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HHS reconciles buy-by date to avoid penalty for failure to obtain health insurance

October 30, 2013

The Department of Health and Human Services (HHS) has issued guidance saying that taxpayers who sign up for insurance on the Affordable Insurance Exchange Marketplace (Exchange) by the end of March won’t face a penalty under Code Sec. 5000A. This move effectively reconciles the date by which an individual must obtain coverage in order to avoid a penalty under the “short coverage gap” exception with the open enrollment dates to purchase coverage on the Exchange.

Background. Code Sec. 5000A, which was added to the Code by the Affordable Care Act (ACA), requires non-exempt U.S. citizens and legal residents for tax years ending after Dec. 31, 2013 to maintain minimum essential health insurance coverage (i.e., government sponsored programs such as Medicare, Medicaid, Children’s Health Insurance Program; eligible employer-sponsored plans; plans in the individual market; certain grandfathered group health plans; and other coverage as recognized by Health and Human Services) or pay a penalty. This requirement is referred to as the “individual mandate,” and the penalty is often referred to as the “shared responsibility payment.”

The individual mandate was highly controversial and challenged soon after the ACA was enacted. In a landmark decision, by a margin of 5-4, the mandate was upheld by the Supreme Court as a valid exercise of Congress’s taxing power. (See Weekly Alert ¶  18  07/05/2012 for more details on the Court’s decision.)

Mechanics of the individual mandate. Under Code Sec. 5000A, nonexempt individuals have a choice of either maintaining minimum essential coverage for themselves and any nonexempt family members (generally, dependents), or including an additional payment with the Federal income tax return.

The amount of the shared responsibility payment for any tax year is generally the sum of monthly penalty amounts for all months in the tax year in which any nonexempt individual for whom the taxpayer is liable under Code Sec. 5000A(b) did not have minimum essential coverage, computed based on either a flat dollar amount or a percentage of the taxpayer’s income over established thresholds. (Code Sec. 5000A(c))

There are a number of situations in which an individual is exempt from the penalty imposed by Code Sec. 5000A(a), including “short coverage gaps,” i.e., when the individual isn’t covered by minimum essential coverage for a continuous period (beginning no earlier than Jan. 1, 2014) of less than three months. Reg. § 1.5000A-3(j)(1))

Relevant dates. Thus, the following are among the operative dates for purposes of the individual mandate:

…The individual mandate goes into effect on Jan. 1, 2014.
…Open enrollment for coverage on the Exchange is from Oct. 1, 2013 through Mar. 31, 2014.
…A non-exempt individual will face a penalty if he doesn’t have coverage for three consecutive post-2013 months (including January, February, and March of 2014).

Under these rules, a person could purchase insurance on the Exchange within the open enrollment period, and if the policy doesn’t go into effect until after March, still face a penalty for exceeding the exception for a short coverage gap.

RIA observation: The White House acknowledged this problem earlier this month, and at that time, it encouraged individuals to buy insurance coverage by mid-February in order to avoid facing a penalty.

HHS reconciles deadlines. Following the Administration’s statement that it would try to harmonize these deadlines, on Oct. 28, HHS issued guidance stating that individuals who sign up for insurance on the Exchange within the open enrollment period won’t face a penalty.

HHS stated that it “is exercising its authority to establish an additional hardship exemption in order to provide relief for individuals in this situation.” This exemption will effectively be claimed in conjunction with filing a federal income tax return in 2015, without any need to request an exemption. HHS also indicated that further detail would be provided in 2014 on how to claim the exemption.

The Administration, as well as the HHS, has emphasized that this “clarification” isn’t a substantive modification, noting that the start date for benefits and overall deadline for enrolling remain unchanged.

Although this news is viewed as welcome news by many, in that it effectively gives individuals more time than originally thought to obtain coverage and not face a penalty, many politicians are calling for further changes, such as extending the open enrollment period or delaying the individual mandate penalty for a year.