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2010 National Healthcare Law – Individual Health Insurance – Mandate, Subsidy, Penalty

By: Ronald B. Sieloff

Unless the U.S. Supreme Court rules the new federal health care law
unconstitutional or it is repealed, the Patient Protection and Affordable Care Act
(P.L. 111-148) as amended by the Health Care and Education Reconciliation Act of
2010 (P.L. 111-152) will, for the most part, go into effect in 2014.
It is now the law and to avoid nasty surprises, it is not too early for the bench, family
law attorneys, tax attorneys and other professionals to now consider the new law
when drafting orders, judgments and decrees and marital termination agreements.
YOUR QUESTIONS
The questions that you should now be asking in family law matters are:
1. Which party does federal law mandate to carry individual coverage for
children?
2. On whom will the penalty fall if it does not occur?
3. What is the effect of the award of the right to claim the income tax
dependency exemption on the health insurance mandate, penalty and
subsidy?
4. On which party’s income is the health insurance subsidy based?
5. How does the new healthcare law interrelate with Minn. Stat. §518A.41
dealing with medical support and, in particular, Minn. Stat §518A.41, subd.
4 relating to “ordering health care coverage”?
6. What new indemnification and hold harmless provisions should be
inserted in judgments, decrees and orders? Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 2
7. Will the IRS use dependency credit to impose penalties?
STATUTORY STRUCTURE OF THE NEW FEDERAL HEALTHCARE LAW
To understand the answers to the above questions, one must first generally grasp
the statutory structure of the law. There are three basic concepts:
1. Mandate. Generally, the new law requires individuals to carry a certain
prescribed level of health insurance for the individual and the individual’s
dependents unless they are covered under other qualifying health
insurance, such as employer-based health insurance or certain other
qualifying governmental plans.
2. Subsidy. The subsidy for the mandated health insurance is created in new
IRC § 36B “REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED
HEALTH PLAN.” The subsidy for the mandate is created and administered
through the filing of tax returns, is a refundable tax credit referred to as
the “premium assistance credit” and is steeply and inversely graduated
based on the “household income” of the taxpayer starting at 2% of
household income up to 133% of poverty line income and rising to 9.5% of
household income for incomes up to 400% of poverty line income (See IRC
§ 36B(b)(3)(A)).
3. Penalty. To enforce the mandate, IRC § 5000A, subd. (b) provides that if a
taxpayer fails to meet the mandated coverage for the taxpayer or a
dependent of a taxpayer as defined in IRC§152 the taxpayer, or the
taxpayer and the spouse with whom the taxpayer filed a joint return, is
liable for a penalty for each month (after three months) in which the
coverage is not in effect. Note that the penalty is tied to the dependency
exemption. The penalty must be “included” with the taxpayer’s return for
the taxable year of the period of non-coverage.
An easy way to remember these three key terms is the acronym “MSP,” MandateSubsidy-Penalty, as in Minneapolis/St. Paul airport.
THE MANDATE
IRC § 5000A requires an individual to “… ensure that the individual, and any
dependent of the individual … is covered under minimal essential coverage …” The
language in this section is odd because the statute does not require an individual to
provide coverage but only to “ensure” the coverage. The words “shall” or “must” are
not used. It is peculiar terminology and one wonders whether in the context of a
dissolution of marriage proceeding, for example, that obtaining a court order
ordering a party to provide the coverage would be sufficient to “ensure” the
coverage. Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 3
THE SUBSIDY
The federal subsidy for the cost of qualifying health insurance premiums is in the
form of a refundable tax credit to be claimed by the individual taxpayer on the
taxpayer’s income tax returns commencing in 2014. Hence, the subsidy is primarily
administered by the IRS. Under some circumstances the tax credit can be
determined and paid in advance, presumably directly to the insurance company.
Basically, the way the system is intended to operate is that beginning in 2014, each
state must set up an Exchange, which is essentially a market by which private
insurance companies will offer individual coverage of health insurance, which must
contain certain levels of “essential benefits.” There are four benefit levels to be
available, referred to as “bronze,” “silver,” “gold” and “platinum” levels. The benefit
level of each of these plans increases from the lowest “bronze” level to the best or
“platinum” level. The insurance companies will then compete as to price for each of
these offerings. The subsidy (tax credit) is based on the second lowest cost “silver”
plan available in the Exchange in the state where the taxpayer resides.
To be eligible for the tax credit, the taxpayer’s household income must be no more
than 400% of the federal poverty line for the family size involved. Those at or below
poverty level will probably be shifted to the new and expanded medical assistance
program. Those with incomes above the 400% poverty level are not entitled to the
credit. Set forth below is the 2009 U.S. HHS poverty guidelines for the 48 contiguous
states:
The 2009 Poverty Guidelines for the 48 Contiguous States and
the District of Columbia
Persons in
family
Poverty
guideline
Persons in
family
Poverty
guideline
1 $10,830 5 25,790
2 14,570 6 29,530
3 18,310 7 33,270
4 22,050 8 37,010
For families with more than 8 persons, add $3,740 for each
individual person.
SOURCE: Federal Register, Vol. 74, No. 14, January 23, 2009, pp. 4199–4201
The higher the taxpayer’s household income and the lower the number of
individuals in the “household,” the lower is the premium assistance credit. Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 4
To be eligible for the credit, taxpayers who are married at the end of the year must
file a joint income tax return. No credit is allowed to any individual for whom a
dependency exemption deduction is “allowable” to another taxpayer (apparently,
without regard to whether the other taxpayer actually claims the dependency
exemption). Note that in other provisions of the law, determinations are not based
on whether the dependency exemption is allowable, but based on whether it is
allowed, i.e. actually claimed or perhaps the IRS will force a taxpayer to claim it.
The family size in calculating “household income” is determined by the number of
individuals for whom the taxpayer is actually “allowed” personal exemptions. For
example, in a family of four with two spouses and two minor children, all of whom
are claimed exemptions on a joint return, the family size would be four.
“Household income” is the taxpayer’s adjusted gross income increased by tax
exempt interest and the foreign earned income and foreign housing expenses
excluded from gross income for taxpayers residing outside the United states or
actually working outside the United States for extended and specific number of days.
This is referred to as modified adjusted gross income. The refundable tax credit
diminishes as the taxpayer’s household income increases because the tax credit is
based on a percentage ofthe taxpayer’s income, which increases from 2% to 9.5%.
Reprinted below is a table set forth in IRC § 36B(a)(3)(A).
(A) APPLICABLE PERCENTAGE.
(i) In general – Except as provided in clause (ii), the applicable percentage
for any taxable year shall be the percentage such that the applicable percentage
for any taxpayer whose household income is within an income tier specified in
the following table shall increase, on a sliding scale in a linear manner, [emphasis
mine] from the initial premium percentage to the final premium percentage
specified in such table for such income tier:
In the case of household income
[Emphasis mine] (expressed as a
percent of poverty line) within
the following income tier:
The initial
premium
percentage is –
The final
premium
percentage is –
Up to 133% 2.0% 2.0%
133% up to 150% 3.0% 4.0%
150% up to 200% 4.0% 6.3%
200% up to 250% 6.3% 8.05%
250% up to 300% 8.05% 9.5%
300% up to 400% 9.5% 9.5%Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 5
These amounts are to be indexed in future years as well as indexed for the rate of
premium growth. Further, all of the computations to be made in determining the tax
credit will be done on a monthly basis, but for simplification in this explanation, I am
using annual amounts. Also, the break points in the percentages will be smoothed by
the linear “sliding scale” by regulations.
If the “second lowest cost silver plan” premium is used, there is disregarded
premiums for benefits offered by an insurer in addition to the required essential
health benefits and there is also disregarded any premiums for state mandated
benefits in addition to the essential health benefits. Some pediatric dental coverage
is included.
In all cases, the computations must be made for both the taxpayer’s own coverage
(“self-only coverage”) and family coverage. “Household income” is defined as
modified adjusted income of the taxpayers and all individuals for whom a
dependency exemption deduction was “allowed” and who were required to file a tax
return for that year. Hence, even though a claim for a dependency exemption may
have been allowable, if it was not claimed and allowed, the dependent’s income
would not be included and if a dependent (or for that matter, the taxpayer) was not
required to file a tax return because the person’s income did not meet the filing
threshold (in 2010, $9,350.00 for a single person or married person filing
separately, or $18,700.00 for married person filing jointly), the income of those
individuals is not included. There is no distinction between the income of a spouse
or a dependent and so, presumably, if the exemptions are not claimed the income of
the spouse or dependent would not be included. Finally, the credit cannot exceed
the lesser of the actual premium for the qualified health plan paid by the taxpayer or
the monthly premium that would have been paid for the second lowest cost “silver”
plan.
The best way to show how the premium credit works is by the following Example.
Assume that the second lowest cost silver plan for family coverage is $12,000.00 per
year for a family of four and the taxpayer actually purchased that insurance:
1. Assume that the taxpayers are married and have filed a joint return as
they are required to do.
2. Assume that the taxpayers actually claimed as dependency exemptions
their two minor children.
3. Assume that the children did not have any income (and that there was no
“kiddie tax” imputed income to the parents) and therefore were not
required to file tax returns themselves.
4. Assume that the taxpayer’s and spouse’s combined household income was
$80,000.00. This would put them in the range for claiming the tax credit. If
their household income was below $22,050.00, they would likely be on Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 6
Medical Assistance, would not be purchasing the insurance on the
Exchange and therefore would not be entitled to a credit. If their
household income was over $88,200.00, the taxpayers would not be
entitled to the healthcare tax credit because their household income
would be at 400% of the poverty line.
5. The healthcare credit is computed by first multiplying the taxpayer’s
household income of $80,000.00 by 9.5% (The percentage used where the
taxpayer’s household income lies between 300% and 400% of the poverty
line.). The product of this multiplication is $7,600.00. The refundable
healthcare credit then would be $12,000.00 minus $7,600.00 or $4,400.00.
DIVORCED PARENTS AND PATERNITY CASES
Let us examine the after tax credit cost of an Exchange purchased health insurance
policy for divorced parents. First, the following observations should be made:
1. Household income does not include child support.
2. Household income includes spousal maintenance to the recipient because
spousal maintenance is included in gross income, but is excluded from the
household income of the payor because spousal maintenance is deducted
from gross income in computing adjusted gross income.
3. In computing household income for purposes of the applicable percentage
of the poverty line, the family size to be used depends on which of the
parents is “allowed” to deduct the dependency exemption for the children.
Therefore, if the non-custodial parent is granted the right to claim a child
as an exemption (for example, the custodial parent executes IRS Form
8332 granting to the non-custodial parent the right to claim the
exemptions), the poverty line percentage for the custodial parent
(assuming the custodial parent is not remarried and has no other
children) would then be determined based on a household of one whereas
the non-custodial parent percentage would be based on a household of
two.
4. If the household income of one parent is below the poverty line and that
parent is mandated to “ensure” that the child has the insurance, that
parent would likely pay nothing for health insurance. Using the facts in the
Example above, except that the parties are divorced and the non-custodial
parent claims the two children as exemptions, if the non-custodial parent
had a household income of over $73,240.00 (four times the $18,310.00
poverty line for a family of three), that parent would have no subsidy for
an annual $12,000.00 health insurance premium covering the parent and
the two children. IRS § 5000A imposes the penalty for failure to have the
minimum insurance on the taxpayer onwhom the child “is a dependent Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 7
(as defined in § 152).” Note that the child under 18 penalty is only one-half
of the adult penalty.
5. If the higher income parent claims the dependency exemption for a child,
then that parent must pay the penalty. If the lower income parent claims
the dependency exemption, then the lower income parent must pay the
penalty.
THE PENALTY
By the year 2016 individuals who fail to maintain the minimum essential coverage
are subject to a penalty under IRC § 5000A equal to the greater of (1) 2.5% of
household income in excess of the minimum income required to file a tax return (In
2010 the income tax return filing threshold is $9,350 for a single person and
married persons filing separately and $18,700 for married persons filing jointly and
persons filing head of household) or (2) $695 per uninsured adult in the household
and one-half of that amount for each household member under age 18. The total
household penalty may not exceed $2,085. Further, the total annual household
penalty may not exceed the national average premium for a “bronze level” health
plan (not to be confused with the second lowest cost “silver level” health plan, which
is used to compute the healthcare tax credit subsidy under IRC § 36B(b)(2)(B)(i).
The per adult penalty is phased in: $95 for 2014; $325 for 2015; $695 for 2016;
thereafter the penalty is indexed to the CPI. The percentage of income penalty is also
phased in: 1% for 2014; 2% for 2015; 2.5% beginning in 2016. Married persons
filing joint returns are jointly liable for the penalty. The penalty is calculated on a
monthly basis and essentially does not begin to run until there is a lapse of
insurance for three months. The penalty is assessed through the Internal Revenue
Code and is treated as an additional amount of tax owed. The penalty must be paid
upon notice and demand by the IRS and is assessed and collected in the same
manner as most other assessable penalties. Although the IRS is not authorized to file
tax liens or seize property for collection of the tax, nor is noncompliance with the
individual responsibility to carry health insurance subject to criminal or civil
penalties and interest does not accrue on the failure to pay the assessment, the tax
must be reported on the individual income tax return and certainly, if there is any
estimated or withheld taxes paid, it will be used to pay the penalty. See Joint
Committee on Taxation, Act §1501 (JCT Rep. NO JCX – 18 – 10).
Household income is defined as adjusted gross income (AGI) of the taxpayer plus
theAGI of all individuals in the household who are required to file a tax return for
that year. Household income is increased by tax-exempt interest and the foreign
earned income exclusion. Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 8
If family coverage is not affordable (i.e. (a) the required employee contribution to an
employer health plan or (b) the net cost of the actual premium after the federal
subsidy through the refundable tax credit for an Exchange based plan for the lowest
cost “bronze level” health plan exceeds 8% of the taxpayer’s household income
(increased by any salary reduction arrangement, such as a cafeteria plan)), the
taxpayer is exempt from the penalty.
Also, if an employee (depending on his exact income) with a family is offered selfonly coverage from the employer costing 5% of income and family coverage costing
10% of income, the employee may not be eligible for the tax credit for self-only
coverage because it costs less than 9.5% of household income. However, the
employee is not exempt from the penalty for failure to purchase self-only insurance
because the self-only insurance costs less than 8% of income.
The minimum coverage required by the law is met (and no penalty is imposed) by
coverage through eligible employer sponsored plans, grandfathered group health
plans, Medicare, Medicaid, CHIPS insurance, U.S. Military and veteran’s health
insurance. These plans are listed in IRC § 5000A(f). Limited scope plans such as
dental and vision benefits, coverage for specific medical conditions, per diem
hospital indemnities and Medicare supplemental health insurance do not qualify.
If an individual is a dependent of another taxpayer, the other taxpayer is liable for
any penalty payment with respect to the individual. Therefore, a minor child
claimed as a dependency exemption on a parent’s return is not subject to the
penalty but the parent is. One possible circumstance is, for example, when the child
graduates from college, has attended college for five months of the year of
graduation and the child leaves college, but then no longer has health insurance; if
the parent claims the child as a dependency exemption for that year, then the parent
will be liable for the penalty for the adult child.
The penalty does not apply to individuals whose household income is below the
income threshold for filing income tax returns. It does not apply to an individual
who is a member of an Indian tribe. It does not apply for periods of less than three
months. There is a hardship exception. Illegal aliens are generally excluded from the
law.
Every person (i.e. insurance company) who provides insurance coverage for an
individual must report the coverage to the IRS. The IRS is required to send
notification to each individual who files an individual income tax return and who is
not enrolled in the minimum coverage.
An individual’s family size is equal to the number of personal exemptions the
taxpayer is allowed for the tax year including dependency exemptions. Adjusted Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: www.sielofflaw.com • Email: sieloff@sielofflaw.com Page | 9
gross income also includes the imputed income from the so called “kiddie tax”
whose unearned income must be reported on the parent’s tax return. Household
income is that which the IRS determines is the most recent year for which the
information is available, (which is oftentimes two years old).
If an individual is eligible for employer coverage because of a relationship to an
employee of that employer, affordability is determined by reference to the required
contribution by the employee and not the individual for whom the coverage is to be
obtained. For example, if a child is eligible for coverage through a non-custodial
parent’s employer, affordability is determined by reference to the non-custodial
parent, even though the custodial parent might claim the dependency exemption
and therefore is liable for the penalty with respect to the child if the non-custodial
parent doesn’t enroll the child in the plan. IRC § 5000A(e)(i)(C).
When and if the federal health legislation becomes effective in 2014, Minn. Stat.
§518A.41, subd. 4 relating to Court orders for health insurance for children should
be amended to reflect what I call a “marshalling of assets” approach to health
insurance for minor children because of the vast disparities of cost of health
insurance depending on the parents’ respective incomes. For example, it is senseless
to order a parent whose income is over four times the poverty rate to carry health
insurance and pay $12,000.00 per year in premiums when the other parent’s
income is below the poverty rate and would get the insurance for free. It equally
makes no sense to order the parent with a higher income to provide the insurance
and for whom a smaller tax credit would be available rather than the lower income
parent who would be eligible for a large tax credit. The Court could make
compensatory adjustments elsewhere in the decree or order.
Some recommendations to implement now.
1. A divorce decree or child support order should provide that if one parent
is subject to the penalty for failure to ensure that a child has health
insurance because the other parent was obligated to, but did not provide
it, the decree or order should provide for indemnification of the penalized
parent.
2. Consider that when the decree or order divides dependency exemptions
between parents when there are two or more children or alternates the
rights of the parents to claim the dependency exemption, one may be
creating unintended consequences and even chaos. The benefit to a party
of claiming the dependency exemption and the $1,000.00 child credit that
goes with it may be less than the cost of the mandate or penalty, which is
imposed on the party who claims the dependency exemption.
3. A reservation clause should be included in the decree or order, which
would provide that the relative obligations of the parties commencing in Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
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2014 to pay for health insurance coverage must be based on a marshalling
of assets concept whereby the dependency exemption, mandate, penalty
and subsidy through the tax credit must be allocated in such a way as to
reduce the total amount of the out-of-pocket costs to both parties and to
take full advantage of the federal subsidy for the insurance.
CONCLUSION
Health insurance orders in dissolution and paternity cases should focus on:
1. The specific needs of children.
2. Allocation of responsibility for premium payment between the parties.
3. Assignment of authority to one or both parents to choose and monitor
coverage.
4. “Marshalling Assets” of the parties to fully utilize federal benefits.
The new health care law does none of this because its basic architecture is the
Internal Revenue Code, including “the allowed” or “allowable” dependency
exemptions. It will be up to us to achieve reasonable decrees and orders under state
law even through our hands may be tied by federal preemption.
IRS CIRCULAR 230 DISCLOSURE:Under U.S. Treasury Department Regulations, we
are required to inform you that, unless expressly indicated, any tax advice contained
herein is not intended to be used and may not be used to (a) avoid penalties
imposed under the Internal Revenue Code (or applicable state or local tax law
provisions) or (b) promote, market, or recommend to another party tax-related
matters addressed herein.
GENERAL DISCLOSURES:Any information herein should be taken as general advice
and should not be relied upon as legal advice. The information provided is not
intended to nor does it create an attorney/client relationship. The presentation is
for general information purposes only and is not legal advice. You should not rely on
any information or views contained in the presentation in evaluating any specific
legal issues you may have. Please consult an attorney for specific legal advice.