Premium Assistance Tax Credit

The Affordable Care Act created the Premium Assistance Tax Credit to provide governmental assistance to help those individuals who meet certain low-income qualifications, obtain affordable health coverage. In order to qualify for the assistance credit, California residents must purchase health insurance through CoveredCA.com. Nonresidents must purchase coverage through their state’s marketplace (exchange).

Those making less than four times the Federal Poverty Level (FPL) may qualify for reduced premiums through the marketplace. Those with income less than two and a half times the FPL may qualify for insurance with lower deductibles and copayments. For example, the FPL for a family of four is $23,550. If a family of four has household income below $94,200 (400% of the FPL), they may qualify for assistance with their health insurance premiums. If an individual or family’s household income is below 138% of the FPL, they probably qualify for Medicaid. The Federal Poverty Level (see below) is adjusted annually for inflation.

2014 Federal Poverty Level

If a household qualifies for the credit, the insurance exchange can make advance payments to the insurance provider on their behalf. Early in 2015, individuals who bought health insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which includes information about their coverage and any premium assistance received. Form 1095-A will help individuals complete their return. Individuals claiming the premium tax credit, including those who received advance payments of the premium tax credit, must file a federal income tax return for the year and attach Form 8962, Premium Tax Credit. A taxpayer’s premium tax credit for the year may differ from the advance credit payment amount estimated by the Marketplace because the taxpayer’s family size and household income are estimated at the time of enrollment. The difference between the actual credit and the amount of advance payments will be reconciled on the tax return.

To reconcile on the return, a taxpayer must subtract the advance credit payments for the year from the amount of his premium tax credit calculated on the tax return. If the premium tax credit computed on the return is more than the advance credit payments made on the taxpayer’s behalf during the year, the difference will increase the refund or lower the amount of tax owed. If the advance credit payments are more than the premium tax credit (an excess advance credit payment), the difference will increase the amount owed and result in either a smaller refund or a balance due. This will be entered in the Tax and Credits section of the return.

The repayment limitation only applies to households that actually qualified for the premium assistance credit. The maximum repayment is $2,500 for families and $1,250 for individuals that qualify for the premium assistance credit based on actual household income. If the insurance exchange makes advance payments based on projected income, but the insured fails to qualify for the credit based on actual income, the repayment amount is not limited and 100% of the difference must be repaid.

Individual Shared Responsibility Mandate Penalty

Those who can afford health insurance but did not obtain coverage in 2014 may be required to pay an “individual responsibility penalty”. Additionally, insurance policies must meet minimum essential coverage requirements to avoid assessment of penalties. An insurance policy purchased from CoveredCA.com satisfies minimum coverage requirements.

The penalties for mandatory individual health insurance will be reported on the taxpayer’s 1040. Penalties will not apply to individuals who are not required to file a tax return. Taxpayers are responsible for providing coverage for any individual they are able to claim as a dependent on their tax return (even if not claimed). The penalty will be assessed for any month in which there was no health insurance coverage.

For 2014, the penalty will be the greater of $95 (Flat Dollar amount) per adult plus 50% of the adult amount per uninsured person under the age of 18 or 1% of the household income. For 2015, the penalty increases to $325 per person or 2% of income. In 2016, the penalty is $695 per person or 2.5% of income. The applicable income subject to the penalty is the excess household income above a threshold filing amount. The Flat Dollar amount is capped at 300% of the adult penalty. The maximum penalty is the national average yearly premium for a bronze plan. For 2017 and beyond, the penalties will be adjusted for inflation.

For example, if couple has $150,000 of household income and the threshold filing amount for Married Filing Joint with no dependents in 2014 is $20,000, then their applicable income is $130,000 ($150,000 – $20,000). Their penalty is $1,300, which is the greater of $190 ($95 x 2) or $1,300 ($130,000 x 1%).

Exemptions from Individual Mandate Penalty

There are a few ways an individual may be exempted from paying any penalties. Many of the exemptions must be applied for on the state exchange. There are a couple of exemptions that can be claimed on the individual’s tax return.

1. Religious reasons
2. Indian Tribes
3. Not required to file a tax return
4. Short coverage gap
5. Unaffordable coverage
6. Incarceration
7. Not a US citizen
8. Hardship Exemption

Short coverage gap – a continuous period of less than three months in which the individual is not covered under minimum essential coverage. If an individual does not have health insurance coverage for three or more months, none of the months included in the continuous period are treat as included in a short coverage gap and the penalty is assessed. This exemption is claimed on the tax return.

Unaffordable coverage– Individuals are exempt from any penalty for any month they lack affordable coverage. Affordability is based on the premium of the lowest cost bronze plan in the market, and reduced by the Premium Assistance Credit. Coverage is unaffordable for any month in which the cost of minimum essential coverage is greater than 8% of adjusted household income. This exemption is claimed on the tax return.

Hardship Exemption – Individuals who are homeless, were evicted in the last six months or facing eviction or foreclosure, or received a shut-off notice from a utility company may qualify for a hardship exemption. Individuals who are a victim of domestic abuse, recently filed for bankruptcy, or suffered the death of a close family member may also be eligible for the hardship exemption.