Tax Year 2016 Changes Related to the Affordable Care Act

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Tax year 2016 is shaping up to be another busy year for tax professionals across the country; keeping up to date with the latest Affordable Care Act (ACA) changes is instrumental in servicing your clients the best way possible. As we navigate through the next tax season, here are the most important ACA changes and provisions carried over from last year that you, your staff and clients need to know about.

Individuals

Tax year 2016 marks the third year that Americans are required to report their health insurance status on their tax returns under the ACA. For most of your clients, it will be another check the box year on Form 1040, indicating they had qualifying health care coverage for the entire year.

Individual Shared Responsibility Payment

The Individual Shared Responsibility Payment applies for any given month that either the taxpayer, spouse or dependents don’t have qualified coverage or an exemption.

The penalty is calculated at the greater of a percentage of household income above the filing threshold, or a flat dollar amount.

In 2017 and beyond, the flat dollar amount of $695 will include a cost-of-living adjustment. The family cap is three times the flat dollar amount, or $2,085. The overall cap on the penalty is based off the National Average Bronze Plan Premium.

Premium Tax Credit

The 2015 federal poverty levels used in tax year 2016 (look back provision) have been indexed for inflation. Taxpayers falling within 100 percent and 400 percent of the federal poverty level may be eligible for premium tax credit.

Coverage Exemptions

There are two changes:

  1. As of Sept. 1, 2016, the coverage exemptions for members of health care sharing ministries, members of Indian tribes and those who are incarcerated are no longer granted by the Marketplace, except in Connecticut. Taxpayers who have an ECN issued by the Marketplace for one or more of these three exemptions may report the ECN on Form 8965 filed with their income tax return for 2016. Taxpayers who qualify for one or more of these exemptions, but who do not have an ECN issued by the Marketplace, may claim these exemptions on Part III of Form 8965.
  2. Eligible for Health Coverage Tax Credit (HCTC) – You were eligible for the health coverage tax credit in a month. (For this purpose, you are considered eligible for the HCTC if you would have been eligible had you enrolled in HCTC qualifying coverage.) This exemption is available only for July through December 2016.

Employer Shared Responsibility (ESR) Provision

The mandate that employers need to cover their employees with health insurance, or face a penalty, began to take effect in tax year 2015, and will cover additional employers in tax year 2016.

  • Employers with fewer than 50 workers are exempt and not subject to the employer shared responsibility rules (ESRs).
  • Employers with between 50 and 99 full-time employees are also liable for the ESR, beginning in tax year 2016. Employers with at least 100 full-time employees were liable for the ESR, beginning in tax year 2015.

Workforce Size

Determining if you’re an applicable large employer (ALE) for the current year is based on the average employee count for 12 months of the prior year. A full-time employee is an employee with at least 130 hours of service in a calendar month. To determine full-time equivalent (FTE) employees for each month, combine the number of hours of service for all those who are not full-time employees – up to 120 hours per employee – and divide the total by 120.

Employer Shared Responsibility Provision

An employer with at least 100 full-time employees is liable for the ESR, if one of the following conditions exists:

  • The employer does not offer health coverage, or offers coverage to fewer than 95 percent (increased from 70 percent in 2015) of its full-time employees and dependents, and at least one of the full-time employees receives a premium tax credit.
  • The employer offers health coverage to at least 95 percent (increased from 70 percent in 2015) of its full-time employees and dependents, but at least one full-time employee receives a premium tax credit. This may occur because the employer did not offer coverage to that employee, or because the coverage the employer offered that employee was either unaffordable or did not provide minimum value.

Calculating the Penalty

  • If an employer does not offer coverage to at least 95 percent of full-time employees, the ESR equals the number of full-time employees minus 30 (down from 80 last year), multiplied by 1/12 of $2,000, provided at least one full-time employee receives a premium tax credit for that month.
  • If an employer offers coverage to at least 95 percent of its full-time employees, but has one or more full-time employees who receive a premium tax credit, the amount of payment for a month equals the number of full-time employees who receive a premium tax credit for that month, multiplied by 1/12 of $3,000.
  • The amount of ESR payment for any calendar month is capped at the number of employer’s full-time employees for a month minus 30 (down from 80 last year), multiplied by 1/12 of $2,000.

Source Documents

The following source documents will be used to support ACA computations continuing into tax year 2016, and with no changes planned from last year:

  • Form 1095-A, Health Insurance Marketplace Statement, is issued by health insurance exchanges, which confirms coverage, premiums and subsidies received to help pay for health insurance. This form is needed for accurate filing. If taxpayers underestimate their income and owe a portion of the subsidy back to the IRS, they may be able to reduce their household income and the amount owed by contributing money to a retirement account or health savings account.
  • Form 1095-B, Health Coverage Statement, may be issued by providers of minimum essential coverage, including self-insured employers. This form is distributed to those who have private health insurance, an employer plan and to those who received government sponsored health insurance, such as Medicare, Medicaid or TriCare. The form indicates whether the taxpayer, spouse and dependents had qualifying health coverage (minimum essential coverage) for some or all months during the year. Individuals with minimum essential coverage are not subject to the individual shared responsibility payment (ACA penalty).
  • Form 1095-C, Employer Provided Health Insurance Offer and Coverage Statement, may be distributed to those who received health insurance through an employer with 50 or more employees. The form indicates whether the employer offered qualifying health coverage to an employee, spouse and dependents for some or all months during the year.

As was the case in 2015, taxpayers do not need to attach or enter information from Forms 1095-B or 1095-C on their 2016 tax returns. This means that if you had non-Marketplace health insurance during the 2016 Tax Year, these new forms will be for informational purposes only, and you’re not required to send in proof of health care coverage to the IRS. However, you should keep these documents with your other records. Other documentation serving as proof of coverage includes insurance cards, explanation of benefits’ statements from your insurer, and W-2 or payroll statements reflecting health insurance deductions.

Miscellaneous

Last year’s PATH legislation suspends, for two years, two new taxes that were installed as part of the health care reform law:

  • The excise tax on medical devices, which was effective for sales after Dec. 31, 2012, won’t apply to sales between Jan. 1, 2016, and Dec. 31, 2017.
  • The 40 percent excise tax on high-end health insurance plans, known as the Cadillac Tax, that would have applied beginning in 2018 will, instead, apply for tax years beginning after 2019.