Affordable Care Act- FAQ for Expats and Self-Employed

By ZM Ishmurzina

The Affordable Care Act, or Obamacare as it is called colloquially, is now active in the United States. There are a number of questions about this act that are of concern to expats who wish to know how they will be impacted by it.

There is a large number of US expats that are confused about what their obligation is when it comes to the Affordable Care Act, or Obamacare. This act requires American citizens and green card holders to have a health care plan with at least the minimum coverage outlined in the plan or face financial penalties. For a US expat who is living and working outside of the United States, this raises the question of whether or not the law applies to them.

An expat who qualifies for the Foreign Earned Income Exclusion (FEIE) as a result of meeting either the Bona Fide Resident Test or the Physical Presence Test will be exempt from the Affordable Care Act taxation. Those US expats who do not qualify for the FEIE are not exempt. The following is a list of common questions and the answers posed by American expats concerned about how Obamacare will affect them.

Frequently Asked Questions about the Affordable Care Act for American Expats and Self-Employed

When must American expats moving to the USA acquire the Minimum Health Care Coverage under the Affordable Care Act?

Expats moving back to the United States from a foreign country are engaging in what is referred to as a “qualifying event”. Any qualifying event will give an expat 60 days to obtain the required health care coverage. Other qualifying events include adopting a child, having a baby, getting married or divorced or losing health insurance coverage that was carried through an employer.

These qualifying events allow an individual to obtain an acceptable health insurance policy outside of the open enrollment period without being penalized. Even though open enrollment for the Affordable Care Act ended in March of 2015, individuals returning to the United States will be allowed 60 days to secure a health insurance policy without penalty.

If an American expat stays in the USA for 3 months, is s/he required to obtain the coverage for these 3 months?

This is dependent on individual circumstances. There is a clause in the Affordable Care Act that allows for a lapse in coverage for up to 3 months without a penalty. In this case, where the expat is only going to be in the US for 3 months, they should be able to avoid any additional taxes.

The problem that will arise is with eligibility for the bona fide resident test or the physical presence test. An expat who spends 90 days in the US was not living in a foreign country for at least 330 days of the year. This will disqualify the expat from both tests and the subsequent FEIE. To get around this, the expat could remain in their host country for the remainder of the year and request an extension from the IRS for filing their tax forms. If the extension is granted, the US taxpayer can wait until they qualify for the bona fide resident test or physical presence test before filing the tax return. In this way they will be able to claim FEIE and be exempt from Affordable Care Act taxation.

Can an American expat purchase a health care policy from the foreign country to avoid the penalties if s/he does not meet either the physical presence test or bona fide residence test?

US citizens are only able to purchase a healthcare plan through Obamacare if they have a physical address in the United States. Open enrollment ended in March of 2014 and the next one is scheduled for November 14th of 2014 and will end on the 15th of January in 2015. The only way in which an expat can enroll before the next open enrollment without penalty is to physically move to the United States or experience another qualifying event outlined earlier in this article.

How does the Affordable Care Act affect self-employed individuals or independent contractors?

Over 10 million individuals in the United States are classified as being independent contractors. For these people the Affordable Care Act will impact their US income tax return. To avoid a negative impact on the return they will have to make a strategic tax plan ahead of time.

What are the Benefits to the Affordable Health Care Act?

The Affordable Care Act extends a wide range of benefits like no refusals due to pre-existing conditions, benefits for children (and adult children) from policies held by parents, and a motivation to purchase Health Insurance.

The penalties outlined in the Affordable Health Care Act may appear negative, they do encourage independent contractors to obtain a health care policy if they previously did not have one. An independent contractor who has been denied health insurance in the past due to a pre-existing condition will now have the benefit of health insurance. Provisions in the Affordable Health Care Act prohibit denying any applicant due to a health condition or disease that was diagnosed before applying for the health care policy.

There are also no lifetime coverage limits under the Affordable Care Act, and any annual limits are temporary and will be phased out during the year. An additional benefit is that children and adult children up to 26 years old are also covered under their parents’ insurance plans.

What are the penalties for a failure to acquire a qualifying health insurance plan?

The penalties for a failure to obtain a qualifying health insurance plan have become effective with a tax year 2014.

The penalties incurred for not obtaining the minimum essential coverage is the greater of 1% of an individual’s earned income or $95 for each uncovered adult and $47.50 for each child. The tax is assessed each year, but prorated for tax payers who did not have the minimum insurance for only a portion of the tax year.

The “short-term gap” clause of the Affordable Care Act stipulates that an individual or family who had a gap in coverage of 3 months or less are exempt from this tax. Coverage for one day in the month also qualifies as being covered for that entire month. This allows for an individual to obtain health insurance up until the last day of a month and meet the requirement needed for the entire month in which the insurance was contracted.

Individuals who earn more than $200,000 annually or a married couple claiming earnings in excess of $250,000 will be obligated to pay a Medicare tax of 3.8% of their investment income. This tax became effective in a tax year 2013. These same individuals under the same circumstances will also pay 0.9% on salary earned income. Those who have Subchapter S or a partnership should note that the business could be held liable for these taxes. The best way to avoid these charges is to purchase insurance through the company as opposed to as an individual.

There is expected to be a 40% excise tax imposed on expensive health insurance plans starting in 2018. An expensive or “high dollar insurance plan” are those with a premium of $10,200 or more for a single individual, and a premium in excess of $27,500 for family plans. These threshold amounts will not be adjusted for inflation when they become effective in 2018.

Can American expats take the itemized deduction for medical expenses spent under the Affordable Care Act?

A $2,500 limit has been placed on contributions to flexible health care spending accounts. With this limit in place, income becomes subject to Social Security taxes and US income tax. For individuals with a high deductible who are paying the out-of-pocket expenses with a flexible spending account, the consequence could be being liable for very high additional taxes. A comprehensive insurance plan with a lower deductible will allow US taxpayers to avoid having to pay those punitive taxes.

The itemized deduction floor for medical expenses was raised from 7.5% to 10% in 2013. With this increase it is nearly impossible for a worker with health insurance to claim a medical expense deduction. A tax payer will have a better chance of qualifying for the deduction by switching from an insurance plan with a high deductible to one that is more comprehensive with a lower deductible.

Health Insurance Care Plan Options: University for Group Alumni Plans, Checking With Companies or Friends, Getting Referrals From the State Insurance Department and More.

The following lists the steps that should be followed in order to find the most comprehensive healthcare plan available.

An individual who is leaving a salaried employment to become self-employed may qualify for COBRA if they were working for an employer who offered a group insurance plan. If the employer was paying all or a portion of the premium, the taxpayer may be responsible for paying for the cost of COBRA, but it will likely be less than an individual health insurance plan.

Individuals with other types of insurance such as for an automobile, home or life may be able to obtain health insurance through the same provider with a discount for bundling the policies.

Some universities are offering group polices for alumni. An individual could benefit by calling their former alma mater and asking if they qualify to be included as a part of the group. The same is true of certain associations with large numbers of members.

Independent contractors often work in close contact with other contracting companies and self-employed individuals. These companies and individuals may have a comprehensive health insurance plan that can include coverage for sub-contractors.

State insurance departments will be able to inform individuals of and give recommendations for local health care insurance providers. From there an individual should call a number of those and compare the rates and coverage options.

Is a Self-Employed Expat Living and Working Abroad Exempt From the Requirement to Purchase US Health Insurance?

If business income is reported on US form 1099-MISC or 1099-K, an individual is considered to have “Essential Minimum Coverage”:

  1. For those months that take place during a period of 12 consecutive months where the expat is present in a foreign country for a period not less than 330 full days.
  2. For the entire 12 month period if the expat qualifies as a bona fide resident of a foreign country.

Do you still have questions about the Affordable Care Act for Americans expats living abroad and self-employed individuals?

If you have any additional questions, expat tax accountants at Artio Partners will be happy to assist you.