Commencing January 1, 2014, the “Affordable Care Act” (ACA), more derisively known as “OBAMACARE” will require that Americans carry so-called “minimum essential health coverage” (basically, health insurance) or suffer payment of a tax penalty. The provision applies to any individual who is a US citizen or who qualifies as US “resident” for federal income tax purposes (e.g., a green card holder or one who meets the so-called “substantial presence” test). The rules apply to those individuals of all ages, including children. The adult or married couple who can claim a child or another individual as a dependent for federal income tax purposes is responsible for making the payment if the dependent does not have the required health coverage or if an exemption does not apply.
An important exemption exists for certain US persons who are living abroad if they meet certain requirements. Those who qualify for this exemption need take no action to comply with the Obamacare provisions. They should report their exempt status with their federal income tax return on Form 8965. The exemption exists because it would not be fair to force Americans living overseas to purchase a policy on one of the new US health insurance marketplaces because most US policies do not provide coverage for overseas medical care (other than emergency care).
Who Qualifies for This Exemption?
In order to qualify for the Obamacare exemption, the individual must qualify for the benefits of claiming the foreign earned income / foreign housing exclusions under Section 911 of the US Internal Revenue Code. Generally, Americans working abroad who meet particular requirements are eligible to exclude from US taxable income certain amounts of foreign earned income (wages, compensation for services) and housing costs paid by their employers under rules governing the Foreign Earned Income Exclusion (FEIE), and Foreign Housing Exclusion (FHE).
For an individual to qualify for the FEIE and / or FHE, a “tax home” must be maintained in a foreign country and either the Bona Fide Foreign Resident (BFR) or Physical Presence Test (PPT) must be met.
Generally, a “tax home” is the location of the main place of business, irrespective of where a family home is maintained. If the nature of a person’s work means that there is no regular or main place of business, then the tax home may be the place where the person regularly lives. A person is not considered to have a tax home in a foreign country if the person’s household is maintained in the US. Temporary presence in the US (for example, for vacation or for employment), does not necessarily mean that the household is in the US during such time.
The BFR Test: To meet the BFR Test, a person must be a bona fide resident of a foreign country for an uninterrupted period which includes a full calendar year. A resident is one who, based on the facts and circumstances, has established a “tax home” and has in effect settled in that country.
The Physical Presence Test: To meet the PPT an individual must be physically present in a foreign country or countries for 330 days in any 12 consecutive months. The 330 days do not have to be consecutive, but they must be whole days present in a foreign country. Travel time does not count toward the requisite 330 days if the travel is in the US or its possessions for periods of 24 hours or more, or takes place over international waters. Recordkeeping is critical. The PPT often helps an individual on short assignment. It also enables an individual to come back to the US for short periods (generally up to one month) in any consecutive 12-month period and still qualify for the exclusions.
Must I Be Working Abroad and Earning Wages?
Many people have asked if the individual must actually file returns and claim the FEIE and FHE in order to be exempt. My view is that so long as the individual meets the “tax home” test and either the BFR or PPT test, he should be exempt from the health care coverage rules. In other words, I believe the individual must merely qualify for the benefits of claiming the foreign earned income / foreign housing exclusions under Section 911 – the law does not say he has to actually claim them to qualify for the exemption. This would make sense since the exemption exists because it would not be fair to force Americans living overseas to purchase a US policy on one of US health insurance marketplaces since generally these policies do not provide coverage for overseas medical care. The law was trying to provide relief for the US person who is truly residing abroad and uses the “tax home”, BFR and PPT concepts to implement the exemption.
Copied below is some of the supplementary information from the final Treasury Regulations implementing the Obamacare provisions:
D. Foreign Issuer Coverage
1. In general, under section 5000A(f)(4) and § 1.5000A–1(b)(2) of the final regulations, an individual is treated as having minimum essential coverage for a month if the individual is a bona fide resident of a United States possession for the month, or if the month occurs during any period described in section 911(d)(1)(A) or section 911(d)(1)(B) that is applicable to the individual. Section 911(d)(1)(A) is applicable to a citizen of the United States who has a tax home outside the United States and is a bona fide resident of a foreign country or countries during an uninterrupted period that includes an entire taxable year. Section 911(d)(1)(B) is applicable to a U.S. citizen or U.S. resident (as defined in section 7701(b)) who has a tax home outside the United States and is present in a foreign country or countries for at least 330 full days during a period of 12 consecutive months.
The IRS publication 5187 provides at page 16:
“U.S. Citizens Living Abroad
How does the Affordable Care Act affect U.S. citizens living abroad?
U.S. citizens living abroad are subject to the individual shared responsibility provision. However, U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period regardless of whether they enroll in any health care coverage.
In addition, U.S. citizens who are bona fide residents of a foreign country (or countries) for an entire taxable year are treated as having minimum essential coverage for that year. In general, these individuals qualify for the foreign earned income exclusion under section 911.
Individuals may qualify for this rule even if they cannot use the section 911 exclusion for all of their foreign earned income because, for example, they are employees of the United States. Individuals that qualify for this rule need take no further action to comply with the individual shared responsibility provision during the months when they qualify. They will report their status with their federal income tax return on Form 8965.” Instructions here – Note, Coverage Exemption Code C on page 2.
Overseas Assignment Ending?
Americans who are returning to the US in 2014 must be extra diligent to make sure they either (i) have the required coverage or (ii) will qualify for the Section 911 exclusion benefits. If they will no longer qualify for the Section 911 benefits, this could give rise to the Obamacare penalty provisions unless the individual already has qualifying health coverage, detailed below:
- Employer-sponsored coverage (including COBRA coverage and retiree coverage)
- Coverage purchased in the individual market, including a qualified health plan offered by the Health Insurance Marketplace (also known as an Affordable Insurance Exchange)
- Medicare Part A coverage and Medicare Advantage plans
- Most Medicaid coverage
- Children’s Health Insurance Program (CHIP) coverage
- Certain types of veterans health coverage administered by the Veterans Administration
- Coverage provided to Peace Corps volunteers
- Coverage under the Nonappropriated Fund Health Benefit Program
- Refugee Medical Assistance supported by the Administration for Children and Families
- Self-funded health coverage offered to students by universities for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these programs may apply to HHS to be recognized as minimum essential coverage)
- State high risk pools for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these program may apply to HHS to be recognized as minimum essential coverage)
Minimum essential coverage does not include coverage providing only limited benefits, such as coverage only for vision care or dental care, and Medicaid covering only certain benefits such as family planning, workers’ compensation, or disability policies.
Fortunately, gaps in insurance coverage that are less than three-months long will generally not result in a penalty. This grace period to obtain new coverage may be helpful to the US person who has been employed overseas but is returning to the US to find a new employer. In addition, provided you have the required insurance for at least one day per month, you will have satisfied the law’s requirements for that month.
If an individual otherwise required to be insured is not insured by the end of April 2014, he will be assessed a penalty at the higher of: $95 per adult and $47.50 per child, or 1% of household income. Household income will be computed by the Internal Revenue Service, basically, as any income in excess of the taxpayer’s tax filing threshold (which depends on tax filing status and age, for example, single or head of household http://www.irs.gov/pub/irs-pdf/i1040.pdf see Chart A on page 7). The penalties increase annually. In 2015, they rise to $325 per person ($162.50 per child) or 2% of household income; in 2016, they rise to $695 per person ($347.50 per child) or 2.5% of household income. Commencing in 2017, the increase is indexed to inflation. Regardless of one’s total income, the penalty is capped at the approximate cost of a basic policy available on one of the new health-insurance exchanges.
For more details see the cited references, below. In parentheses are the relevant excerpts for the exemption for US persons abroad.
Final Treasury Regulations (See Section 1.5000A-3(b)(2) on page 53657 of the Federal Register)
IRS Interactive Tax Assistant (This is a computer-generated interview taking approximately 15 minutes. It will help you determine if you are required to make coverage payments)
by Virginia La Torre Jeker J.D at: