The ACA and the tax penalty

On February 1, 2013, the Internal Revenue Service released a proposed regulation and sought comments. 78 FR 7314. The subject is how to calculate the penalty under the Affordable Care Act for not purchasing health insurance for a taxpayer or for any of his dependents.

The proposed rule confusingly refers to the penalty to be paid as the taxpayer's "shared responsibility payment." The terminology becomes muddled because the amount that an employer is required to pay, if it does not provide health coverage, is also called its "shared responsibility payment." See this IRS page for information about that requirement.

The French word for puzzle is "casse-tete," literally "headbreaker." That phrase would apply to this proposed regulation. The proposal is dense and impenetrable, the calculations are complex, and following tradition for the IRS, the proposal is filled with confusing jargon and newly manufactured phrases:

- flat dollar amount
- excess income amount
- applicable dollar amount
and, of course,
- shared responsibility payment (SRP)

(To be fair, at least two of these phrases were created and filled out in the Affordable Care Act. Blame Congress, not the IRS.)

To comply with the requirements and to calculate the SRP, the taxpayer must separately determine, for each month of the year and for each member of his family,

• whether that person has proper medical coverage
• whether that person is exempt from the requirement
• whether health coverage is available to that person
• what the cost to the family would be to buy health coverage for that person, and
• whether that cost would exceed 8% of the total family income

For each member of the family, for each month in the year for which (1) he or she has no coverage and (2) he or she does not meet an exemption, the taxpayer will have to calculate what the monthly penalty amount would be. At the end of the year, he will need to determine how many months it would apply, and pay the corresponding amount with his Federal income tax return.

For a single person with steady employment and income, the calculation may not be too difficult. For spouses filing jointly, each of them is regarded as the taxpayer and they bear this responsibility jointly. For a single parent or a couple with children, the calculation can end up being extremely complex, particularly when household income changes based on different events.

The statute and the proposed regulations require that these determinations be made from month to month. This means that the calculations will need to be redone if conditions change from one month to the next:

• if there are new additions to the family
• if a child moves out
• if a child moves back in
• if anyone takes on a new job, loses a job, or otherwise experiences a change in income
• if a child living with his parents takes on a summer job
• if employer-provided health insurance is offered, withdrawn, or the cost to the employee changes
• if the cost of commercially-available health insurance changes

One of the possible difficulties with the proposal is the fact that the drafters appear to assume that, for each individual in the family, spending up to 8% of the total household income on health insurance is "affordable." This may be true for very small families. The larger the family gets, the more untrue that assumption becomes.

Family size        "Affordable" figure
1                          8%
3                          24%
6                          48%
8                          64%
10                        80%
12                        96%


(It should be noted, though, that the examples that are provided include one which suggests that a different calculation methodology would apply - the employee's 8% is to be compared, for self-only coverage, and then the cost of insuring the rest of the family is considered together and compared to the household income.)

We have posted a document which displays some of the calculations that would be involved in applying the proposed regulation. This will provide an appreciation for how dense and difficult the proposal is.

One thing that we can predict: beginning in 2015, when the taxes for the tax year 2014 are going to be figured, many more Americans will find the need to have their documents done by a professional tax preparer.