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January 31, 2012

CMS, IRS issue proposed rules governing shared responsibility for mandatory health insurance coverage and eligibility rules for exemptions

By Susan L. Smith JD, MA

Regulations proposed by the Centers for Medicare & Medicaid Services (CMS), HHS, and the Internal Revenue Service (IRS), Treasury Department lay out the process by which individuals can receive certificates of exemption from the shared responsibility payment for not maintaining minimum essential health insurance coverage as mandated by Title I of the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) (see CMS fact sheet). The proposed rules add and amend definitions, establish eligibility standards for exemption, identify exempt individuals, list reasons for hardship exemptions, and provide guidance on the liability for the shared responsibility payment for not maintaining minimum essential coverage. Comments on the CMS proposed rule must be received no later than 5:00 p.m. 45 days after the date of publication in the Federal Register, which is February 1, 2013. The IRS will conduct a public hearing on May 29, 2013. Topics to be discussed at the public hearing must be received by May 3, 2013.

Background. Beginning in 2014, the individual shared responsibility provision requires individuals to have basic health insurance coverage, referred to as minimum essential coverage; qualify for an exemption; or make a shared responsibility payment when filing a federal income tax return. Individuals will not have to make a payment if coverage is unaffordable, if they spend less than three consecutive months without coverage, or if they qualify for an exemption for several other reasons addressed in the statute and the proposed rules. Beginning in 2015, individuals filing a tax return for the previous tax year must indicate which members of their family are exempt from the provision. The taxpayer must indicate whether family members who are not exempt have insurance coverage. For each nonexempt family member who does not have insurance coverage, the taxpayer will owe a payment.

Computation of shared responsibility payment. The shared responsibility payment amount for any taxable year generally would be the sum of monthly penalty amounts for all months in the taxable year in which any nonexempt individual did not have minimum essential coverage. This payment amount for any year may not exceed an amount equal to the national average premium for bronze-level qualified health plans offered through Exchanges for the applicable family size involved.

Minimum essential coverage: Under the proposed regulations, minimum essential coverage includes the following statutory categories: employer-sponsored coverage (including COBRA coverage and retiree coverage), coverage purchased in the individual market within a state, coverage under a grandfathered health plan, Medicare Part A coverage, Medicaid coverage, Children's Health Insurance Program (CHIP) coverage, certain types of veterans health coverage, and TRICARE. Minimum essential coverage, however, would not include specialized coverage, such as vision or dental care, workers' compensation, or coverage for a specific disease or condition.

Individuals exempt from shared responsibility. Individuals who would be exempt from the shared responsibility payment include: individuals who cannot afford coverage, taxpayers with income below the filing threshold, members of Indian tribes, individuals who experience short coverage gaps, members of a health care sharing ministry, incarcerated individuals, individuals who are not lawfully present, and individuals who qualify because of hardship or religious conscience,. Under PPACA, the religious conscience and hardship exemptions are available exclusively through a Health Insurance Marketplace or Exchange.

The proposed regulations specify four categories of exemptions that would be available exclusively from the IRS through the filing process: (1) the exemptions for individuals who are not lawfully present, (2) taxpayers with household income below the filing threshold, (3) individuals who cannot afford coverage, and (4) individuals who experience short coverage gaps. The proposed rule provides individuals that fall into the three remaining exemption categories (members of a health care sharing ministry, individuals who are incarcerated, and members of Indian tribes) a choice of obtaining an exemption through a Heath Insurance Marketplace or the tax filing process.

In the case of an individual who is eligible for multiple exemptions simultaneously, the proposed rule would permit the applicant to be able to apply for multiple exemptions in case some are denied and receive any exemptions for which he or she is eligible. An applicant would be required to submit a new application for each year for which an applicant would like to be considered for an exemption through an Exchange, and the exemption would be provided for a calendar that the applicant submitted an application.

Availability of the hardship exemption. PPACA provides HHS with the authority to exempt individuals that it has determined have suffered a hardship with respect to the capability to obtain coverage. HHS has proposed to include several situations in the regulations that will always be treated as constituting a hardship and, therefore, allow for an exemption. Hardship exemptions would include: (1) individuals whom an Exchange projects will have no offer of affordable coverage even if, due to a change in circumstance during the year, it turns out that the coverage would have been affordable); (2) certain individuals who are not required to file an income tax return but who technically fall outside the statutory exemption for those with household income below the filing threshold; and (3) individuals who would be eligible for Medicaid but for a state's choice not to expand Medicaid eligibility.

The hardship exemption also would be available on a case-by-case basis for individuals who encounter other unexpected personal or financial circumstances that prevent them from obtaining coverage. Under the regulations proposed by the Treasury, an individual would be treated as having coverage for a month so long as he or she has coverage for any one day of that month. In other words, an individual who is eligible for an exemption for any one day of a month is treated as exempt for the entire month. The Treasury's proposed regulations also provide that if the part of a gap in the first tax year is less than three months, then no shared responsibility payment is due for the part of the gap that occurs during the first calendar year, regardless of the eventual length of the gap. The statute provides an exemption for gaps in coverage of less than three months. For example, a gap lasting from November through February that lasts four months, generally would not qualify for the exemption; however, recognizing that many individuals file their tax returns as early as January, before the length of an ongoing gap may be known, no payment would be due for November and December for a gap lasting from November through February.

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