Help Your Clients Understand the ACA and Make Informed Health Insurance Decisions

By Sally Herigstad

Help Your Clients – TaxAct Professional

Your clients count on you to help them understand complex tax and financial choices. That's especially true when they are faced with as many new rules and options as those that go along with the Affordable Care Act (ACA).

Because the ACA is being phased in over a period of years, with some details being refined and clarified during the phase-in period, it's no wonder some of your clients may feel confused and overwhelmed.

It's important that they understand the basic rules as they apply to their own situations. When you prepare their tax returns next year, your clients will have better tax results if you've given them the information to make good decisions about health insurance now.

Here's a list of ACA-related points you may want to make sure your clients understand sooner rather than later.

The 2015 penalty may be higher than your clients think.

Your clients may have heard about the $325 tax penalty for taxpayers who don't have qualified health insurance for 2015. That may not sound bad. In fact, it may be a fraction of the amount they would pay for health insurance for one month. If they don't spend much on medical bills, they may decide to risk it and put off buying health insurance.

However, that could be a mistake.

The $325 penalty is per adult in the household. Unless they qualify for an exception, they could pay a penalty for themselves, and the same for their spouse. If they have children, there's a penalty of $162.50 per child. A family of four could face a minimum penalty of $975 ($325 for each spouse and $162.50 for each of two children).

In addition, the $325-per-adult penalty is only a minimum.

The penalty is the higher of that total amount or 2% of your clients' yearly household income, up to a maximum penalty equal to the national average premium for a Bronze plan.

That means clients with a high income could pay as much in penalty as if they had purchased health insurance — and they will still be uninsured.

Tip: Estimate clients' 2015 penalty amounts with TaxAct's calculator.

Estimating 2015 income for purposes of health insurance premium tax credit is very important.

If clients buy health insurance through the ACA marketplace, they may qualify for a premium tax credit, or subsidy, based on the income they expect to have for the tax year. When you prepare their taxes the following year, TaxAct calculates the correct amount of credit they should have received based on their actual adjusted gross income.

The difference between the amount of credit they receive and the amount they should have received increases or decreases your clients' tax bill.

Problems arise when clients have a significantly higher modified adjusted gross income on their 2015 return than they estimated when they applied for marketplace insurance. Maybe they got a raise, worked more hours or sold some appreciated stock. Or perhaps they just didn't estimate their income accurately in the first place.

Even a modest change to income can make a huge difference in how much premium tax credit amount they will receive. If they must pay back some or all of their credit, they get a reduced tax refund or even a tax bill — and you end up with uhappy clients end up with unhappy clients.

The fact that the tax credit can be paid directly to the insurance company in advance may compound the confusion. Some taxpayers have asked why they should have to pay back a credit they never saw, especially if they never used the insurance plan.

It's worth the time to explain to clients beforehand how the subsidies being paid to insurance companies in advance work, and that they will be liable for any shortfall if they end up qualifying for a lesser credit than they planned.

Clients can avoid the possibility of having to repay advance credit payments.

If clients are leery of having to pay back advance credit payments next year, the safest bet is to have them claim less or no advance credit payments for 2016.

They'll be able to get the full credit they're entitled to when you prepare their return next year, but they won't have to worry about the possibility of paying back a credit.

Clients must report life changes to HealthCare.gov.

When clients get married or divorced, have a child, or move, the last thing on their minds may be notifying HealthCare.gov of the change. If they purchase insurance through the marketplace, however, they are required to do so.

Clients must also notify HealthCare.gov if they become disabled or lose disability status, become pregnant, become incarcerated or are released from incarceration, have a change in citizenship or immigration status, or have other changes in family or health status. If they do not report changes to HealthCare.gov, they may receive more or less advance credit payment than they should.

In addition, a change in family status, such as a new baby, can change insurance needs. Your clients may qualify for a 60-day Special Enrollment Period to change plans based on their new status.

Clients need to save Form 1095 with their tax documents.

Clients who get health insurance through their employers may receive IRS Form 1095, reporting their health insurance coverage.

If they pay for their own ACA-compliant coverage, or if they are on a government-sponsored program such as Medicare or Medicaid, they should receive 1095-B. Clients who purchase health insurance through a marketplace should also receive 1095-A in the mail.

Regardless of which forms they receive, clients need to save them with their tax documents and give them to you to prepare their return. They should expect to receive Form 1095 around the same time they receive other tax documents — by the end of January or the first week of February.

For clients without insurance, help them determine if they qualify for an exemption from paying the penalty.

HealthCare.gov provides a long list of exemptions from paying the penalty for not having health insurance. Many clients don't need to worry about the insurance mandate because their income is too low, or the cheapest coverage they could find would cost more than 8% of their household income.

Clients may also qualify for exemptions based on religious objections or tribal affiliation.

Some exemptions from the penalty require your clients to file an application.

To receive exemptions based on hardships, clients must fill out a form available on HealthCare.gov. Hardships that require this form include homelessness, eviction or foreclosure, receiving a shut-off notice from a utility company, death of a close family member, filing for bankruptcy within the last six months, and other hardships.

After they sign and mail the form, including any required documentation, they can expect to hear back within two weeks about whether they are eligible for an exemption. They need to request the exemption far enough in advance of the time they want you to prepare their return.

Clients who qualify for an exemption will receive an Exemption Certificate Number (ECN) that you must enter on their tax return.

Clients who initially do not qualify for an exemption can appeal the decision within 90 days of the date of the notice they receive.

Clients can buy insurance anytime in the first two months of 2016 and still avoid the penalty.

The penalty for not having qualified health insurance coverage only applies if taxpayers are without coverage for more than two months of 2015. That means a client could start paying premiums for coverage beginning by March 1 and still avoid paying a penalty.

For example, let's say a client lost her job and employer-provided coverage. Within a month, she found a new job with insurance. Because she was uninsured for less than two months, she will not have to pay a penalty.

Of course, clients are not covered when their insurance policies are not in force. It's also important they know that, as a general rule, they can only apply for 2016 insurance coverage through the marketplace during the open enrollment period, from November 1, 2015 to January 31, 2016.

They can also apply for insurance any time that they have a life event, such as having a child or changing jobs.

2015 plans purchased through the ACA marketplace will automatically renew in the fall.

Clients don't need to worry about their marketplace insurance lapsing because they forget to renew. It renews automatically every fall.

However, it's important that clients revisit their health care plans before they auto renew in the fall if one or more of these situations apply:

  • Their expected income is higher or lower for 2016.
    They may qualify for less or no premium tax credit next year if their income increases. If their expected income is lower, they may qualify for the premium credit or a higher credit amount, which can make life easier while they make do with less.

    Advise clients, however, to be careful of signing up for subsidized health insurance during brief periods of unemployment or in other situations in which they could end up paying back large subsidies because their income increased. Clients can change their estimated income levels anytime during the year, but it's a good idea to review it before it auto renews.

  • They have new medical issues or more medical expenses during 2015 that could convince them to change their deductibles or coverage levels.
    You can explain the pros and cons of paying more for insurance and not worrying about potentially higher medical bills, or paying less for expensive health insurance and putting the money they save aside for future medical expenses.

  • Clients want to see if they still have the best plan.
    Plans change, especially during this time of adjustments and phase-ins of regulations. Not only are rates likely to rise for 2016, but prescription coverage can change, as well as the doctors and medical services and facilities that their plan covers.

    Now is the time for clients to find out exactly what they get for their premiums — and if it meets their needs. They can compare plans offered by their current insurance company, plans offered by competing insurance companies through the marketplace, and private plans outside of the marketplace. Note that if they shop for a private plan, they won't qualify for premium tax credits or cost-sharing reductions.

Where to find more information

  • HealthCare.gov — The federal government's official website where individuals and small businesses can apply for insurance, change plans and get answers.
  • IRS.gov — Your IRS resource for all tax-related ACA matters. Be sure to check out the ACA Information Center for Tax Professionals.
  • HealthcareACT.com, powered by TaxAct — Information, calculators and resources to help you make sense of the tax implications of the ACA.

About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.