Confused about What Happens at Tax Time? FAQs on Penalties, Exemptions, Reconciliation, and SEPs

By Tricia Brooks, Sandy Ahn, Sabrina Corlette and JoAnn Volk

As part of our Robert Wood Johnson Foundation funded work in providing technical assistance to consumer assisters in five states, we are getting a lot of questions about issues related to tax time and health coverage. Here are some of the common questions and answers.

Who is subject to the tax penalty (aka individual shared responsibility payment) for being uninsured? Individuals who did not have health coverage that meets minimum essential coverage (MEC) standards and do not qualify for an exemption will be subject to penalty. For each month uninsured, the consumer is assessed a prorated penalty equal to 1/12th of the annual penalty (unless the individual has a gap of coverage of less than 3 months, in which case he or she qualifies for an exemption).

If I have a gap in coverage of 3 months do I have to pay the tax penalty? Yes. Only consumers with a gap in coverage of less than 3 months can be exempted for paying the penalty. Keep in mind, however, that being covered 1 day in a month is considered having coverage for the full month.

Do I have to pay the penalty for being uninsured if I can’t afford it? Yes. We’ve gotten this question on multiple occasions, and there are a couple of reasons why consumers may be confused about this issue. First of all, individuals may qualify for an “affordability exemption” if coverage through employer-sponsored insurance (ESI) or the lowest cost bronze plan (in the case of people who do not have access to ESI) is greater than 8% of household income. Another reason people may be confused is that the IRS has indicated it may waive the “penalty” it imposes when people underpay their taxes if they have to repay excess premium tax credits. This is not the same penalty that is assessed for being uninsured, which is also called the individual shared responsibility payment.

Is it too late to get an exemption? No. Many of the exemptions can be obtained directly when the individual files their 2014 taxes. Page 2 of the instructions for form 8965 lists the exemptions that can be claimed at tax time.

Do I have to pay back excess premium tax credits if I received more than I should have? Yes. The amount of premium tax credit that an individual is allowed to take in “advance” to lower the premium they pay for Marketplace coverage is based on “projected annual income.” But the final amount that an individual can receive is based on “actual taxable income.” In addition to taxable income, nontaxable Social Security benefits for tax filers (but not necessarily for tax dependents), tax-exempt interest and foreign income also count. Consumers who underestimated their income, or were not aware that they needed to report a change in income, may have received a higher amount of advanced premium tax credits than they qualify for. The difference will have to be paid back. Repayment amounts may be capped based on income (see table 5 of the instructions for form 8965).

What if I can’t afford to pay back excess premium tax credits? Like any other tax liability, individuals who received a higher amount of premium tax credit than they should have based on actual income will have to repay the excess amount. If an individual is entitled to a refund of taxes paid, the excess amount will reduce their refund. Otherwise, the excess premium tax credit must be paid back in full by the tax filing deadline of April 15 to avoid additional costs in interest and penalties. Payment plans can be worked out with the IRS if a tax filer cannot pay the full amount by the tax filing deadline and, as noted above, the IRS may waive the “penalty” associated with late repayment. But individuals will have to pay back the excess amount plus any interest.

Now that I know I am subject to a penalty for 2014, is it too late to get coverage to avoid the penalty for 2015? Not necessarily. Consumers who meet the following criteria may qualify for a special enrollment period (SEP). This special enrollment period will start March 15 and end April 30. To qualify, individuals:

  • Cannot currently be enrolled in coverage for 2015, nor can they have enrolled through the FFM but not paid their premium.
  • Attest that they will be subject to the penalty for not having health coverage in 2014.
  • Attest that they first became aware of, or understood the implications of, the penalty for not having health insurance (shared responsibility payment) after the end of open enrollment (February 15, 2015) in connection with their 2014 taxes.

If I have not filed my taxes but have learned that I will be subject to the penalty, can I qualify for the SEP? Yes. Recent clarification from CMS indicates that consumers are not required to have already filed their tax return to qualify for the SEP as long as they meet the criteria above.

If I have already filed my taxes, do I have to show that I have paid the penalty in order to qualify for the SEP? No. Consumers who are subject to the penalty, whether they have paid it or not, can qualify for the SEP if they meet the criteria above.

If I qualify for an exemption from the tax penalty, can I get a SEP? No, only consumers who are subject to the penalty can qualify for the SEP.

Do I have to complete the application and enrollment process by April 30, 2015? Yes. Unlike other SEPs where the consumer has 60 days to enroll after being determined eligible, for the tax-penalty related SEP, consumers must apply, be determined eligible, and enroll in a plan on or before April 30, 2015.

Editor’s Note: This post was originally published on the Georgetown University Center for Children and Families’ Say Ahhh! Blog.

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The opinions expressed here are solely those of the individual blog post authors and do not represent the views of Georgetown University, the Center on Health Insurance Reforms, any organization that the author is affiliated with, or the opinions of any other author who publishes on this blog.