The Affordable Care Act (ACA, or more popularly known as Obamacare) will go into effect January 1, 2014 and Americans are polarized on whether or not it's a positive or negative change to US healthcare. But no matter what your personal beliefs, it has been passed by Congress and it is, indeed, happening. The best thing to do is to fully understand its impact and ensure you are compliant. For US residents, Obamacare has wide-reaching implications and will affect both the financial landscape of healthcare as well as coverage options. US expats, on the other hand, may be exempt. To help you understand how this Act may affect you and your US taxes abroad, we have outlined the 3 critical components of Obamacare you need to know.
Obamacare and the US Expat
The basic premise of Obamacare is that Americans have a shared responsibility to ensure health care coverage for everyone. Every US resident must obtain minimum health care coverage or be subject to additional taxes (which help support the program's ability to provide coverage for those individuals who cannot afford it on their own).
Since US expats aren't generally residents of the US while living overseas, the majority of expats will be exempt from the Obamacare health insurance requirements. But in order to be exempt you must prove residency in another country through one of two tests:
- The Bona Fide Residence Test- To qualify through this test you must have been living abroad for at least one year and have no immediate plans to return to the US.
- The Physical Presence Test- Most expats will qualify for this test, as you simply need to have foreign earned income and be physically out of the US for 330 days out of a 365 day period.
Once you qualify for foreign residency, you are said to have the ‘minimum essential coverage' and are not required to purchase any additional coverage. Whether or not you hold coverage in your current country of residence or through a US expatriate plan is irrelevant—you are still considered to be exempt from Obamacare by simply qualifying as a resident of another country.
Contractors or Employees on Short-Term Assignments Overseas
If you are an expat on a short-term assignment and do not qualify for exemption through one of the residency tests, you will need to comply with Obamacare regulations. This means you have 2 choices: enroll in a US expatriate plan that provides the minimum essential coverage (if you qualify) or pay an additional tax.
By definition, the minimum essential coverage includes:
- 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)
It is important to note that if you do not make enough money to be required to file a tax return (the filing threshold is currently $9,750) then you do not need to comply with Obamacare. It is important to check with a tax professional about your filing requirements if you are unsure.
The Penalties for Not Maintaining the Minimum Essential Coverage
If you are in a situation where you need to pay the ACA penalty taxes, they are calculated on a yearly basis, but assessed only for the months in which you don't have the required coverage. If you are on a qualifying plan for even one day in a month, you are considered covered for that month and will not be taxed. The tax rate is graduated, and increases in each of the next 3 years:
- In 2014 - The greater of $95 per adult and $47.50 per child (up to $285 for the family) OR 1% of your family income (defined as income over and above the filing threshold)
- In 2015 - The greater of $325 per adult and $162.50 per child (up to $975 for the family) OR 2% of your family income (defined as income over and above the filing threshold)
- In 2016 and beyond - The greater of $695 per adult and $347.50 per child (up to $2085 for the family) OR 2.5% of your family income (defined as income over and above the filing threshold)
US Expatriate Health Plans and Obamacare
Many expats are covered under a US-based expatriate health plan. The Obamacare provisions do NOT apply to these plans. The government has decided that, at this time, it is too difficult for these types of plans to comply with the law for a variety of practical reasons; for example, it is too challenging to define and enforce preventive care internationally, and it is a logistical challenge to effectively communicate with enrollees living abroad. While the government continues to evaluate the feasibility of these expatriate plans complying with the law, they have granted an exemption until at least December 31, 2015.
It is important to understand the type of expatriate health plan you are covered under. The plan must be an insured group health plan that limits enrollment to primary insureds (and covered dependents) who reside outside of their home country for at least six months of the plan year.
Assuming your plan fits the description above, your coverage satisfies Obamacare requirements. It also means that your expatriate health plan won't offer the additional benefits that Obamacare provides (such as free wellness/preventive care, coverage for children up to age 26, no lifetime maximums or guaranteed maternity coverage).
For More Information
If you have any questions about your residency status as a US expat or your US tax filing requirements, contact an expat tax professional who can help you better understand your options. As with many expat tax issues, not fully understanding your US healthcare responsibilities can end up being quite costly!