Most Americans have heard about the Affordable Care Act (ACA) which is often referred to as Obamacare, but the big question is: How does it affect ME and my expatriate taxes? If you are a contract worker living abroad, the impact on you will be different than an expat who has a somewhat permanent residence abroad. Here are the most important things you need to know.
What Exactly is the ACA?
The ACA is the extensive healthcare reform program implemented in 2014 by President Obama’s administration. It requires all Americans to have the ‘minimum essential healthcare coverage’ as outlined by the plan. The goal is for every American to have healthcare and those who cannot afford coverage will be eligible for subsidized plans. They can continue on their current plans (so long as they continue to be available) or choose a healthcare plan from the ‘marketplace’ that is sort of a healthcare one-stop-shop. For those who choose not to enroll in a plan, there will be a penalty tax assessed. The taxes collected by the government will be partially used to fund plans for those who can’t afford it.
How Does Qualifying for the Foreign Earned Income Exclusion Impact Me?
Generally, those working on contracts abroad are not overseas long enough to qualify for the FEIE via one of the two resident tests; the Physical Presence test or the Bona Fide Residence test. The Physical Presence test requires that you are overseas 330 days out of any 365 day period and have foreign earned income, and the Bona Fide Residence test is applicable only if you are overseas for at least one year. If you are a contract worker, you may not be there for 330 days or you may not be earning income from a foreign source, which would disqualify you from the Physical Presence test. But if you are on a long-term contract and DO qualify for FEIE, the ACA provisions will not apply to you.
What if I’m Covered Under a US-Based Expatriate Health Plan?
For now, Americans covered under US expatriate health plans are exempt from ACA regulations. The administration has stated that expatriate health plans are exempt until December 31, 2015, at which time there will be a more solid, long-term decision made about these types of plans and how they will be treated.
What if I Don’t Qualify for FEIE?
So, let’s assume you are on a short-term contract overseas and you aren’t covered under an expatriate health plan (and that isn’t an option for you), nor do you qualify for the FEIE. Now what? Well, unfortunately, for the months you are overseas you will be assessed a penalty tax. It seems a bit confusing that you can’t enroll in a plan in the US since you aren’t a resident, yet you are required to hold the minimum essential coverage nonetheless. Perhaps that will change in the future as the ACA continues to roll out, but for now you are stuck in sort of an ‘Obamacare gap.’ The penalties on your expatriate taxes 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)
What Happens When I Return to the US?
Once you are back on US soil, you will need to enroll in a qualified health plan or continue to be penalized for each month you remain uncovered. If you are covered for even one day in a month, you are considered to hold coverage for the entire month. This affords you a little bit of time when you return to research your healthcare options (if you aren’t covered under your employer’s plan).