The Affordable Care Act, also known as Obamacare, is a US tax provision that was designed to give affordable healthcare to all Americans. This tax provision applies to all US persons, of all ages, whether or not they live in the US.
What is Required Under the Affordable Care Act?
Under the Affordable Care Act, you and your family are required to have health insurance that meets the “minimum essential coverage” requirements either through your employer, through the Marketplace or a state run insurance purchasing site. If you don’t hold the qualifying coverage (including coverage for all members of your household), then you must qualify for an exemption from the requirement in order to avoid paying the “individual shared responsibility payment.” Essentially, this a tax you pay based on either a per person basis or a percentage of family income, whichever is greater. These requirements are particularly tricky for US expats, as US expats often don’t have US healthcare insurance, and most foreign health care plans do not qualify as “minimum essential coverage.”
Are There Any Exemptions to the Affordable Care Act?
Under certain circumstances, there are exemptions to the ACA requirements. And, most US expats automatically qualify for an exemption from the ACA penalties due to Foreign Earned Income Exclusion. If you qualify for the Foreign Earned Income Exclusion, then you are exempt from needing “minimum essential coverage.” There are two ways to qualify for the Foreign Earned Income Exclusion either through the Physical Presence Test or the Bona Fide Resident Test. Please note, if you qualify for Foreign Earned Income Exclusion based on your dates living outside the US it does not mean that you have to or can claim Foreign Earned Income Exlcusion. For example:
A US government employee living in Germany for the entire year of 2015 would normally qualify for the Foreign Earned Income Exclusion using the Bona Fide Resident Test, but US Government employees cannot claim the Foreign Earned Income Exclusion. In this case, since the taxpayer qualifies for the Bona Fide Resident Test, they can take the exemption from the ACA, and not pay any penalties on their tax return.
Additionally, there are some foreign health insurance plans that cover expats both inside and outside of the US which would qualify them as having “minimum essential coverage.” However, each plan would need to be carefully examined and would need to specifically state that it conforms to the ACA “minimum essential coverage” standards. It’s always best to check directly with your provider if you have any questions or concerns as to whether the plan conforms to ACA standards.
How Do I Document This Exemption?
Just like the Foreign Earned Income Exclusion, if you qualify for an exemption from the ACA you need to make sure that you note that on your tax return. The IRS will not assume that you qualify for an exemption just because you are filing a tax return with a foreign address or claiming the Foreign Earned Income Exclusion.
If you only qualify for a partial year foreign earned income deduction, you will need to make sure that you have “minimum essential coverage” for the part of the year that you don’t qualify for Foreign Earned Income Exclusion. This is generally the case if you move during the year either into or out of the US.
What Are the Penalties for Non-Compliance?
What if you don’t qualify for the exemption and don’t have healthcare as outlined by the ACA? The answer is – you will have to pay! When you file your tax return, you will need to pay the penalties in the form of additional taxes. These taxes cannot be offset by the Foreign Tax Credit, and could cause you to have a tax liability to the IRS. There are many people who face the ACA penalties, not only when they file their taxes, but also when they fail to pay penalties and interest on delinquent returns. It is important that you confirm you comply with the ACA to avoid additional penalties and interest from the IRS for paying your taxes late.
The penalties for the ACA have risen for the 2015 tax year. The penalties are assessed when you file your tax return and amount to the highest amount under #1 or #2:
- Percentage of income:
- 5% of the household income
- Maximum – total yearly premium for the national average price of a Bronze plan sold through the marketplace. (This is different for each state, as they control the marketplace)
- Per person in your household (maximum of $975 per household):
- $325 per adult
- $162.50 per child under 18 years of age in 2015
You work as a contractor flying cargo planes into and out of Afghanistan. You work a schedule where you alternately work 30 days and return to the US for 30 days. You were misinformed and thought you qualified for the ACA exemption for working overseas and didn’t have healthcare through your employer or the marketplace. Because you don’t qualify for the Foreign Earned Income Exclusion, you don’t qualify for the ACA exemption. You will need to pay a penalty when you file your 2015 tax return. The penalty is calculated based on your state (as the healthcare marketplace is controlled by the states) but using California, the penalty is $1,588 for a family of 4 (2 adults and 2 minor children making $100,000 per year)!
When and Where Can You Get Coverage?
If you need to get coverage for you and your family, now is the time to do it. It’s too late to get coverage for the 2015 tax year, but you can look ahead for 2016. If your employer does not offer healthcare coverage, or their coverage does not conform to the ACA healthcare standards as “minimum essential coverage,” then you will need to purchase insurance through the healthcare marketplace during open enrollment.
This marketplace is an online service that allows you to choose your preferred level of coverage amongst approved providers. You would register through your resident state. As an expat, you may not have a true resident state, but if you do not qualify for the Foreign Earned Income Exlcusion, the IRS considers you a resident of a US state. Use the state that you have the best connection to, with family, property or other ties.
Open enrollment in the marketplace is only open for three months – November 1, 2015 through January 31, 2016. After January 31st, 2016, only those with life changing events (such as marriage, divorce, birth and death of family members) can make adjustments to their insurance coverage.
What If You Cannot Afford Coverage?
If you cannot afford healthcare coverage, you may qualify for a credit to help offset the premiums. This credit, called the Premium Tax Credit, can be paid directly to your healthcare provider or as a refundable credit on your tax return. The credit is based upon your income and family size.
As an expat, you are generally shielded from the penalties involving the ACA, but you should be aware of the guidelines as they change on a yearly basis. If you think you will need coverage in 2016, because you will not qualify for an exemption, now is the time to see what your options are in the healthcare marketplace. For more information visit Healthcare.gov.
Have More Questions About the Affordable Care Act?
If you have any questions regarding exemption or penalties on the Affordable Care Act Tax Provision, don’t hesitate to contact us today. We get back to you within 1 business day!