5 Things US Expats Need to Know About Obamacare and Expatriate Taxes

Obamacare and expatriate taxes

Americans are well aware that there are big healthcare changes on the horizon. As of January 1, 2014, the ACA (or more popularly known as Obamacare) goes into effect. All Americans will be subject to what is being referred to as the Individual Shared Responsibility Provision for US healthcare. This basically requires that all US residents obtain minimum health care coverage, or pay an additional tax (which essentially helps pay for insurance for those who can’t afford it on their own).

There are many opinions on whether the changes are positive or negative, but no matter what side of the fence you fall on, knowing how it impacts you is of the utmost importance. As a US expat, you are less affected than residents of the US, but here are the 5 things you DO need to know.

1. Americans living abroad are generally considered to be covered under the ‘minimum essential coverage’ clause.

This means that you are deemed to have sufficient coverage to avoid the additional taxes that are assessed to those who do not meet the minimum essential coverage requirements. Whether or not you actually have any health care coverage in your host country (or expatriate health coverage from the US) is irrelevant if you qualify as a resident of a country other than the US.

2. To be exempt from ACA provisions, expats must qualify as a resident of another country.

Expats can qualify by exemption by proving their residency in another country. Generally, if you qualify for the Foreign Earned Income Exclusion, you satisfy the minimum essential requirements in the eyes of the US government. To qualify for exemption you must pass one of the two residency tests:

  • The Physical Presence Test – To qualify for this test, which also helps reduce your expatriate taxes, you must be physically outside of the US for 330 days in a 365 day period.
  • The Bona Fide Residence Test – To be considered a bona fide resident of another country, you must live inside a foreign country for an entire year and have no immediate intentions of returning to the United States permanently. The second part of this test can raise some tax issues for US expats, especially contractors who will not qualify as they are expected to return once the contract is completed (even if they don’t plan to return to the USA).

3. Non-resident aliens living in the US are not required to comply with ACA regulations.

If they remain in the US long enough to be considered a resident alien, they will be required to obtain the minimum essential coverage or be subject to an additional tax (which is assessed based on each month in a tax year that one does not have sufficient coverage, as outlined by the plan).

There are definitely some gray areas in the mandate when it comes to non-residents in the US. ACA applies to ‘applicable individuals’ who are lawfully present in the US. Generally, those who are here for less than 3 months are not subject to ACA regulations. Once the 3 month period passes, they are considered lawfully present and must comply with the mandate. However, penalties for failing to comply are included with the taxpayer’s return for the year of failure—if a resident or non-resident alien isn’t subject to US tax and has no US filing requirement, there is no way to enforce the penalty so noncompliance becomes a non-issue.

It is important to note that coverage under a foreign healthcare policy does not exempt you from the ACA requirements.  Minimum essential coverage doesn’t actually refer to the level of benefits a plan provides—it is based on the plan being a ‘qualifying US plan.’ As such, foreign policies may have similar coverage to US health plans, but will still not meet the minimum essential coverage for exemption. A qualifying policy must be issued in the US and one must be a resident of the state from which the coverage was issued. Resident aliens with such coverage would need to enroll in a US plan or choose to pay a penalty (which, essentially, could cost less than enrolling in a US plan, especially if coverage exists under an international policy).

For clarification, minimum essential coverage includes the following:

  • Employer-sponsored coverage (including COBRA coverage and retiree coverage)
  • Coverage purchased in the individual market, including a qualified health plan offered by the Health Insurance Marketplace (also known as an Affordable Insurance Exchange)
  • Medicare Part A coverage and Medicare Advantage plans
  • Most Medicaid coverage
  • Children’s Health Insurance Program (CHIP) coverage
  • Certain types of veterans health coverage administered by the Veterans Administration
  • Coverage provided to Peace Corps volunteers
  • Coverage under the Nonappropriated Fund Health Benefit Program
  • Refugee Medical Assistance supported by the Administration for Children and Families
  • Self-funded health coverage offered to students by universities for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these programs may apply to HHS to be recognized as minimum essential coverage)
  • State high risk pools for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these program may apply to HHS to be recognized as minimum essential coverage)

Minimum essential coverage does not include coverage providing only limited benefits, such as coverage only for vision care or dental care, and Medicaid covering only certain benefits such as family planning, workers’ compensation, or disability policies.

4. US-based expatriate health plans are not subject to the Obamacare provisions.

It was stated that these plans face special challenges in complying with the law and the government has granted a temporary exemption for fully-insured expatriate plans through December 31, 2015. This exemption applies to plans that limit enrollment to ‘primary insured’s who reside outside their home country for at least six months of the plan year and any covered dependents.’ Thus, the new benefits, such as the elimination of pre-existing conditions, free preventive and wellness care and the ability to add children up to age 26, are not available on your expatriate plan.

5. If you are on a short-term overseas contract for, say, 6-months, you will not qualify as a resident outside of the US and you will be subject to the Affordable Care Act regulations.

Unfortunately, short-term overseas contractors fall into an Obamacare ‘gap.’ You don’t qualify for residency in another country, but you also can’t purchase a US health plan through the exchange because you don’t currently reside in the US. So you have two options: you can choose to obtain expatriate health coverage through a US plan (which will satisfy the minimum essential coverage if you qualify for such a plan) or pay additional penalties on your expatriate taxes, which are as follows:

  • 2014 – The GREATER of $95 per adult and $47.50 per child (up to $285 for the family) OR 1% of your family income (defined as income over and above the filing threshold)
  • 2015 – The GREATER of $325 per adult and $162.50 per child (up to $975 for the family) OR 2% of your family income (defined as income over and above the filing threshold)
  • 2016 and beyond – The GREATER of $695 per adult and $347.50 per child (up to $2085 for the family) OR 2.5% of your family income (defined as income over and above the filing threshold)

Clearly there is much to learn and understand about Obamacare but many US expats will be unaffected for as long as they live outside the US. If you are planning a return to the US or are unsure about qualifying for exemption through the residency tests, it is wise to contact an expert in expatriate taxes who can help clarify your status.

Want to Know More About Obamacare and Expatriate Taxes?

For more information about how Obamacare affects you or to learn more about expatriate taxes, please get in touch and one of our expert CPA’s or IRS Enrolled Agents will be happy to assist you!

Was this helpful?

Thank You!

More in Topic