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http://healthaffairs.org/blog/2014/08/08/implementing-health-reform-transferring-information-among-the-exchanges-the-irs-and-taxpayers/
For better or worse, Congress decided to use our tax system and the Internal Revenue Service to operationalize two of the most important features of the Affordable Care Act (ACA): the premium tax credits that make coverage affordable to many lower and moderate-income Americans, and the individual responsibility provision which ensures that healthy as well as unhealthy Americans obtain health coverage.
The tax credits are available to otherwise uninsured Americans with incomes between 100 and 400 percent of the federal poverty level. For 2014, tax credits are being received by 85 percent of marketplace enrollees and are reducing their premiums in the federally-facilitated exchanges by 76 percent.
The individual mandate is enforced through a tax that will be imposed on Americans who do not have minimum essential coverage—such as employment-based coverage, individual coverage, or coverage through a government program—and who do not qualify for an exemption. For 2014, these individuals will owe a tax for each month that they lack minimum essential coverage of 1/12th of $95 per adult and $47.50 per child (up to $285 for a year) or 1 percent of their income above the tax filing limit up to the average annual cost of bronze plan ($2,448 per individual up to $12,240 for families of five or more)
In a recent post on Health Affairs Blog, Jon Kingsdale and Julia Lerche offered an excellent analysis of some of the difficulties that may be encountered during the 2014 tax filing season. In another post I described briefly recently released 2014 tax forms, as well as further guidance on tax matters. This post examines how tax reporting and filing will be handled in greater detail, and also discusses a federal appellate court decision rejecting a challenge to the Affordable Care Act.
Advance premium tax credits are currently being provided to individuals enrolled in qualified health plans through the exchange based on their projected income for 2014. When these individuals file their tax returns in the spring of 2015 based on their actual 2014 income, the IRS will have to reconcile the advance premium tax credits they have received with the tax credits to which they were entitled given their actual 2014 income. Individuals will also have to report whether they complied with the individual responsibility provision and pay a tax if they did not.
The 2015 Tax Season
Draft tax forms to be used for ACA reporting were published by the IRS on July 24, 2014. Individuals will file their tax returns using form 1040, 1040-A, or 1040-EZ. Each of these forms will include a box that taxpayers can check if they had minimum essential coverage for the entire year. Each also includes a line where taxpayers can enter the additional tax they will owe if they lacked minimum coverage in one or more months. This line is labeled “see instructions.” Presumably the instructions for the forms will include a worksheet that the taxpayer’s who lacked minimum essential coverage can use to calculate the amount of the tax owed.
This will not be a simple calculation, as individuals will not only have to calculate the amount of the penalty, but will also have to determine whether coverage was “affordable” (cost more than 8 percent of household income) or whether they had a short-term gap (less than three months) in coverage, and thus qualify for an exemption. The amount of the individual responsibility tax reported will be added to taxes otherwise owed to calculate the “total tax” owed by the taxpayer. This total will be subtracted from the amount withheld from the taxpayer’s income or paid in estimated taxes to determine the amount the taxpayer owes in additional taxes or the taxpayer’s refund.
If the taxpayer is owed a refund, as most are, the individual responsibility tax will be collected from the refund. If the taxpayer’s withholdings or estimated tax payments are not sufficient to cover the total amount of taxes owed including the individual responsibility tax, the taxpayer will owe the additional amount to the IRS, although under the ACA the IRS cannot impose liens or levies or criminal penalties to collect the individual responsibility tax.
Individuals who qualify for an exemption from the requirement based on hardship, religious conviction, or receipt of services through an Indian health care provider must request an exemption through their exchange. Individuals granted these exemptions must claim the exemption when they file their return on form 8965 and provide their exemption certificate number. Individuals claiming an exemption on their return — for example for membership in a health care sharing ministry, incarceration, a short gap in coverage, lack of lawful presence in the United States, or lack of affordability – must also claim this exemption on the form 8965 for each month it applies. Individuals with incomes below the tax filing limit do not need to file a return and will receive an exemption automatically.
Beginning with tax year 2015, individuals will receive a 1095-B from the insurer, self-insured employer, or government agency that provides them coverage, or a 1095-C from their large employer informing them if they had minimum essential coverage. For 2014, however, these reports are optional, and I would expect few employers or insurers will provide them. Individuals who received coverage through the exchanges will receive a 1095-A reporting that coverage. But individuals who are not covered through the exchange will have to rely on their own records or memory to report whether or not they were covered.
It is unclear how, in the absence of a 1095-B or 1095-C, the IRS will verify claims of coverage for 2014, but they may have access to credit bureaus or other sources of information, and they can of course audit returns. Individuals must sign the return “under penalty of perjury,” and knowingly lying about coverage would be a criminal offense punishable by up to three years imprisonment.
Individuals who received premium tax credits must complete a form 8962 through which they must calculate the amount of premium tax credit they are due for 2014 considering their family size, modified adjusted gross household income, household income as a percentage of the federal poverty level, and the lesser of the actual premium for their coverage or for the second-lowest cost silver plan that would have covered their family. They must then report the amount of advance premium tax credit they received from the exchange and the actual amount they were in fact entitled to. Where a taxpayer received a tax credit for an individual not claimed as a dependent or failed to receive a tax credit for an individual claimed as a dependent, or where an individual was married for only part of the year, the back side of the form must be filled out to allocate or apportion tax credits.
Overpayments must be paid back, subject to limitations found in amendments to the statue, ranging from $300 for individuals with incomes below 200 percent of poverty to $2,500 for families with incomes between 300 and 400 percent of poverty. Individuals with incomes above 400 percent of poverty must pay back all advance premium tax credits they have received. Any overpayment or underpayment of advance premium tax credits must be entered as a net premium credit on the 1040 or 1040-A and will be either added to or subtracted from taxes owed or a refund. The IRS may use any means legally available to it for collecting amounts owed the IRS for overpayments of tax credits beyond statutory limits, but presumably the IRS may also use means available to it for negotiating or settling tax claims if immediate repayment would cause undue hardship.
The exchange must report to individuals and to the IRS, using the 1095-A, the amount of premium tax credits the individual received as an advance premium tax credit for each month of the year, as well as the individual’s monthly premium amount and the monthly premium amount of the second-lowest cost silver plan available to the individual and his or her coverage household. The exchange must provide the 1095-A to individuals and the IRS no later than January 31, 2014.
Issue of Accurate Information
As Kingsdale and Lerche describe in their blog post, this is going to be a heavy lift. Exchanges are required ordinarily to report to the IRS on a monthly basis information regarding policies purchased through the exchange and exemptions granted by it. Because of problems with the launch of exchange back-office functions, however, the first monthly report from the exchanges is expected to be filed on October 15, 2014 for cumulative data through September 30, 2014. These data are supposed to be updated and cleaned up on a monthly basis, but as a practical matter there will be little opportunity to do this before 1095-A must be filed for 2014. If the 1095-A forms are late, the lower- and moderate-income taxpayers who will be waiting for them — and for the refunds that they hope to receive once their returns are filed — will be very unhappy.
Under the reporting rules, exchanges have until April 15, 2015 to correct errors in reported data, but if these errors affect the amount of over- or under-payment of advance credits already reported by a taxpayer, the taxpayer may need to file an amended return. Moreover, as Kingsdale and Lerche point out, if an individual is within the 90-day grace period for nonpayment of premiums at the end of the year, the exchange may not know until after the year ends, until it is too late to finalize the 1095-A, whether the individual paid back premiums owed and thus reinstated coverage and earned tax credits for the final months of the year.
A report released by the IRS Inspector General on August 5, 2014 found that the IRS had a nearly perfect record in providing income data to the exchanges during 2014. Whether the exchanges, and individual taxpayers, are capable of providing accurate information to the IRS, on the other hand, is cause for serious concern.
There are two issues here. The first is whether HHS and the IRS, as well as the federally facilitated and state exchanges, can provide accurate information to taxpayers by the end of January 2015. They will have to do this at the same time they are redetermining eligibility and reenrolling millions of individuals who were enrolled for 2014, and enrolling millions of new enrollees for 2015. It is likely that an effort equal to or greater than that which saved the exchanges in the fall of 2013 will be needed again this year to accomplish this Herculean task.
The second is whether individuals can figure out how to report their insurance coverage and to calculate properly the premium tax credits they are due, and compare these to those that have been paid in advance. It is likely that some of the individuals receiving tax credits will have never filed returns before, or only filed a 1040-EZ or 1040-A. Many will be illiterate, at least in English, or innumerate. Most will probably have to turn to tax preparation services for assistance, which had better be prepared to help them figure this out. It is also to be hoped that the IRS will deal with taxpayers who find this all overwhelming with patience and understanding.
Another ACA Challenge Rebuffed
On August 7, 2014, the Ninth Circuit federal court of appeals rejected yet another Affordable Care Act challenge in Coons v. Lew. The case had originally been brought by two Arizona residents (a physician, Eric Novak, and another private citizen, Nick Coons) and two congressmen (Jeff Flake and Trent Franks) as one of the many cases challenging the individual mandate as unconstitutional. These claims were dismissed in the wake of the Supreme Court’s decision upholding the mandate as a tax. The case continued, however, raising other issues.
The most significant of these was a challenge to the constitutionality of the Independent Payment Advisory Board. The IPAB is an administrative body that is charged by the ACA to monitor the growth of Medicare spending and develop and make recommendations to Congress when it appears that the expenditure targets set in the statute are not met. The recommendations are to be considered by Congress, and unless Congress adopts an alternative proposal that achieves equivalent savings, HHS must implement the recommendations of the board. No IPAB has yet been appointed, and Medicare spending growth has been within the spending targets so that the IPAB would not have to make recommendations were it in place. Novak challenged the IPAB provisions as unconstitutionally delegating congressional authority to an administrative agency.
Coons raised several other issues as well. He claimed that the individual mandate violated his constitutional right to medical autonomy because it forced him to buy health insurance he did not want and to enter into an “intimate relationship concerning his health and medical care with millions of non-physician intermediaries employed by health insurers, rather than directly with the physician of” his choice. He further claimed that the ACA burdened his fundamental right to informational privacy by forcing him to disclose personal medical information to insurers. Finally, the plaintiffs argued that they were protected from purchasing insurance by the Arizona Health Care Freedom Act, which provides that Arizona citizens could forego insurance coverage without having to pay a penalty.
The district court dismissed all claims, and plaintiffs Coons and Novak (but not the congressmen) appealed to the Ninth Circuit. The panel, consisting of Judges Mary Schroeder, Susan Graber, and Jay Bybee, in a decision written by Judge Graber, affirmed the district court’s judgment rejecting the medical autonomy and privacy claims and holding the Arizona Act to be preempted by the ACA.
The court held that the ACA does not require Coons to purchase health insurance, but gives him the option to pay a tax instead. The Constitution does not provide a substantive due process right to be free from a tax. His medical privacy claim was not ripe for adjudication because he had not alleged that any third party had requested his medical information, and any claim as to medical privacy was purely speculative. The court also affirmed the district court’s finding that that the Arizona act conflicted with the ACA individual mandate and was thus preempted under the Supremacy Clause.
For better or worse, Congress decided to use our tax system and the Internal Revenue Service to operationalize two of the most important features of the Affordable Care Act (ACA): the premium tax credits that make coverage affordable to many lower and moderate-income Americans, and the individual responsibility provision which ensures that healthy as well as unhealthy Americans obtain health coverage.
The tax credits are available to otherwise uninsured Americans with incomes between 100 and 400 percent of the federal poverty level. For 2014, tax credits are being received by 85 percent of marketplace enrollees and are reducing their premiums in the federally-facilitated exchanges by 76 percent.
The individual mandate is enforced through a tax that will be imposed on Americans who do not have minimum essential coverage—such as employment-based coverage, individual coverage, or coverage through a government program—and who do not qualify for an exemption. For 2014, these individuals will owe a tax for each month that they lack minimum essential coverage of 1/12th of $95 per adult and $47.50 per child (up to $285 for a year) or 1 percent of their income above the tax filing limit up to the average annual cost of bronze plan ($2,448 per individual up to $12,240 for families of five or more)
In a recent post on Health Affairs Blog, Jon Kingsdale and Julia Lerche offered an excellent analysis of some of the difficulties that may be encountered during the 2014 tax filing season. In another post I described briefly recently released 2014 tax forms, as well as further guidance on tax matters. This post examines how tax reporting and filing will be handled in greater detail, and also discusses a federal appellate court decision rejecting a challenge to the Affordable Care Act.
Advance premium tax credits are currently being provided to individuals enrolled in qualified health plans through the exchange based on their projected income for 2014. When these individuals file their tax returns in the spring of 2015 based on their actual 2014 income, the IRS will have to reconcile the advance premium tax credits they have received with the tax credits to which they were entitled given their actual 2014 income. Individuals will also have to report whether they complied with the individual responsibility provision and pay a tax if they did not.
The 2015 Tax Season
Draft tax forms to be used for ACA reporting were published by the IRS on July 24, 2014. Individuals will file their tax returns using form 1040, 1040-A, or 1040-EZ. Each of these forms will include a box that taxpayers can check if they had minimum essential coverage for the entire year. Each also includes a line where taxpayers can enter the additional tax they will owe if they lacked minimum coverage in one or more months. This line is labeled “see instructions.” Presumably the instructions for the forms will include a worksheet that the taxpayer’s who lacked minimum essential coverage can use to calculate the amount of the tax owed.
This will not be a simple calculation, as individuals will not only have to calculate the amount of the penalty, but will also have to determine whether coverage was “affordable” (cost more than 8 percent of household income) or whether they had a short-term gap (less than three months) in coverage, and thus qualify for an exemption. The amount of the individual responsibility tax reported will be added to taxes otherwise owed to calculate the “total tax” owed by the taxpayer. This total will be subtracted from the amount withheld from the taxpayer’s income or paid in estimated taxes to determine the amount the taxpayer owes in additional taxes or the taxpayer’s refund.
If the taxpayer is owed a refund, as most are, the individual responsibility tax will be collected from the refund. If the taxpayer’s withholdings or estimated tax payments are not sufficient to cover the total amount of taxes owed including the individual responsibility tax, the taxpayer will owe the additional amount to the IRS, although under the ACA the IRS cannot impose liens or levies or criminal penalties to collect the individual responsibility tax.
Individuals who qualify for an exemption from the requirement based on hardship, religious conviction, or receipt of services through an Indian health care provider must request an exemption through their exchange. Individuals granted these exemptions must claim the exemption when they file their return on form 8965 and provide their exemption certificate number. Individuals claiming an exemption on their return — for example for membership in a health care sharing ministry, incarceration, a short gap in coverage, lack of lawful presence in the United States, or lack of affordability – must also claim this exemption on the form 8965 for each month it applies. Individuals with incomes below the tax filing limit do not need to file a return and will receive an exemption automatically.
Beginning with tax year 2015, individuals will receive a 1095-B from the insurer, self-insured employer, or government agency that provides them coverage, or a 1095-C from their large employer informing them if they had minimum essential coverage. For 2014, however, these reports are optional, and I would expect few employers or insurers will provide them. Individuals who received coverage through the exchanges will receive a 1095-A reporting that coverage. But individuals who are not covered through the exchange will have to rely on their own records or memory to report whether or not they were covered.
It is unclear how, in the absence of a 1095-B or 1095-C, the IRS will verify claims of coverage for 2014, but they may have access to credit bureaus or other sources of information, and they can of course audit returns. Individuals must sign the return “under penalty of perjury,” and knowingly lying about coverage would be a criminal offense punishable by up to three years imprisonment.
Individuals who received premium tax credits must complete a form 8962 through which they must calculate the amount of premium tax credit they are due for 2014 considering their family size, modified adjusted gross household income, household income as a percentage of the federal poverty level, and the lesser of the actual premium for their coverage or for the second-lowest cost silver plan that would have covered their family. They must then report the amount of advance premium tax credit they received from the exchange and the actual amount they were in fact entitled to. Where a taxpayer received a tax credit for an individual not claimed as a dependent or failed to receive a tax credit for an individual claimed as a dependent, or where an individual was married for only part of the year, the back side of the form must be filled out to allocate or apportion tax credits.
Overpayments must be paid back, subject to limitations found in amendments to the statue, ranging from $300 for individuals with incomes below 200 percent of poverty to $2,500 for families with incomes between 300 and 400 percent of poverty. Individuals with incomes above 400 percent of poverty must pay back all advance premium tax credits they have received. Any overpayment or underpayment of advance premium tax credits must be entered as a net premium credit on the 1040 or 1040-A and will be either added to or subtracted from taxes owed or a refund. The IRS may use any means legally available to it for collecting amounts owed the IRS for overpayments of tax credits beyond statutory limits, but presumably the IRS may also use means available to it for negotiating or settling tax claims if immediate repayment would cause undue hardship.
The exchange must report to individuals and to the IRS, using the 1095-A, the amount of premium tax credits the individual received as an advance premium tax credit for each month of the year, as well as the individual’s monthly premium amount and the monthly premium amount of the second-lowest cost silver plan available to the individual and his or her coverage household. The exchange must provide the 1095-A to individuals and the IRS no later than January 31, 2014.
Issue of Accurate Information
As Kingsdale and Lerche describe in their blog post, this is going to be a heavy lift. Exchanges are required ordinarily to report to the IRS on a monthly basis information regarding policies purchased through the exchange and exemptions granted by it. Because of problems with the launch of exchange back-office functions, however, the first monthly report from the exchanges is expected to be filed on October 15, 2014 for cumulative data through September 30, 2014. These data are supposed to be updated and cleaned up on a monthly basis, but as a practical matter there will be little opportunity to do this before 1095-A must be filed for 2014. If the 1095-A forms are late, the lower- and moderate-income taxpayers who will be waiting for them — and for the refunds that they hope to receive once their returns are filed — will be very unhappy.
Under the reporting rules, exchanges have until April 15, 2015 to correct errors in reported data, but if these errors affect the amount of over- or under-payment of advance credits already reported by a taxpayer, the taxpayer may need to file an amended return. Moreover, as Kingsdale and Lerche point out, if an individual is within the 90-day grace period for nonpayment of premiums at the end of the year, the exchange may not know until after the year ends, until it is too late to finalize the 1095-A, whether the individual paid back premiums owed and thus reinstated coverage and earned tax credits for the final months of the year.
A report released by the IRS Inspector General on August 5, 2014 found that the IRS had a nearly perfect record in providing income data to the exchanges during 2014. Whether the exchanges, and individual taxpayers, are capable of providing accurate information to the IRS, on the other hand, is cause for serious concern.
There are two issues here. The first is whether HHS and the IRS, as well as the federally facilitated and state exchanges, can provide accurate information to taxpayers by the end of January 2015. They will have to do this at the same time they are redetermining eligibility and reenrolling millions of individuals who were enrolled for 2014, and enrolling millions of new enrollees for 2015. It is likely that an effort equal to or greater than that which saved the exchanges in the fall of 2013 will be needed again this year to accomplish this Herculean task.
The second is whether individuals can figure out how to report their insurance coverage and to calculate properly the premium tax credits they are due, and compare these to those that have been paid in advance. It is likely that some of the individuals receiving tax credits will have never filed returns before, or only filed a 1040-EZ or 1040-A. Many will be illiterate, at least in English, or innumerate. Most will probably have to turn to tax preparation services for assistance, which had better be prepared to help them figure this out. It is also to be hoped that the IRS will deal with taxpayers who find this all overwhelming with patience and understanding.
Another ACA Challenge Rebuffed
On August 7, 2014, the Ninth Circuit federal court of appeals rejected yet another Affordable Care Act challenge in Coons v. Lew. The case had originally been brought by two Arizona residents (a physician, Eric Novak, and another private citizen, Nick Coons) and two congressmen (Jeff Flake and Trent Franks) as one of the many cases challenging the individual mandate as unconstitutional. These claims were dismissed in the wake of the Supreme Court’s decision upholding the mandate as a tax. The case continued, however, raising other issues.
The most significant of these was a challenge to the constitutionality of the Independent Payment Advisory Board. The IPAB is an administrative body that is charged by the ACA to monitor the growth of Medicare spending and develop and make recommendations to Congress when it appears that the expenditure targets set in the statute are not met. The recommendations are to be considered by Congress, and unless Congress adopts an alternative proposal that achieves equivalent savings, HHS must implement the recommendations of the board. No IPAB has yet been appointed, and Medicare spending growth has been within the spending targets so that the IPAB would not have to make recommendations were it in place. Novak challenged the IPAB provisions as unconstitutionally delegating congressional authority to an administrative agency.
Coons raised several other issues as well. He claimed that the individual mandate violated his constitutional right to medical autonomy because it forced him to buy health insurance he did not want and to enter into an “intimate relationship concerning his health and medical care with millions of non-physician intermediaries employed by health insurers, rather than directly with the physician of” his choice. He further claimed that the ACA burdened his fundamental right to informational privacy by forcing him to disclose personal medical information to insurers. Finally, the plaintiffs argued that they were protected from purchasing insurance by the Arizona Health Care Freedom Act, which provides that Arizona citizens could forego insurance coverage without having to pay a penalty.
The district court dismissed all claims, and plaintiffs Coons and Novak (but not the congressmen) appealed to the Ninth Circuit. The panel, consisting of Judges Mary Schroeder, Susan Graber, and Jay Bybee, in a decision written by Judge Graber, affirmed the district court’s judgment rejecting the medical autonomy and privacy claims and holding the Arizona Act to be preempted by the ACA.
The court held that the ACA does not require Coons to purchase health insurance, but gives him the option to pay a tax instead. The Constitution does not provide a substantive due process right to be free from a tax. His medical privacy claim was not ripe for adjudication because he had not alleged that any third party had requested his medical information, and any claim as to medical privacy was purely speculative. The court also affirmed the district court’s finding that that the Arizona act conflicted with the ACA individual mandate and was thus preempted under the Supremacy Clause.