A few people have already pointed out this oddity in the Affordable Care Act including National Taxpayer Advocate Nina Olson in her 2013 Annual Report to Congress. Her excerpt notes that in determining if a person had affordable health coverage available to them from an employer, the measure is whether the self-only lowest cost coverage available to the employee costs 8% or less. It doesn’t matter if the family coverage offered by the employer is affordable. The relevance is that the family members won’t qualify for a Premium Tax Credit.

That seems odd if no “affordable” coverage was offered to the rest of the family. Isn’t that the point of the Affordable Care Act? To help make coverage affordable to everyone?

There is an example in the instructions to the new Form 8965, Health Care Exemptions. See Example 2 on page 8. It involves a family with two children and $90,000 of household income. The mother’s employer offers coverage to the mother (Susan), self-only coverage that costs $5,000. The employer also offers family coverage that costs $20,000. To avoid the Individual Shared Responsibility Payment (the new penalty of Code section 5000A that became effective starting in 2014), you need to have “minimum essential coverage” (basically employer or government or Marketplace provided coverage) or meet an exemption or pay the penalty. If Susan declines the self-only coverage, she likely will owe the penalty. This is because one key exemption – unaffordability, won’t apply to her because the cost of her self-only coverage ($5,000) is less than 8% of household income ($7,200). She should see if another exemption applies (there are 9 categories of them – see page 2 of the instructions).

The Example 2 in the instructions goes on to note that if the family doesn’t take the family coverage costing $20,000, the husband and two children will meet an exemption because at $20,000 cost, it is unaffordable as it exceeds 8% of household income. If Susan did not get the employer-provided coverage and doesn’t have any other coverage or meet any other exemption, she owes a Shared Responsibility Payment (ISRP) of $697 for 2014. That will go on new line 61 of her 2014 Form 1040 (still in draft form as of 12/9/14). Her family members don’t owe an ISRP (but they also don’t have coverage).

What the example doesn’t say (because it is looking only at the exemption from the penalty), is that because the family was offered employee self-only coverage that was affordable, the husband and children are not eligible for a Premium Tax Credit (PTC). (See FAQ8 from the IRS.) This may not be a big deal for this family because their income is close to 400% of the federal poverty line which is where the PTC ends.

But is it odd that eligibility for the PTC is based on the affordability of employee self-only coverage? Seems that way. Or, perhaps the goal is to encourage Susan to go to her employer and ask that the cost of family coverage be lowered. She should at least ask that the employer not offer unaffordable coverage to her husband because then he would potentially be eligible for a PTC (I say potentially because household income is close to 400% of the federal poverty line).

We’ll keep learning more as filing season begins and individuals and preparers start dealing with these rules to complete the 2014 Forms 1040.

More later on the PTC and ISRP and the employer shared responsibility payment (effective starting in 2015, but things to deal with now to get ready to avoid it).

What do you think?

Original Post By:  Annette Nellen