An employer's costs to provide health care for its employees generally are deductible to the employer, and the cost of the plan and the benefits provided generally are tax-free to the employee, except in the case of certain discriminatory plans.
The Affordable Care Act (ACA), enacted in 2010, changed the healthcare landscape in the United States, affecting individuals, insurers, employers, and the federal and state governments.
Healthcare plans in the United States must comply with ACA requirements, such as allowing parents to keep their children on their health plans until age 26, first-dollar coverage for preventive care, and elimination of preexisting condition exclusions and annual and lifetime maximums. These requirements are in addition to the pre-ACA requirements applicable to group health plans, including those mandated by HIPAA (privacy of health information, notices, etc.), COBRA (continuation coverage following certain qualifying events), and mental health parity.
An excise tax penalty is imposed for failure to satisfy these plan design mandates. Other fees and penalties, such as the Patient Centered Outcome Research Institute fee, also may apply to health plans under the ACA.
Starting in 2014, individuals living in the United States were required to maintain minimum essential coverage or face a tax penalty. As discussed below, for calendar years ending on and after December 31, 2018, the individual penalty for not maintaining minimum essential coverage is $0, which effectively eliminates the individual mandate. Individual and family coverage still may be purchased on the state-based or federally assisted exchanges (also called the 'marketplace').
The exchanges first became available January 1, 2014. Individuals may enroll for exchange coverage during the annual enrollment period beginning in the fall before the beginning of the calendar year and continuing through mid-December. The open enrollment period has not been established for 2021 enrollment. Families with income between 100 and 400% of the federal poverty level who do not have access to minimum affordable coverage from an employer or a governmental plan may qualify for subsidized coverage on the exchanges. For 2020, the upper limit for subsidy eligibility at the single person level is an annual salary of $49,960.
Before January 1, 2019, the ACA imposed a penalty on US citizens, permanent residents, and foreign nationals who qualify as resident aliens who did not maintain minimum essential coverage. This mandate did not apply to nonresident aliens. US citizens living abroad for a calendar year (whose income qualifies for exclusion under Code Section 911) are treated as having minimum essential coverage for the year.
The Act did not repeal the employer mandate, under which ‘applicable large employers’ must offer health coverage to at least 95% of their full-time employees or pay a penalty equal to $2,750 (indexed) multiplied by each full-time employee (excluding the first 30 employees) if one of their full-time employees obtains subsidized coverage on an exchange. If the coverage offered by the employer is not adequate or affordable, the employer must pay a $3,860 penalty (indexed) with respect to each employee who obtains subsidized coverage on an exchange. ‘Applicable large employers’ are those with at least 50 full-time equivalent employees — determined across the controlled group ─ and based on 30 hours of service a week, but excluding any hours of service for which an employee does not receive US-source income.
Applicable large employers and entities providing health insurance to individuals must provide tax forms to covered individuals and full-time employees and file statements with the IRS. These forms are discussed in the chart in section II.P.4 above.