Employer Mandate, Health Care Reform, Individual Mandate, Penalties, Premium Tax Credit & Advance PTC, Subsidies, Taxes, Fees & Penalties

Confused about the Different “Household Income” Tests? Here’s Why!

There are two different purposes for which the “9.5% of income” test applies.  There also is an 8% test.

  • “9.5% of income” tests:
    • Whether the employer is subject to a penalty if a full-time employee gets a subsidy for buying individual health insurance in the Marketplace/Exchange
    • Whether an individual is eligible for a subsidy
  • “8% of income” test:
    • Whether an individual is required to pay the “individual mandate tax”

9.5% Test: Whether Large Employer is Subject to a Penalty

3 Safe Harbors:  A large employer who offers health coverage that provides at least minimum value will be subject to a “play-or-pay” penalty if the coverage is “unaffordable” for a full-time employee, and that employee buys health insurance in the individual Marketplace/ Exchange and qualifies for a subsidy.  Coverage is unaffordable only if the employee cost for employee-only coverage is more than 9.5% of one of the following three safe-harbors:

1.       W-2, Box 1 earnings

2.       Monthly rate of pay at the beginning of the plan year (hourly rate times 130, or monthly salary not times 130)

3.       100% of Federal Poverty Level (FPL) for one individual

The reason these three safe harbors apply for determining whether the employer will be subject to a penalty is because the employer would not know an employee’s “household income,” which was the original standard under the ACA itself.  This is an amount from the employee’s prior year tax return.

In most cases an individual’s “household income” will be the same or more than the individual’s W-2 earnings from the employer, but there are several situations in which it could be less.   One example is if the individual pays alimony, which is a tax-deductible expense.   Another example is if the employee and spouse file a joint return and the spouse is self-employed and had a business loss.

9.5% Test:  Whether Individual is Eligible for a Subsidy  

9.5% Household Income Test:  Individuals whose “household income” is 100-400% of the Federal Poverty Level (FPL) may qualify for a subsidy if they buy individual insurance in the Marketplace, and if they are not eligible for government health coverage or for employer coverage that provides minimum value and is “affordable.” Employer coverage is affordable if the employee cost for employee-only coverage is less than 9.5% of “household income.” The two types of subsidies are a premium tax credit and a cost-sharing reduction.  “Household income” is defined as Modified Adjusted Gross Income (MAGI) from the employee’s federal tax return for the prior tax year.  For open enrollment in October to December of 2013 (for enrollment effective January 1, 2014), the most recent tax return will be the 2012 return.

8% Test:  Whether Individual is Subject to the Individual Mandate Tax

8% Household Income Test:  If an individual does not have “minimum essential coverage” (MEC) for any month beginning January 2014, IRC section 5000A requires the individual to pay the individual “shared responsibility payment” (often referred to as the “individual mandate tax”) for failure to have MEC.  There are several exemptions and exceptions that apply.  One of the exceptions is that an individual will not be subject to the individual mandate tax for failure to have MEC if the cost for the lowest-priced bronze policy available to the individual (or to the family, if the individual has a family) would cost more than 8% of household income.

If an individual is subject to the tax, the monthly tax is 1/12 of the annual tax, which for 2014 is the greater of $95 per person or 1% of household income above the yearly tax filing requirement amount.  The penalty increases in 2015 to the greater of $325 or 2% of household income, and in 2016 to the greater of $695 or 2.5% of household income (the yearly tax filing requirement amount).

Confused about Household Income Tests [PDF]