Our previous article on the Patient Protection and Affordable Care Act (PPACA), also commonly known as “Obamacare”, focused on one US insurer’s very cautious viewpoint of how the new health insurance law would affect US expats.
To recap, PPACA aims to ensure that all US citizens have adequate health insurance. Those who cannot prove they have such coverage, or are exempt from having to seek cover, face a financial penalty from the US Internal Revenue Service (IRS).
According to US insurer Cigna’s interpretation, this new rule has already begun to affect American expatriates due to it working in conjunction with the country’s tax system. The USA is unusual in that it requires its citizens to file tax reports even if they are not normally resident in the USA, therefore, US citizens living overseas are affected by PPACA because this new law seeks to impose tax penalties on those who do not have health insurance.
The new law also requires insurers to submit evidence of each taxpayer’s coverage, to the IRS, which checks this against the evidence of health insurance coverage provided by the taxfiler in their tax return. Any discrepancy puts the taxfiler at risk of paying a financial penalty for not having adequate health insurance, or “Minimum Essential Coverage” (MEC) as the new law refers to it.
The reporting deadline for the 2014 tax year was April 15, 2015. Cigna say that, 2014 was a grace year under PPACA, and there was no need to provide any evidence of MEC. However according to Cigna’s interpretation, the grace period has ended, and US expatriates must take action now to be covered for the current 2015 tax year. This means either making sure you have MEC right now, or being able to show you were exempt from having to provide such evidence, come reporting time in April 2016.
The PPACA issue is of course complex and there are many factors which give rise to different interpretations of the new rules. The most pressing matter does appear to be, do you need to prove you have MEC now, or will the grace period be extended?
One World Cover spoke with a range of other insurers working in the global health insurance market, some headquartered in the US, others based elsewhere. In general, other insurers had differing interpretations of the situation and none shared the proactive stance of Cigna, ie. urging clients to act now. Many insurers expressed doubts that the 2014 grace period on reporting MEC was over and said there was no need for any urgency at present. Given the complexity of the rules and the fact that the new law itself will not be fully implemented until 2018, most insurers believe the lack of consensus on the act at the moment means the grace period will continue. Imposing penalties on taxpayers for failing to provide evidence of MEC at the end of the current tax year would be very impractical, not to mention controversial, some pointed out.
For all intents and purposes, proving one had MEC on one’s tax return last year amounted to ticking a box to say yes and not needing to provide any actual proof. All insurers we spoke with believe this would still be the case when tax filing time comes around again next year, apart from Cigna.
Automatic minimum essential coverage for expatriates.
Even if the grace period for reporting MEC does expire soon, you may in fact already be classed as having MEC, even if you have not taken any action, according to the IRS.
The IRS does confirm that Americans living overseas are covered by the terms (and rules) of PPACA – so expatriates do have to address the issue at least. However, the IRS website also states:
“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.
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.” (see http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Questions-and-Answers-on-the-Individual-Shared-Responsibility-Provision)
So should you be overseas for the above period of time, you are classed as having MEC, if you are able to prove this to the IRS when you file your taxes. US citizens living overseas can claim exemption from paying US taxes, and consequently any obligations under the PPACA by claiming bona fide foreign resident status. However, the IRS does not give an exact definition of this term and states that bona fide residence is determined on a case-by-case basis. However generally a tax filer has to demonstrate they have been out of the US for over 330 days over a period of one tax year.
It is also important to point out here that what constitutes MEC is yet to be strictly defined by the act. US citizens living in the US, with a health coverage plan issued by a US insurer are considered to have MEC. If you are an American living overseas, with a US-issued plan that includes coverage for the geographical area you are normally resident in, this should constitute MEC.
Things are a little different for those covered by plans underwritten by a non-US insurer and “regulated by a non-US government”. This category includes companies such as Ping An Health and subsidiaries of US or European insurers operating in Asian countries such as Cigna & CMB and Allianz China General Insurance, all of which are regulated by the China Insurance Regulatory Commission.
In this case, MEC requirements are met if the US citizen is informed their coverage is MEC, and the insurer reports the issuing of this plan to the individual in question, to the IRS.
However, as stated previously – there is always the fallback position of MEC being automatically conferred upon any US citizen, regardless of whether they actually have any health insurance or not, if they can prove they are a bona fide foreign resident.
For more details consult the IRS’ own website at http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—Bona-Fide-Residence-Test
For employers in Asia, PPACA is already having an effect even if there is yet to be a clear word on exactly how the act applies to Americans overseas, in the form of worried US employees asking their HR departments if they will have to pay extra taxes under PPACA.
Overall the extent to which PPACA affects employers will largely depend upon how many US expats the company or school employs. If only a handful of US citizens are on the staff roll, the impact will be small as this is largely a matter for individual employees. However, for those employing larger numbers of Americans, suddenly having a significant proportion of your workforce insecure about their health coverage status and facing possible financial penalties from the US government, creates obvious problems. At the moment there is no clear word on whether health plans issued by overseas employers are deemed to provide MEC coverage. However, as detailed above, this may not matter as long as employees can demonstrate to the IRS that they are bona fide foreign residents. So it ultimately rests with individual employees being able to report their tax status accurately to the IRS.
How exactly PPACA will be applied to expatriates is yet to be finalized, and many aspects will change between now and the final implementation. One significant factor in the equation is the US presidential election of 2016, the outcome of which could have a very big impact on the final implementation of the act which is due in 2018. For this reason, several non-US insurers told us that they would not be making any significant changes to their operations to accommodate PPACA until after the elections. However, whilst insurers have the choice to wait before dealing with the new laws, it’s a different matter for individual US taxpayers.
The law is already a reality for for Americans living in the USA, and it does appear to be only a matter of time before expats will have to prove they are adequately covered too when the reporting grace period ends. Whether that is now, or closer to 2018 is a matter of interpretation it seems.
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]ver.com