Effective January 1, 2014, all individuals must obtain minimum essential coverage or pay a tax. The IRS recently recognized that most employer plans do not allow individuals to enroll after the beginning of the plan year, except in limited circumstances. The result would be that an employee would be required to enroll in a non-calendar year plan in 2013 to have coverage in effect on January 1, 2014. As such, the IRS provided transitional relief to such employees and their dependents. Specifically, an individual who is eligible to enroll in an employer sponsored plan with a plan year beginning in 2013 and ending in 2014, will not be liable for a shared responsibility tax before the beginning on of the plan year in 2014. For example, an employee eligible to enroll in a plan with a plan year beginning October 1, 2013 and ending on September 30, 2014 would not be liable for the shared responsibility tax from January 1, 2014 through September 30, 2014, if the employee enrolls in coverage effective October 1, 2014.
The penalty is applied for each month during which an individual does not have minimum essential coverage. The penalty for any month is 1/12th the greater of a flat dollar amount ($95 in 2014 phased up to $695 in 2016) or a specified percentage of household income (1% in 2014 phased up to 2.5% in 2016). Penalties are 50% for children under age 18. The maximum family penalty is three times the penalty that applies for adults. The penalty is capped at the amount the individual or family would have to pay for the average cost of bronze level Exchange coverage.
Exemptions are available for individuals who cannot afford employer coverage (e.g., if required contributions for the lowest-cost employer option exceed 8% of the individual's household income), who are low-income taxpayers (e.g. individuals who are not required to file a Federal income tax return), who have coverage gaps of less than three months, who are members of Indian tribes or who are determined to have suffered a hardship. The flat dollar amounts are indexed to CPI-U. Tax credits are available for certain individuals with family income up to 400% of the federal poverty level.
Individual Mandate Hot Topics & FAQs
- Does an employer plan qualify as "minimum essential coverage" for purposes of the individual mandate?
Answer: Yes. Any employer-sponsored major medical coverage (that does not qualify as a HIPAA excepted benefit) will satisfy an employee's obligation to obtain minimum essential coverage. An insurance plan purchased through a state Exchange is another example of qualifying minimum essential coverage.
American Fidelity Assurance Company does not provide tax or legal advice.