Are You Required to Have Health Insurance If You Are a U.S. Taxpayer Living Abroad?

Experienced tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses the rules regarding health insurance, how the Affordable Care ACT (ACA) has affected taxpayers, who is required to have health insurance coverage, and whether or not U.S. citizens living abroad or permanent residents are penalized if they do not retain health insurance for a given tax year.

A Look at Health Insurance in the United States: Pre-Affordable Care Act

Once upon a time, not too long ago, many of us will recall a time when having health insurance was elective. This was the norm for U.S. taxpayers pre-2010, prior to the Affordable Care Act (ACA) being passed.

A considerable number of U.S. taxpayers were provided top-notch health insurance through their employer. Most of these employer-provided plans came at a minimal cost to both employers and their workers. For workers, employer-provided plans boasted a low premiums, low deductibles and low out-of-pocket expenses, all while granting the insured extensive coverage for a variety of medical procedures and tests. In addition, the insured was able to add dependents for a minimal fee as well.

For taxpayers who were self-employed, the choice to retain health insurance was also elective. An independent contractor could be purchase health insurance directly from a provider, browse numerous plans and choose the coverage that best suited their needs. Granted, self-paid insurance naturally cost more than employer-provided insurance because the taxpayer was responsible for 100 percent of the premium costs. However, taxpayers had the ability to shop for coverage across multiple providers, compare and contrast prices and benefits, and ultimately, decide what insurance company and plan level they wanted.  

Moreover, insurance could be retained at any point throughout the tax year. There was no such thing as an “Open Enrollment” period, no rush to obtain coverage and a slew of plan options for taxpayers. In a nutshell, the choice to have health insurance was a personal one. And should you decide not to obtain health insurance, the choice certainly had no bearing on your taxes. Taxpayers were not penalized if they made the decision to forgo health insurance coverage.

What Are the Tradeoffs of Having Marketplace Health Insurance vs. Not Having Health Insurance Coverage?

While freedom of choice when it comes to having health insurance was certainly a perk, there were, undoubtedly, a number of tradeoffs. Should you choose not to retain health insurance, you would be responsible for paying any medical expenses yourself. For most relatively healthy individuals, this wasn’t an issue. For many, aside from the occasional annual physical and random mild medical incidents, such as the common cold or a minor injury, foregoing the monthly costs of health insurance to pay out-of-of-pocket expenses for these few-and-far-between instances was a risk they were willing to take.

However, when an unexpected catastrophic injury occurred, they were hit with exorbitant medical bills that were their own responsibility to pay in full. Trips to the Emergency Room, surgery and overnight hospital stays are in no way “affordable” for the majority of taxpayers. As a result, many individuals found themselves with hefty medical bills that totaled well over $10,000 and no way to pay these bills, sans enrolling in a payment plan with the hospital or medical facility where they obtained treatment. Several taxpayers became indebted to healthcare providers and, basically, worked to pay off their medical bills.

In addition, those with pre-existing conditions had a much harder time retaining coverage, and if they did, premiums were significantly higher than those for individuals who did not suffer from pre-existing conditions. For anyone suffering from a pre-existing condition – even a former cancer patient who was in remission or someone with a minor chronic illness – health insurance premiums could amount to well over $1,000 per month for even the most basic of coverage plans. While having health insurance was still a choice, those with pre-existing medical conditions had little choice in the matter – either pay the costly premiums or pay tens of thousands of dollars out of pocket. Even then, many taxpayers who suffered from pre-existing medical conditions were denied coverage, as insurance providers were well-aware that these individuals were a liability of sorts.

Finally, there was no law in place that could prevent health insurance providers from driving up costs for individuals with pre-existing conditions – or anyone else for that matter. Since health insurance was privatized, providers could essentially do as they pleased and charge whatever premiums they desired.

How the Affordable Care Act Changed Healthcare for U.S. Taxpayers

In March 2010, the U.S. government passed the Affordable Care Act (ACA), also known as Obamacare. The purpose of the ACA was to provide all U.S. taxpayers with the ability to retain health insurance at an “affordable” price. The ACA also made it much easier for health insurance premiums to be regulated and made it much harder for insurance providers to reduce or flat-out deny coverage for those with pre-existing conditions. Furthermore, low-income earners were also given the opportunity to retain health insurance at a reasonable price. Finally, the ACA also lowered costs for prescription drugs.

At first glance, the ACA seemed like a godsend. Millions of taxpayers benefitted from the new law and those that were either previously unable to afford coverage or denied health insurance benefits suddenly found themselves able to retain health insurance at a fraction of what they previously paid. Win-win, right? Well, as they say, there are always two sides to every coin. And while some taxpayers certainly benefitted from the Affordable Care Act, others found themselves in a predicament they never expected.

Naturally, in order for more people to be eligible for health insurance coverage, the costs had to be offset. Thus, these costs must be spread out to other taxpayers, resulting in greater premiums for employers and individuals. And one of the most controversial aspects of the law became the fact that retaining health insurance became a requirement. Those who chose NOT to retain health insurance were now required to pay a penalty fine – a fine that has increased every year. 

Effects of the Affordable Care Act on Employers

After the ACA was passed, the cost burden for employers drastically rose. According to a 2016 International Foundation of Employee Benefit Plans (IFEBP) survey, the ACA drove up health care costs for employers by an average of 5.8 percent. Even for larger companies, these costs add up. As a result, the cost for employees has also shot up.

Moreover, companies that have 50 or more full-time employees are required to provide health insurance coverage or pay a penalty. This has caused several companies to lower hours for workers in order to avoid having to provide health insurance to employees, or, many companies have sought to outsource jobs. Several workers have gone from full-time to part-time as a result, and thus, the burden to procure health insurance has shifted to the employee.

Effects of the Affordable Care Act on Employees or Self-Employed U.S. Taxpayers

According to the ACA, all U.S. citizens and permanent residents (aka green card holders) are required to have health insurance. While the ACA certainly benefitted those with pre-existing conditions or those with low-income earnings, but for the middle class, expenses rose significantly. 

After the ACA was passed, workers whose employers provided insurance coverage at a minimal cost to them suddenly found themselves having to pay a lot more – and for plans that were nowhere near as comprehensive. The costs of these plans also rose every year. Those with dependents also found themselves having to pay between $200 to over $400 per family member. This lead many young adults who were previously covered under their parents’ plans to make a tough choice: either retain health insurance on their own or have their parents pay twice the price – or more – to have them covered as a dependent.

Furthermore, with every year that passed, coverage became more expensive – as did the penalties for not having health insurance. Additionally, gone were the days of being able to select health insurance directly from insurance providers. Those whose employers did not provide insurance, were self-employed or whose employers’ plans were too expensive are now required to select insurance directly from what is known as the “Healthcare Marketplace”. Every taxpayer attempting to obtain health insurance must sign up through the Marketplace. Insurance is divvied up by “tier”, meaning Bronze, Silver, Gold or Platinum level (each tier offering greater coverage and, naturally, at a higher cost).

How the ACA Affects Taxpayers and What to Do When Filing an Income Tax Return

After the ACA was passed, U.S. taxpayers are required to report whether or not they had healthcare coverage for the entire tax year on their income tax returns. Those who went more than three months without healthcare coverage are assessed a penalty, unless they qualify for an IRS exemption. Exemptions include insurance coverage costing over a certain percentage of your earnings (be it employer-provided or the minimum cost for a Bronze level plan), among others.  

Health Insurance Exemptions for U.S. Citizens Living Abroad and Permanent Residents

While all U.S. citizens and permanent residents must retrain health insurance, fortunately, one of the IRS’ exemptions for taxpayers not having to pay the penalty for lacking health insurance coverage for the tax year is the fact that said taxpayer was living abroad – among others.

According to the IRS, a taxpayer is exempt from having to carry health insurance for the tax year if you meet any one of the below criteria:

• You are a U.S. citizen or resident alien who was living in a foreign country (or multiple foreign countries) for a minimum of 330 days during a period of 12-consecutive months
• You are a U.S. citizen who is a bona fide resident of a foreign country (or multiple countries) for an uninterrupted period of time, including a full tax year
• You are a bona fide resident of a U.S. territory
• You are a resident alien who 1) was also a citizen or national of a foreign country that has an income tax treaty bearing a nondiscrimination clause, and 2) was a bona fide resident of a foreign country for an uninterrupted period of time, including a full tax year
• You were not lawfully present in the U.S. and are not a U.S. citizen or U.S. national
• You are a nonresident alien

If you meet any of the above criteria, you can file for an exemption using Form 8965 when filing your tax return. A tax lawyer who has experience in both the handling of health insurance tax matters and in the interpretation of complex ACA reporting requirements can guide you through the process of filing an exemption, as well as other health insurance matters as they pertain to your individual or business tax filings.

How a Tax Attorney Can Assist You When Claiming Exemptions to Health Insurance Coverage

The Affordable Care Act and its mandates can be confusing for taxpayers. Just one small mistake on your tax return filing can lead you to incur even greater penalties than would normally be assessed. And for many who believe they are required to pay a certain amount for health insurance penalties, that figure can be reduced.

One thing is certain – going at it on your own can be extremely difficult. Any tax-related matter can be a complicated one, between filling out forms and providing accurate documentation. Add health insurance to the mix and you can undoubtedly face a recipe for disaster.

Figuring out whether you qualify for an exemption from the penalty of not having health insurance for a tax year can be complex, but luckily, a tax attorney can assist you in determining what your IRS healthcare requirements are as an individual taxpayer or business, what the requirements are for your loved ones and whether or not you can reduce or eliminate the fee imposed on U.S. taxpayers for not carrying health insurance for the tax year.

If you need help with health insurance tax matters, Thorn Law Group is on your side. For more information on your unique situation, contact Managing Partner Kevin E. Thorn today to schedule a confidential consultation. As an experienced tax lawyer, Kevin E. Thorn will provide you with the legal counsel and guidance you both need and deserve to resolve your health insurance IRS issues quickly and favorably.