be a permissible tax (National Federation of Independent Business, et al v. Sebelius (6/28/12)]	5000A
Employer mandate (penalty) applies if applicable large employer (ALE) does not offer coverage to full-time employees and their dependents up to age 26 (and other provisions). [IRS delays effective date to 2015 and for 2015 provides additional transitional relief. Notice 2013-45 and blog post of 7/2/13 of Assistant Treasury Secretary for Tax Policy Mark J. Mazur.]	4980H
Information reporting by exchanges, insurance providers and ALEs (Form 1095-A, 1095-B and 1095-C, respectively). [IRS make 1095-B and 1095-C reporting optional for 2014.]	36B(f)(3) 6055 6056
Certain types of health coverage reimbursement arrangements (HRA) will fail the “market reforms” exposing the employer to a penalty of $100/day/employee. [Notice 2013-54 and IRS website] [In Notice 2015-17, IRS provided relief through 6/30/15; Congress provided relief through 12/31/16 (P.L. 114-255 (12/13/16))]	4980D
Excise tax on certain health insurance providers	Reg. 57.1, et seq. (TD 9643 (11/29/13))
Increase in estimated tax payments for large corporations (assets of $1 billion or more) due in July, August, or September 2014	6655
Effective 2017
Increase in medical expense deduction threshold to 10% of AGI for individuals age 65 or older (applicable to other individuals starting in 2013)	213
Qualified Small Employer Health Reimbursement Arrangement allowed starting 1/1/17 [added by P.L. 114-255 (12/13/16))]	9831(d) 6051(a)(15) 6652(o) 106(g) 36B(c)(4)
Effective 2018
Nondeductible 40% excise tax on high cost employer-sponsored health coverage (“Cadillac” plans) [postponed to 2020 by P.L. 114-113 (12/18/15)]	4980I

A big Republican health care fix proposed in 2005 and 2016 missing from current bill - why?

The House Republican plan to repeal and replace the Affordable Care Act (aka Obamacare) that was released on March 6 omits something that the House Republican health reform blueprint of June 2016 said would be included. The missing item is a big one, that if modified, would make the tax law more equitable, reduce health care spending, raise revenue (that could be used to help those without insurance), and help a lot of people know what their health insurance costs.

The missing change is to reduce the largest (most costly) tax benefit in the law - the exclusion for employer-provided health insurance. The House Republican blueprint for health reform stated that the annual cost is $266 billion a year (income and payroll taxes not collected due to the tax break). In June, they proposed to limit this exclusion to replace the "Cadillac" tax.

Here are observations made in the June plan on this generous tax break enjoyed by about 60% of employees (see June 2016 plan at page 15). I encourage you to read the full-text (about a page) as the Republicans lay out strong arguments why this generous tax break should be pared back.

• The tax break has no cap (as do contributions to retirement plans). It is "unlimited and uncapped, so the federal subsidy is endless."
• The CBO says the annual cost of this subsidy (meaning tax revenue that doesn't get generated due to employees being able to exclude from income what their employers pay towards their health insurance) is $266 billion per year. (Note: This is the largest tax break in the tax system by far; other large ones, such as the mortgage interest deduction and lower rate for capital gains are less than half of the figure for the exclusion.)
• "CBO has estimated that the exclusion increases average premiums for employer-based coverage 10 to 15 percent above what it would have been without the benefit because" it incentivizes employers and employees to get more expensive plans.
• The tax benefit is regressive because it provides a greater savings to individuals in higher tax brackets.
• "Our plan proposes to cap the exclusion at a level that would ensure job-based coverage continues unchanged for the vast majority of health insurance plans. Only the most generous plans would see a difference."

My observations:

• The House Republican plan released in early March does not make the above change highlighted in their "A Better Way" plan and keeps the Cadillac tax, but postpones its effective date from 2020 to 2025.  [See these House Ways and Means links to the proposal - here and here.]
• While the March 2017 plan repeals the individual and large employer mandates and the ACA taxes (including a big tax break for the top 1% and even bigger for the to 0.1%), why did it keep the employer-provided exclusion as is despite saying last June that this provision was a problem and fixing it would be better than having the Cadillac tax? [For an overview of this tax, see IRC Section 4980I and the Tax Policy Center explanation.]
• I think there are two possible reasons why the House Republicans omitted any change to the health insurance subsidy employees get when their employer pays all or part of their health insurance costs: (1) They discovered that it has become an "entitlement" so is difficult to modify; or (2) They are waiting to cut it back later either in one of the three bills they say it will take to handle ACA repeal/replace or for tax reform to generate revenue for a rate cut.
• I have not yet seen a news reporter mention this exclusion.  In fact today on an MSNBC show, a reporter and commentator stated that a goal of the Republican plan and less funding for health care was to allow market forces to handle costs.  Well, the employer-provided health care exclusion is an intrusion on market forces.  Economists estimate that it drives up health care costs by encouraging employees to get more expensive plans and it removes the supply and demand effects that should exist. A quick example of that - if you have such coverage, you know the first question a doctor asks is if you have coverage and you never hear about prices. There is an excellent discussion of this in the 2005 final report of President Bush's Advisory Panel on Federal Tax Reform (pages 78-82). That's yet one more Republican plan that called for reducing this tax break to make the law more fair and to pay for lower tax rates! (The plan called for capping the exclusion amount and allowing those without employer-provided health coverage to get a deduction for a portion of their health insurance cost.)

What do you think?

Repealing Obamacare - Costs and Issues!

The 115th Congress started on January 3 and repeal of Obamacare (the Affordable Care Act) has begun.  Here is information from Majority Speaker Paul Ryan including the budget resolution to help with the repeal. He states:

“This is the first step toward relief for Americans struggling under Obamacare. This resolution sets the stage for repeal followed by a stable transition to a better health care system. Our goal is to ensure that patients will be in control of their health care and have greater access to quality, affordable coverage. Today we begin to deliver on our promise to the American people.”

The ACA is certainly not perfect and I'm speaking from a tax perspective. The ACA included some complex tax rules.  It also included some inequitable ones, which I've written about before (such as 12/14/14 and 10/18/14 and 3/8/15). Some of the key tax issues/inequities:

• If you purchase health insurance on the exchange, you only get a tax credit if your household income is under 400% of the federal poverty line (about $42,000 for a single person). In contrast, if you're fortunate to have your employer subsidize your health insurance, that income is excluded from your taxable income regardless of your income level.

• The eligibility for the Premium Tax Credit doesn't factor in age even though health insurance costs a lot more as you get older.

• The employer mandate is too complex. Reg 1.4980H-1 includes 50 definitions! and that's just part of its complexity.

The ACA enabled millions of people to afford insurance and to obtain it even if they had a pre-existing condition.

The Congressional Budget Office and Joint Committee on Taxation estimate that repeal of the ACA will increase the budget deficit by $137 billion over 10 years.

Two of the ACA taxes - the net investment income tax (NIIT) and the .09% additional Medicare tax on higher income individuals bring in more revenue than the individual AMT! That was over $35 billion for 2014. Repeal of the AMT would provide a better benefit because the AMT generally is not paid by the highest income individuals. But, where will the replacement funds come from or how much will repeal cost us in increased budget deficits and interest expense on the debt? [Per IRS data for 2014]

When will repeal be effective? Will people who purchased their insurance on the Exchange for 2017 lose it? Will they lose their subsidy (Premium Tax Credit) that helps most people be able to afford the insurance? What happens to people with pre-existing conditions? What happens to the ability for parents to include children up to age 26 on their health plan and if provided by their employer, to exclude that income benefit from income?

Challenges of repeal include:

• If there is a replacement, will it be better? 
• Why not just fix Obamacare (and call it something new)? 
• How will it all be paid for (see above dollar issues)?

Why not help pay for it by reducing the largest tax subsidy in the tax system - the income exclusion for employer-provided health care which benefits the roughly 60% of employees with such coverage?  It costs the budget about $266 billion per year! The House Republicans identify that as one of the three largest government health care subsidies. They also note that this subsidy increases the cost of health insurance by about 10 - 15% (page 15)!

Per the House Republican Health Care Blueprint (page 15):

"The non-partisan CBO projects this job-based subsidy will lower federal revenues by $266 billion in fiscal year 2016 alone and $3.6 trillion over the next decade. This benefit is so massive that, in terms of federal support, it would be the third largest health expenditure, after Medicare and Medicaid."

The Republican plan does call for taxing this benefit, likely if the benefits exceeds a specified amount. I think that's a good idea.  This is the biggest tax break in our tax system and taxing some portion of it would help fund health care for more people and even allow for lower tax rates.

We'll see what happens. Repeal won't be easy and likely won't be popular.

What do you think?

ACA taxes generate more revenue than AMT

In reviewing some IRS stats for 2014 returns, I was surprised to see that two taxes added by the Affordable Care Act (Obamacare), generated more revenue in 2014 than was generated from the individual AMT. Here are the stats:

Net Investment Income Tax (NIIT)    (3.8% §1411 tax)	$22.5 billion
Additional .09% Medicare tax	$7.3 billion
Total	$29.8 billion
Alternative Minimum Tax (AMT)	$28.6 billion

For 2013 returns, the AMT generated $4.6 billion more than the two ACA taxes.

[IRS 2014 stats, Figure E on page 27]

These ACA taxes only apply to individuals with income over $200,000 if single or over $250,000 of income if married. The AMT applies to individuals with over $52,800 of income if single and over $82,100 if married (and if they have sufficient preferences and adjustments such as state tax deductions and mortgage interest on a home equity debt or incentive stock option income).

The AMT threshold amounts are adjusted annually for inflation while the NIIT and Medicare tax thresholds are not adjusted.

Data from the Tax Policy Center estimates that for 2016, only individuals in the top 10% paid the NIIT. They estimate that if the NIIT were repealed for 2016, the average benefit to individuals in the top 1% of income level would save on average almost $24,000. I'm glad to see they break that down further to show what the top 0.1% benefit because not only do we have an income gap between the top 10% of income earners and the bottom 90%, but there is a big gap within the top 1% for the top 0.1% and the other 0.9% in that top 1%.  The benefit of repeal for the top 0.1% is about $154,000 per year. [Tax Policy Center, T16-0169, 8/16/16]

So, if Republicans repeal Obamacare, how will they address not only the increase in uninsured but the loss of about $30 billion of revenue per year?  Don't be surprised if they keep the tax (at least until tax reform occurs) or they phase it out over a few years to reduce the revenue loss impact.

We'll see.

What do you think?      

ACA Complexity Evident in IRS Incomplete Tax Tip

For the past few weeks, the IRS has been publishing Health Care Tax Tips.  The one I received by email today was troubling because it includes an error or at least not enough detail to be entirely useful. Today's (3/23/16), HCTT 2016-25 - Understanding the Terms Affordable Coverage and Minimum Value, is directed to people interested in the employer mandate. This mandate applies to "applicable large employers" (ALE) meaning employers who had 50 or more full-time and full-time equivalent employees in the prior year. An ALE has to offer coverage to at least 95% of their full-time employees and their dependents up to age 26 to avoid version (a) of the penalty at IRC Section 4980H. To avoid version (b) of the penalty, that coverage has to be affordable and minimum value.

The statute says that affordable means the coverage most not cost more than 9.5% of the employee's household income.  A similar concept is used in explaining who is eligible for the Premium Tax Credit (PTC) (the individual cannot have been offered affordable coverage by their employer).  But, the measure of "affordable" described at Section 36B for the PTC says that measure is indexed annually.  That language should also be at Section 4980H but is not.

In late 2015, the IRS addressed this problem and told us that the affordability percentage at Section 36B will also be used at Section 4980H (see Q&A 12 of Notice 2015-87). For 2015, that factor is 9.56% rather than 9.5%. The tax tip issued by the IRS on 3/23/16 says the affordability factor is 9.5%. While it doesn't say the year, it should be assumed that the year is 2015 or 2016.  AND, the factor is 9.66% for 2016! (per Rev. Proc. 2014-62)

Why can't the IRS tip provide this information?  Did the IRS just overlook it?  Perhaps. These are some of the most complex tax provisions of the Affordable Care Act.

There is no penalty risk to ALEs by the error or oversight because if the plan is affordable at 9.5%, it is also affordable using 9.66%.  Also, to note even more aspects of the complexity of Section 4980H, the last sentence of Q&A 12 of Notice 2015-87 states: " For all periods, applicable large employers may rely on the 9.5 percent standard as adjusted pursuant to §36B(c)(2)(C)(iv) in applying the alternative reporting method for qualifying offers."  btw, there are safe harbors employers can use to meet the affordability measure which is a great idea given that employers don't know the household income of their employees!

Does it have to be this complicated? No.  I believe there are numerous ways the ACA tax provisions can be simplified and made more equitable.

What do you think?

ACA Confusion on 1095-C and Affordability

There is much to be confused about regarding the Affordable Care Act. While the goals of broadening access to affordable care and reducing costs are laudable, the complexity of many of the tax provisions is disconcerting to say the least.

In a recent "tax tip," the IRS pushed out on the 1095 forms, an item for Form 1095-C issued by "applicable large employers" to their full-time employees, caught my attention (again). One of the ways the IRS tells a recipient of Form 1095-C to use it follows:

"If you enrolled in a health plan through the Marketplace, the information in Part II of Form 1095-C could help determine if you’re eligible for the premium tax credit. If you did not enroll in a health plan through the Marketplace, this information is not relevant to you."

Part 2 of the 1095-C states what the cost is of the lowest cost insurance plan an employer offered. When an employer offers a plan that is "affordable" (for 2015, the cost was no greater than 9.56% of the employee's household income), the employee is not eligible for a Premium Tax Credit, assuming they even buy health insurance through the Marketplace. 

A problem is that many people don't know what their household income will be until the end of the year (or soon thereafter). Why?  Consider these things that might happen during the year:

• You get a higher paying job or extra hours.
• You get a year-end bonus.
• You win the lottery or do well in Vegas at the slots.

So, you might not know until year end that your employer-offered coverage was affordable and you're not eligible for the Premium Tax Credit you got from the Exchange that lowered the premiums you paid each month. You'll have to pay that amount back (it could be thousands of dollars)!

But wait! As long as you provided current information to the Marketplace/Exchange about the cost of the coverage offered by your employer and about your income, you'll be okay.  See page 11 of Pub 974 for more on this. What is not clear is what verification you'll have that you gave proper information to the Exchange.  Will it be enough that the Exchange gave you the Premium Tax Credit each month?  What will the IRS do with the Part 2 information and the PTC Form 8962 attached to the employee's return?  We'll have to wait and see.

All of this just illustrates a few flaws in the system of how health coverage is subsidized through the tax system. If you have employer-subsidized coverage, no worries as you're not getting a PTC, but you're getting an exclusion from your income. And, unlike the PTC that ends once your household income exceeds 400% of the federal poverty line (about $42,000 for a single person), your income exclusion for your employer-subsidized coverage doesn't end.

What do you think?

Filing Season and Affordable Care Act

I think it is correct to say that all taxpayers are affected by the Affordable Care Act in some way. Certainly individuals living in the US.  All must answer a question on the 1040 as to whether everyone in the "shared responsibility family" (basically those listed on the return), had health coverage for all months of the year. If there are any uncovered months, the next step is to see if an exemption applies for that month. If no exemption for any month, a penalty is computed and reported on the 1040.

Some individuals obtained coverage on the Exchange or Marketplace and if their household income is at least 100% of the Federal poverty line but not more than 400% FPL, they get a Premium Tax Credit. Most likely they got it each month via reduced monthly premium amounts, but they must reconcile it by filing a 1040 or 1040A and attaching form 8962.

I've got an article in the AICPA Tax Insider (2/18/16) - "What Individuals Need to Know About the Affordable Care Act for 2016." It covers items relevant to filing 2015 returns as well as for dealing with our current year 2016.

What do you think about the tax provisions of the ACA?  I find most to be some of the most complex tax provisions we have - particularly the employer mandate of IRC Section 4980H.

Video - What's New for 2016 Filing Season

Something different - a video from the AICPA of me discussing a few new items for the 2016 filing season.  Enjoy!