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?

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.

HR 30 - Defining full-time worker for ACA has costs

The Affordable Care Act (ACA) imposes a penalty on "applicable large employers" starting in 2014 (changed to 2015 by the Administration). An ALE is an employer with 50 or more full-time or full-time equivalent workers. A full-time worker is one who works on average, 30 hours per week, or 130 hours per month.

There have been proposals to increase the threshold from 30 to 40, including this week - H.R. 30 of the new 114th Congress. Full-time employee is relevant in determining if an employer is an ALE, but more significantly, it is relevant in describing which employee the ALE has to offer coverage to (as well as the employee's dependents up to age 26), in order to avoid the employer mandate penalty (IRC Section 4980H).  An ALE only owes a penalty if one of its full-time employees obtains a Premium Tax Credit. The change from 30 to 40 means there are fewer employees the ALE has to offer coverage to and reduced exposure for such employees obtaining a PTC.

Sounds good for the ALEs.  But, the cost to the government could be high.  With fewer employees offered coverage from their employer (who wants to avoid a penalty), more employees are eligible to obtain Medicaid or insurance in the Marketplace (federal or state exchange).  Many of those getting insurance in the Marketplace would be eligible for a PTC.  Of course, when the employer offers coverage and subsidizes it (also necessary for the ALE to fully avoid penalty exposure), there are costs in that the employer deducts what it pays for the insurance and that income is excluded by the employee.

The Congressional Budget Office has a report on H.R. 30 which goes into more details on this issue. Per CBO's summary: "CBO and JCT estimate that enacting H.R. 30 would increase budget deficits by $18.1 billion over the 2015-2020 period and by $53.2 billion over the 2015-2025 period. The 2015-2025 total is the net of $66.4 billion in additional on-budget costs and $13.2 billion in off-budget savings (the latter attributable to increased revenues)."

Other considerations - I've seen news reports in the past about some employers reducing hours of those working on average, 30 or more hours per week, so that employers do not have to offer them coverage. These employees may also favor H.R. 30. But, part of the ACA's "shared responsibility" aspect is to have employers (at least ALEs) share in the cost of health insurance.

What do you think?