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IRS explains how to determine affordability exemption from individual mandate

In a Notice, IRS has provided guidance on computing the affordability exemption under Code Sec. 5000A(e)(1) and Reg. § 1.5000A-3(e) for taxpayers with a family member who (i) is not eligible for coverage under an eligible employer-sponsored plan, and (ii) resides in an area in which the Health Insurance Marketplace (Marketplace) serving the area does not offer a bronze-level qualified health plan.

Background. Code Sec. 5000A provides that each individual must have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Under Code Sec. 5000A(e)(1)(A), an individual is exempt from Code Sec. 5000A for a month if the individual lacks access to affordable minimum essential coverage—i.e., if the individual’s required contribution for minimum essential coverage exceeds a certain percentage (8.16% for 2017) of the individual’s household income for the tax year.

For individuals who are ineligible to purchase coverage under an eligible employer-sponsored plan, the required contribution is the annual premium for the “applicable plan,” reduced by the maximum amount of any premium tax credit allowable under Code Sec. 36B for the tax year, determined as if the individual were covered for the entire tax year by a qualified health plan offered through the Marketplace serving the rating area where the individual resides. In general, an applicable plan means the lowest cost bronze plan available through the Marketplace serving the rating area in which the individual resides that would cover all nonexempt members of the individual’s family on one policy.

However, if the Marketplace serving the rating area where the individual resides does not offer a single bronze plan covering all nonexempt members of the individual’s family, the premium for the applicable plan is the sum of the premiums for the lowest cost bronze plans that are offered through the Marketplaces serving the rating areas where one or more of the family members reside that would cover, in the aggregate, all the nonexempt members of the family. A nonexempt family member is an individual in the family who is not otherwise exempt under Reg. § 1.5000A-3 (which excludes certain individuals, such as incarcerated individuals and members of recognized religious sects, from the requirement to maintain minimum essential coverage) and who is ineligible for coverage under an eligible employer-sponsored plan under Reg. § 1.5000A-3(e)(3)(i).

Issue. According to IRS, market instability has resulted in limited offerings of plans on the Marketplaces in some regions, and, as a result, there are some individuals who live in rating areas where no bronze plan was offered for 2017 and are thus unable to determine whether or not they are eligible for the affordability exemption.

IRS reasoned that individuals who aren’t eligible for coverage under an eligible employer-sponsored plan and who lack access to affordable coverage should not be denied the use of the affordability exemption under Code Sec. 5000A(e)(1) and Reg. § 1.5000A-3(e) merely because they reside in an area served by a Marketplace that does not offer a bronze-level plan.

Guidance. For purposes of the affordability exemption under Code Sec. 5000A(e)(1) and Reg. § 1.5000A-3(e), if an individual resides in a rating area served by a Marketplace that does not offer a bronze plan, the individual generally should use as his or her applicable plan the lowest cost metal-level plan available in the Marketplace serving the rating area in which the individual resides that would cover all nonexempt members of the individual’s family.

However, if the Marketplace serving the rating area where an affected taxpayer resides does not offer a single bronze plan (or, if no bronze plan is available through the Marketplace, any lowest cost metal-level plan) that would cover all nonexempt members of the affected taxpayer’s family, the affected taxpayer should determine the applicable plan by adding the premiums for the lowest cost bronze plans, or the lowest cost metal-level plans if a bronze plan is not offered, that would cover in the aggregate all of the nonexempt members of the affected taxpayer’s family.

Illustration 1: Barry, who is not eligible for employer-sponsored coverage, lives in an area served by a Marketplace that does not offer a bronze plan but does offer several silver plans. To determine if he qualifies for the affordability exemption, Barry should use as his applicable plan the lowest cost silver plan available in the Marketplace that would cover him.
Illustration 2: Carrie has three dependents, and none of them are eligible for employer-sponsored coverage. Two of the dependents reside with Carrie, who lives in an area served by a Marketplace that offers bronze plans that cover Carrie and her dependents, and one resides with her ex-husband, who lives in an area that does not offer a bronze plan but does offer a silver plan. Carrie uses the lowest cost bronze plan offered by the Marketplace serving the area where she resides as her applicable plan to determine whether she qualifies for the affordability exemption.
Illustration 3: Same facts as (2), except the Marketplace where Carrie lives doesn’t offer a bronze plan that would cover her third dependent who resides with her ex-husband. Because no bronze plan in the Marketplace serving the area where Carrie resides covers all nonexempt members of her family, she must aggregate the cost of more than one plan to determine the “applicable plan” premium. Thus, Carrie would add the cost of the lowest cost bronze plan covering her and the two dependents that reside with her, plus the cost of the lowest cost silver plan offered by the Marketplace serving the area where her ex-husband and third dependent reside, to determine if she qualifies for the affordability exemption.

Effective date. Notice 2017-74 is effective for tax years ending after Dec. 31, 2016.

References: For the affordability exemption from individual mandate for individuals not eligible for coverage under eligible employer-sponsored plan, see FTC 2d/FIN ¶  A-6414; Accounting and Auditing Disclosure Manual ¶  50,00A4.11.

Notice 2017-74, 2017-51 IRB

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