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Annette Nellen
Annette Nellen
An update on Affordable Care Act busy season developments

Although busy season has started, the government is still issuing guidance relevant for 2014 returns.

March 12, 2015
by Annette Nellen, Esq., CPA, CGMA

Two significant parts of 2010’s health care law affect individual returns for 2014, making this filing season extra challenging for many taxpayers and their preparers. Two provisions—the premium tax credit and the individual shared-responsibility payment (the individual mandate)—are complex, and much guidance has been issued since 2011. Complexity stems from numerous definitions, exceptions, transition rules, yearly indexing affecting calculations, and challenges the IRS has had in finalizing forms, instructions, and publications to implement the law. For example, IRS Publication 974, Premium Tax Credit, was released in draft form in early January with only five of its eventual 40 pages!

Early on this tax season, the IRS discovered some errors, complications, and adversities for some individuals and provided relief. Beyond relief for some tax credit and individual mandate issues, the IRS also issued overdue relief for certain employers facing potential penalties of $36,500 per employee because of a clash between long-standing health reimbursement arrangements (HRA) and the health care law that has been known about for well over a year. And, in the middle of the filing season, the fate of the premium tax credit, and perhaps much of the health care law, is before the U.S. Supreme Court, with oral arguments presented on March 4.

This article summarizes health care act guidance and relief issued in early 2015 and notes health care updates relevant for 2015 and beyond.

Premium tax credit and individual mandate problems and relief

To help ease the pain of some premium tax credit results when taxpayers reconcile the Sec. 36B premium tax credit on their returns and to help with calculations for the credit and the Sec. 5000A shared-responsibility payment, the IRS or U.S. Department of Health and Human Services (HHS) addressed the following problems.

Form 1095-A errors and relief: On Feb. 20, the Centers for Medicare & Medicaid Services (CMS) within HHS announced in a blog post that about 800,000 Forms 1095-A, Health Insurance Marketplace Statement, had errors on them. Form 1095-A is issued to individuals who obtained coverage through an exchange and are potentially eligible for a premium tax credit. It contains the information necessary to calculate the credit.

A HealthCare.gov blog announced that those who received an incorrect form would likely get a corrected one posted to their Marketplace account by early March. Individuals who did not want to wait could use an online tool to find the correct “second lowest cost Silver plan (SLCSP)” amounts to compute their PTC, which was what the incorrect forms had wrong.

On Feb. 24, Treasury announced that the roughly 50,000 individuals who already filed using erroneous 1095-A data would not have to amend their returns. It noted though that if the SLCSP amount on the incorrect Form 1095-A is lower than on the correct form, it would likely be a good idea to amend because the taxpayer probably would receive a refund.

Penalties due to premium tax credit repayment: Individuals who received a premium tax credit in advance (or are entitled to a PTC) must file Form 8962, Premium Tax Credit, to reconcile the advanced amount (if any) with the correct amount. After the reconciliation, some taxpayers may have to repay some of the credit, which might cause individuals to also owe an estimated tax penalty (Sec. 6654(a)) and a failure-to-pay penalty (Sec. 6651(a)(2)). Just for 2014 returns, the IRS has provided limited relief from those penalties, described in Notice 2015-9.

Individual shared-responsibility payment (ISRP) wake-up call: On Feb. 20, CMS announced that certain individuals would be allowed to obtain coverage from the exchange during a special enrollment period from March 15 to April 30. This is available to individuals who attest to (1) having paid the ISRP for 2014 due to not having health coverage, and (2) “first became aware of, or understood the implications of, the Shared Responsibility Payment after the end of open enrollment (February 15, 2015) in connection with preparing their 2014 taxes.”

Tools: The IRS and HHS have provided some tools to help with health care compliance, including:

  • Exemption questionnaire to determine what exemption from the individual mandate, if any, may apply.
  • Affordability exemption information needed to determine the cost of Bronze-level coverage and SCLSP for 2014 on the exchange. These figures are needed by an individual without employer-offered coverage to know the cost of coverage from the exchange to determine if it would have been unaffordable (cost in excess of 8% of household income).

HRA relief

Notice 2013-54 explains how the health care act’s market reform and other provisions affect HRAs, health flexible spending arrangements (FSAs), and a few other employer-provided health care plans. Similar guidance was issued by the U.S. Department of Labor (DOL) (Technical Release No. 2013-03) and HHS, as the guidance involved employee benefits rules. Expertise in the benefits area is needed to understand the implications of the notice.

In 2014, FAQs from the IRS noted the gist of the 2013 guidance is that some plans were potentially subject to the excise tax of Sec. 4980D, imposed at $100 per day per employee (see IRS FAQs with links to 2013 and 2014 DOL and HHS FAQs, and Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code, and instructions).

Notice 2015-17 provides transition relief to employers who are not applicable large employers (per Sec. 4980H(c)(2)). Basically, employers have until June 30, 2015, to fix problem reimbursement plans. After that date, they face exposure to the Sec. 4980D excise tax. While the relief is helpful, it may have come too late for employers who tried to fix the problems before the end of 2014, which may have involved undoing the plans and increasing employee wages. The details of Notice 2015-17 and prior guidance should be reviewed well before June 30 to be sure employer plans are in compliance with the current rules.

2015 and beyond

Surviving busy season and explaining the premium tax credit and the ISRP to clients will be a challenge. At the same time, many practitioners may also be advising applicable large employers on actions to take to avoid the employer mandate penalty (Sec. 4980H) and handle reporting required on new Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. But there will be additional health care act matters to get up to speed on and address. Several of these topics are briefly summarized here.

Premium tax credit and ISRP indexed amounts: Annual changes in some factors used to compute the credit and determine exemptions from the mandate mean that eligibility can change from year to year for clients. The provisions that are adjusted annually include:

  • Premium tax credit: Applicable percentage table and contribution percentage for:
  • Premium tax credit: Eligibility for the premium tax credit is based on household income in relation to the federal poverty line (FPL) for the prior year (Regs. Sec. 1.36B-1(h)). Per the HHS FPL information for one person:
    • 2015: $11,670 (based on 2014 HHS guideline).
    • 2016: $11,770 (based on 2015 HHS guideline).
  • ISRP national average Bronze-plan premium (provides the cap for the ISRP):
  • ISRP percentage for the affordability exemption for:

Sec. 4980H indexed amounts: The employer mandate includes two possible penalties for an applicable large employer. The dollar amounts are $2,000 per full-time employee per year (Secs. 4980H(a) and (c)) and $3,000 per applicable employee per year (Sec. 4980H(b)). After 2014, these amounts are to be adjusted based on the “premium adjustment percentage” (Sec. 4980H(c)(5)). IRS FAQ No. 26 on the employer mandate states that despite transition relief that postponed first imposition of the penalty from 2014 to 2015, the inflation-adjustment provision is not affected. Even though HHS released the premium adjustment percentage for 2015 in March 2014 (CMS–9954–F), the IRS website still does not state the adjusted penalty amounts. Using the HHS figure of approximately 4.21%, the Sec. 4980H penalty amounts for 2015 appear to be $2,084 and $3,126.

Fate of the PTC: The U.S. Supreme Court should issue its decision in King v. Burwell, No. 14-114 (U.S. 3/4/15) (oral arguments), by the end of June 2015. Should the Court rule against the government, millions of individuals who obtained coverage on the federal exchange will lose their premium tax credits. The likelihood of the government’s obtaining the credit back from individuals for 2014 and 2015 is slim, given the amounts. Also, many of these individuals could not have purchased the insurance without the premium tax credit assistance. The fate of the credit may also affect the health care law if millions of people drop insurance coverage, resulting in premium increases for others. The fate of the premium tax credit may also affect the core of the law due to the reality that it would only be helping people in a few states obtain health coverage. If the government wins, the premium tax credit continues, although lawmakers may yet want to revisit the system. (For background on the litigation, see “Can Individuals on Federal Exchanges Claim the Premium Tax Credit?Tax Insider (Oct. 16, 2014).)

The “Cadillac plan” tax: Sec. 4980I imposes a 40% excise tax on the “excess benefit” of certain plans, often referred to as “Cadillac plans” due to the generous benefits provided. This tax goes into effect in 2018. The IRS released 24-page Notice 2015-16, suggesting implementation approaches and seeking comments.

Form W-2 reporting threshold: Since 2010, the IRS has allowed a transition rule for Form W-2, Wage and Tax Statement, reporting of employer-provided health coverage that was to be effective for W-2s issued for 2011 (Sec. 6051(a)(14)). Today, only employers who issued 250 or more Forms W-2 in the prior year are required to report the cost of health coverage in box 12 of Form W-2. Per the IRS: “Any guidance that expands the reporting requirements will apply only to calendar years that start at least six months after the guidance is issued” (IRS website). The transition rule may not be as broad given the new Form 1095-C reporting applicable large employers must perform starting for 2015 and the upcoming Sec. 4980I excise tax.

Looking forward

Tax practitioners were eased into the health care law as the tax provisions slowly rolled out starting in 2010. The 2015 filing season challenges of the premium tax credit and the individual mandate, as well as the start of the employer mandate for 2015, are significant, complex changes. And there is more to come. No doubt, practitioners need to find ways to deal with the challenges of finding time to help both individual and business clients understand and properly address these new rules and taxes, as well as insuring that their own firms are complying with the law.

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Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and a blog.