Avoiding ACA Employer and Individual Penalties for Expatriates

November 2017

The Affordable Care Act (“ACA”) requires individuals to have qualifying healthcare coverage (“minimum essential coverage”) for each month, qualify for an exemption from coverage for the month, or pay a penalty when filing their federal income tax return.

By a letter released June 30, 2017 (AM 2017-0011), the IRS addressed the application of this individual mandate where an individual moved from Germany to Florida in 1998 for reasons unrelated to work, and has since continued her health insurance coverage solely under the German healthcare system. The IRS concluded that the German healthcare system does not constitute an expatriate health plan that is deemed to satisfy minimum essential coverage and the individual does not qualify as an expatriate. Accordingly, the individual is subject to ACA penalties for failure to maintain minimum essential coverage, unless another exemption applies.

The IRS findings bear a review of the proposed regulations issued in June 2016 regarding the elements necessary for an individual to qualify as an expatriate and an employer’s plan to qualify as an expatriate health plan for purposes of avoiding ACA penalties for both employers and their employees.

Qualified Expatriate Health Plans

The Expatriate Health Coverage Clarification Act of 2014 exempts expatriate health plans from complying with many healthcare reform requirements, provided several conditions are met. In particular, expatriate health plans must provide coverage that meets certain standards:
  • Provide “minimum value”;
  • Cover inpatient hospital services, outpatient facility services, physician services, and emergency services in the US and the countries where the individual is transferred;
  • Offer coverage to dependent children until age 26; and
  • Satisfy other standards to ensure that coverage is administered by an expatriate health insurance carrier or expatriate health plan administrator with international operations.

To qualify as an expatriate health plan, substantially all of the primary enrollees (e.g., employees of the plan sponsor) must be “qualified expatriates.” A plan satisfies this requirement only if, on the first day of the plan year, at least 95% of the primary enrollees are qualified expatriates.

Qualified Expatriates

Generally, qualified expatriates must fit into one of the following categories:
  • Workers in the US (“Inpats”): Individuals (i) whose skills, qualifications, job duties or expertise caused the employer to temporarily transfer the individual to the US; (ii) who are reasonably determined to require access to health insurance coverage in multiple countries; and (iii) to whom the employer periodically offers other multinational benefits (e.g., tax equalization and compensation for cross-border moving expenses).
  • Workers outside the US (“Expats”): Nationals of the US who work outside the US for at least 180 days in a consecutive 12-month period that spans across two consecutive plan years

Expatriate Plan Relief and Compliance

Coverage under an expatriate health plan counts as minimum essential coverage for both the individual mandate to maintain minimum essential coverage and the employer mandate to offer the requisite coverage to substantially all of its full-time employees. The proposed regulations also relieve expatriate health plans from compliance with the healthcare reform mandates (e.g., no lifetime or annual limits, no preexisting condition exclusions, limited waiting periods before commencing coverage, coverage of preventive health services). In addition, expatriate health plans are exempt from the Patient Centered Outcome Research Institute (“PCORI”) fee and the transitional reinsurance fee.

Notably, the Affordable Care Act information reporting (Form 1095 series) is required; although to facilitate furnishing statements to individuals covered by an expatriate plan, such recipients are treated as having consented to electronic statements unless they explicitly refuse.

The proposed regulations may be relied upon for plan years beginning on or after January 1, 2017.

Read Next Article, "IRS Released 2017 ACA Information Returns"

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