US expatriates need to prepare now for PPACA law, US government advisor tells OWC

The views expressed in the Q&A section of this article represent those of Cigna only. The OWC team has spoken with a number of insurers about PPACA, and there are differing interpretations of when or even if the act will begin to affect US American expatriates.

The views expressed in the Q&A section of this article represent those of Ciga only. The OWC team has spoken with a number of insurers about PPACA, and there are differing interpretations of when or even if the act will begin to affect US American expatriates.

We will be exploring other interpretations of PPACA in future articles.

Of the insurers we have spoken to so far, Cigna appears to be the most proactive on preparing their systems for PPACA reporting.

Introduction

The Patient Protection and Affordable Care Act (PPACA) aims to ensure that all US citizens and their dependents have adequate health insurance.

The legislation is also commonly known as the Affordable Care Act (ACA) or simply Obamacare. It came into effect in March 2010 and aims to improve healthcare and health insurance for millions of Americans who have little or no coverage – including those working overseas.

The act has potentially huge knock-on effects, as beginning in 2015, it requires all US citizens to prove they have what is termed as Minimal Essential Coverage (MEC). Those who cannot risk a financial penalty from the US Internal Revenue Service.

According to most reports, US citizens must provide proof of coverage from next year onwards. However, there are many exceptions to the rule and different interpretations of who will need to provide proof of MEC and when they are obliged to start providing such evidence.

As the legislation will not be fully implemented by 2018, a great many aspects of PPACA are yet to be finally determined, and as such all analysis of the new rules and any recommendations made must be accepted on the understanding that the situation is very fluid at present.

In order to help our clients understand this complex issue, we are providing a series of Q&A with major insurers for their take on the topic.

The first is with Elaine McCarthy, director of Global Product for Cigna’s Global Health Benefits business. Elaine has been Cigna’s business lead for PPACA implementation and an advocate for its global expatriate products, and has been working with US government regulators since the act’s passage in 2010 to help them understand the global impacts of the legislation. Elaine has been a keen promoter of the interests of US expatriates with respect to the act’s implementation.

The following is a Q&A between One World Cover and Elaine.

One World Cover: How does PPACA define a US expat?

Elaine McCarthy: The drafters of the legislation were focused on creating regulations for the U.S. healthcare system and for U.S. citizens living and working in the U.S. and as a consequence, the actual legislation doesn’t actually define expatriates. The law created the MEC requirement which applies to “all U.S. citizens and anyone living in the US legally”. There is only one section in the thousands of pages of legislation which references how the law might impact U.S. citizens living outside the U.S. This section refers to and allows U.S. taxpayers who are considered bona-fide foreign residents of other countries to be deemed to have MEC automatically and, therefore, not face a penalty. The definition of a bona fide foreign resident is an Internal Revenue Service (IRS) definition which already existed in the U.S. tax code and is used by taxpayers living outside the US to claim a credit on their taxes. It is an individual determination which requires the filer to be outside the US for an entire tax year or at least 330 days of a tax year. Presumably any U.S. citizen living abroad who qualifies will not face a tax penalty but those who do not qualify will face the tax penalty if they don’t have MEC.

One World Cover: When does an expat have to provide MEC proof and when do they not?

Elaine McCarthy: All U.S. tax filers will be required to indicate on their tax forms whether they have MEC.

For the 2014 tax year (forms are due April 15th, 2015) there is no proof required because there the government had delayed the insurer and employer reporting which is what the IRS will use to verify. So the 2014 plan year was a “free pass” year in the sense that the IRS will have to rely on self-declarations of MEC indicated on tax forms by the filer. For the 2015 plan year, however, insurers will be required to report MEC information to the IRS so that the penalties can be enforced. The insurers will also be sending each employee a copy of what is reported to the IRS on a form called a 1095 B which presumably will be sent to the IRS by the tax filer with the tax forms when filed or if filing electronically, the tax filer would copy the information from the form onto the 2015 tax return. The IRS will then match these up to determine whether the information provided by the tax filer matches the document sent by the insurer. If there is no form submitted, or if the IRS cannot match the information provided by the taxpayer with an insurer form, then the taxpayer will likely be contacted by the IRS to provide additional proof of MEC. So, if the insurer doesn’t submit the MEC reporting to the IRS and the employee, is not a bona fide foreign resident or doesn’t meet some other exemption (such as low-income) they risk having no proof of MEC and incurring the tax penalty.

One World Cover: Is there a simple way to review a client’s current plan and assess whether or not it would fulfill the criteria of MEC?

Elaine McCarthy: The requirement for MEC is not too complicated for a non-U.S. employer sponsored plan. A non-US plan can qualify as MEC for an expatriate living outside the U.S. and their covered dependents on two conditions – the employer provides a notice to the plan participants that the plan is MEC and the insurer on a fully insured case or employer on a self-insured case completes the MEC reporting to both the IRS and the impacted individuals. If the insurer or employer does not complete the MEC reporting, the plan is not considered MEC for any of the covered individuals. The reporting itself, unfortunately, is complicated and requires that employers and insurers identify those employees and their dependents who are U.S. citizens or U.S. tax filers.

Because non-U.S. employer sponsored plans are not subject to PPACA’s benefit requirements, the plan is not required to comply with those benefit requirements unless the expatriate is on assignment in the U.S. or covered on a U.S. issued employer plan.

Employers who are subject to the Employer Mandate would have to comply with the employer mandate requirements which are separate and distinct. For the majority of clients with no presence in the U.S., this will not apply.

One additional thing to consider – the tax penalty is assessed on the family so if the plan does not cover dependents, it would only qualify as MEC for the employee who could then be facing individual mandate penalties for any non-covered family members.

One World Cover: According to our understanding of Cigna’s position on PPACA, US expats risk a financial penalty this time next year (April 15th 2016) when filing their tax returns if they cannot prove they have MEC.

Elaine McCarthy: Yes, that is correct. As mentioned earlier, there was no reporting required from employers and insurers for the 2014 plan year so the IRS has no mechanism to confirm whether taxpayers have MEC. However, the employer and insurer reporting requirements were effective January 1, 2015 meaning employers required to report and insurers will have to report on all individuals who were covered during 2015. The reports will show who was covered for each month of 2015. This reporting is due to the IRS and to the employees in February 2016.

One World Cover: We have seen some different interpretations of this however – other sources appear to state that a grace period will exclude US expats from providing MEC in 2016 or even beyond this date. Could this be taken to mean that expats won’t have to provide any evidence of MEC any time soon?

Elaine McCarthy: It is not uncommon to see differing interpretations because of the large number of complex regulations involved in the implementation of the ACA. It is important to recognize that guidance and interim rules issued by the government change as final rules are issued. If just searching the internet, for example, one can find interim regulations but not realize that this guidance has since been replaced by an actual final regulation. This is why it is important to work with trusted partners who understand the complexities.

In the U.S. the grace period cited in the question refers to guidance issued in 2013. At that time the government had provided temporary transitional relief for U.S. issued expatriate plans from some of PPACA’s benefit requirements and deemed those plans to be MEC for covered expatriates. That guidance did not apply to non-US issued plans and did not exempt these plans or the covered individuals from the MEC requirement. Additionally, that 2013 guidance has since been replaced by the Expatriate Clarification Act which passed Congress in December 2014. That law allows certain U.S. issued expatriate plans to qualify for benefit and tax relief and deems those plans to be MEC provided they meet certain conditions. However, the employer and individual mandates still apply and the MEC reporting is still required.

The bottom line is this: Anyone filing their 2014 tax forms is not required to prove they have MEC. For the 2015 tax year, all U.S. citizens and all legal U.S. residents will either have to prove they have MEC or prove they meet one of the exemptions (bona-fide foreign resident, hardship, etc). A US issued or non-US issued employer sponsored expatriate plan can be MEC for covered employees and dependents but in either case, the MEC reporting will have to be completed for the plans to be considered MEC and for the taxpayers to avoid the tax penalties.

One World Cover: Thank you Elaine for your time and sharing your expertise.

The Q&A section represents the views of Cigna as of 15th April, 2015. One World Cover stresses that the viewpoints expressed in this article are for guidance purposes only and must not be construed as official legal or tax advice from either One World Cover or Cigna.

If you are in any doubt as to your personal tax obligations, seek the advice of a qualified professional.

Do you have any queries about how PPACA is going to affect you? Let us help you understand the new laws more by contacting us at [email protected]