Obamacare has introduced many changes for Americans effective in year 2013. The Supreme Court adopted the US Patient Protection and Affordable Care Act (PPACA) in June 2012. Many provisions of Obamacare will affect mostly US citizens and green card holders residing in the USA. For example, effective January 1, 2014 Americans will be required to obtain affordable healthcare coverage or to pay a penalty tax. The annual penalty tax will start at $95 and grow to $695 by YR 2016. Effective January 1, 2013 some high-income earners including American expats will be subject to 3.8% Medicare tax on net investment income. Americans living abroad must be aware of the major provisions of Obamacare that affect them.
This is one of the emails from one of our clients, American expats. “I read about Obamacare and still wonder whether it affects Americans living abroad. I wonder whether I am required to purchase a healthcare coverage as a part of Obamacare. Will I have to pay a penalty tax? Also, I read about 3.8% Medicare tax on net investment income as a part of Obamacare. What does it mean?” The purpose of this guide is provide a summary of key Affordable Care Act provisions that affect American expats living abroad, green card holders and foreign nationals residing in the USA.
Key Obamacare provisions for American Expats living Abroad
Who is eligible to apply for a minimum health coverage under Affordable Care Act?
The PPACA is currently available only to residents of the United States and it covers only domestic insurance plans. Per Obamacare insurers cannot discriminate against individuals with pre-existing conditions or chronic health conditions. Consequently, Americans living abroad with pre-existing health conditions cannot take advantage of this opportunity and they cannot buy a domestic insurance plan. American expats are advised to review their medical coverage options overseas.
What is considered a minimum essential health coverage under Obamacare?
Minimum essential coverage includes the following types:
- Employer-sponsored coverage (including COBRA coverage and retiree coverage)
- Coverage purchased in the individual market, including a qualified health plan offered by the Health Insurance Marketplace (also known as an Affordable Insurance Exchange)
- Medicare Part A coverage and Medicare Advantage plans
- Most Medicaid coverage
- Children’s Health Insurance Program (CHIP) coverage
- Certain types of veterans health coverage administered by the Veterans Administration
- TRICARE
- Coverage provided to Peace Corps volunteers
- Coverage under the Nonappropriated Fund Health Benefit Program
- Refugee Medical Assistance supported by the Administration for Children and Families
- Self-funded health coverage offered to students by universities for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these programs may apply to HHS to be recognized as minimum essential coverage)
- State high risk pools for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these program may apply to HHS to be recognized as minimum essential coverage)
Minimum essential coverage does not include the plans with limited benefits like dental or vision care plans as well as Medicaid that covers only some benefits like workers’ compensation, disability policy or family planning.
Are American expats living abroad required to obtain a health coverage under Obamacare?
No, but they have to meet some requirements. American expats are considered to have a minimum essential coverage if they reside abroad for a calendar year (or at least 330 days within 12 month period). American expats are considered to have enough health coverage if they qualify for the foreign income exclusion. It means that even if Americans living abroad do not have health coverage, they are not required to pay a penalty tax under Obamacare. The key thing is that they meet a physical presence test or bona fide residence test to qualify for the foreign income exclusion.
- Physical Presence Test. To qualify under the Physical Presence Test, an American must be present abroad for 330 days within 12 consecutive months.
- Bona Fide Residence Test. To qualify under the Bona Fide Residence Test, a US expatriate must have a tax home in a foreign country and must be present in a foreign country for an uninterrupted period of one year.
Are Americans living abroad subject to penalty tax if they do not enroll under the Affordable Care Act?
No if they qualify under the Physical Presence Test or Bona Fide Residence Test. Please see above.
Are contractors and international assignees who are present overseas for a short term (under 330 days) subject to Affordable Care Act Regulations and penalty tax?
Yes, because they do not meet either a physical presence test or bona fide residence test requirements. They will have to obtain a minimum coverage to avoid paying a penalty.
How much is a penalty tax for Americans who are required but do not obtain a minimum essential coverage?
Most Americans must obtain health insurance by 2014 or pay a tax penalty. Health coverage must be obtained by January 1st, 2014. The penalty will be assessed per the annual taxable income for each month without insurance. Although, there is a 3 month grace period so the health insurance marketplaces will be open until March 31, 2014.
If a taxpayer prefers to pay a penalty, then the amount will be the following. For year 2014 a penalty is $95 per adult and $47.50 per child or 1% of your taxable income (up to $285 for a family), whichever is greater.
- 2014 = Greater of $95 per person per year or 1% of your modified adjusted gross income
- 2015 = Greater of $325 per person per year or 2% of your modified adjusted gross income
- 2016 = Greater of $695 per person per year or 2.5% of your modified adjusted gross income
- 2017 = Tax Penalty will increase by the rate of inflation going forward, or 2.5% of your modified adjusted gross income
Are green card holders required to obtain a minimum essential health coverage under Obamacare?
Yes, all permanent residents are subject to individual shared responsibility provision and they are required to buy a minimum essential coverage.
Are foreign nationals residing in the USA subject to a mandatory minimum essential coverage under Obamacare?
The answer depends on the status of each foreign national. Foreign nationals are not required to obtain a minimum health coverage if they have resided in the USA for a short period of time and they are not considered resident aliens for federal income tax purposes (although, they might be required to file a US tax return as non-residents).
Foreign nationals are required to buy a minimum health coverage under Obamacare if they have resided in the USA for a long time and they qualify as resident aliens for US tax purposes.
Does a foreign insurance plan qualify under Obamacare?
US citizens or foreign nationals might have an insurance plan issued by a foreign country. Unfortunately, these plans do not qualify under Obamacare. For a list of qualified plans, please see above.
Are American expats living abroad subject to other taxes that are a part of Obamacare?
There is 3.8% Medicare Tax on Net Investment Income and additional 0.9% Medicare tax.
Are American expats required to pay 3.8% Medicare tax on net investment income?
Although, most Americans living abroad are exempt from a penalty tax under Obamacare, some high-income earners living abroad will have to pay 3.8% Medicare tax on net investment income. Net investment income includes capital gains, rents, royalties, interest, dividends and annuities.
The following categories of American expatriates are affected per Obamacare:
- Single filer with MAGI (modified adjusted gross income) over $200,000
- Married filing jointly with MAGI over $250,000
- Married filing separately with MAGI over $125,000
Are American expats required to pay an additional Medicare 0.9% tax on wages and self-employment income?
These high-income earners will be subject to an additional Medicare 0.9% tax on wages and self-employment income under Obamacare. However, the USA has social security agreements with 24 countries that prevent dual social security coverage. Some American expats might be exempt from the additional 0.9% Medicare tax under Obamacare.
Conclusion
The IRS will scrutinize even more the US expatriate tax returns to determine whether the foreign income exclusion was not claimed correctly. Obamacare taxes are the additional sources of revenue. American expats are advised to stay up to date in regards to future Obamacare developments or to contact an expat tax CPA that provides international tax services. International tax experts at Artio Partners will be pleased to assist you with various Obamacare questions as well as other expat tax issues.