1. Applicability of the ACA requirement of minimum essential coverage and the Individual Shared Responsibility payment for U.S. residents.

U.S. residents living abroad, as well as U.S. citizens living within the United States, are subject to the requirement under the Affordable Care Act of having "minimum essential coverage" unless they qualify for an exemption. These requirements can be confusing for American expatriates ("expats") living outside the United States, who frequently do not have minimum essential coverage.

The minimum essential coverage requirement – that is, qualifying health care coverage under the ACA – can be met through a variety of avenues including employer-provided coverage (which includes COBRA and retiree coverage); government-sponsored programs such as Medicare Part A and Medicare Advantage programs, most of Medicaid, CHIP, TRICARE, veterans coverage administered by the VA, coverage offered to Peace Corp volunteers and refugees; insurance purchased by individuals either directly from an insurance company or through the health insurance marketplaces, as well as through other options. 

Excluded from minimum essential coverage are plans offering limited benefits, such as vision only, dental only, as well as some limited Medicaid plans.

If the requirements for minimum essential coverage are not met, then the qualifications for an exemption must be met in order to avoid having to pay the "individual shared responsibility payment."  The Individual Shared Responsibility Payment is, for all extents and purposes, a tax or a fine based either on a per-person basis or a percentage of family income, whichever is greater.

In addition, new proposed rulemaking has been issued by the Departments of Labor, Treasury and HHS on June 8, 2016 which will affect whether and how the Affordable Care Act affects expatriates.

2. Exemption from the Individual Shared Responsibility requirements is not automatic for expatriates

In most cases, American expatriates will qualify for an exemption from the Affordable Care Act requirements.  If the expatriate can qualify for the Foreign Earned Income Exclusion (FEIE), then they will also meet the requirements to be exempt from needing "minimum essential coverage" and the Individual Shared Responsibility penalties. 

Resident aliens who are citizens or nationals of a foreign country with which the U.S. has an income tax treaty with a nondiscrimination clause, and who are bona fide residents of a foreign country for an uninterrupted period that includes an entire tax year also are exempt from the ACA shared responsibility requirements.

There are two ways to qualify for the Foreign Earned Income Exclusion – the "Physical Presence Test" and the "Bona Fide Resident" test.

"Physical Presence" test. The Physical Presence test is three-pronged.  Individuals desiring to qualify for an exemption from the ACA requirements must meet the three requirements of income, tax home status and presence.

1. Income -  The taxpayer must have earned foreign income.  Income includes salaries (including self-employment income), wages, and bonuses.  Income does not include "passive income" such as dividends, interest, pension distributions or short or long term capital gains.

2. Tax home – The taxpayer must have a "tax home" in a foreign country.  This is perhaps the most confusing component to many who wish to qualify for expat tax benefits. "Tax home" is defined as the location where a person is either permanently or at least indefinitely engaged in gainful employment. This can be different than the location of the individual's personal residence.  In order to qualify for a "tax home", the taxpayer must have a work assignment which is anticipated to last at least a year.  If the taxpayer maintains a personal residence in the United States, the qualification for a "tax home" abroad is not met.

3. Physical presence – The taxpayer must be physically present in a foreign country for at least 330 full days out of a 365-day period (i.e., twelve consecutive months).  The 365-day period does not have to be a "calendar year" – any span of 365 days will qualify as long as the individual did not return to the United States for a period exceeding 35 days within the identified 365 day period.

Purpose of presence is not important: Any time spent in the foreign location, regardless of purpose (work, vacation, medical treatment, etc.) will qualify in the count for the 330 days.   In the converse, however, any reason for returning to the United States, including illnesses, visits, vacations, etc. will have to be subtracted from the 330 days. Again, return visits to the United States cannot exceed a thirty-five day total or the 365 day period is broken.

Definition of full day: The IRS has stated that the 330 days must be FULL days in the foreign location.  The full day begins and ends at MIDNIGHT.  Therefore, any partial days – or days spent in international airspace or international waters does NOT qualify.  However – if the individual is WITHIN THE AIRSPACE of the country before midnight, that day can be counted as a full day. The 330 day requirement can be verified if necessary by checking passports and entry records.

Travel within the country:  Travel within the foreign country or even other foreign countries does not break the consecutive presence, however, if within an international area for more than twenty-four hours, entire days will have to subtracted from the count.

Calculation of the 365-day period – four rules to remember: 

• The period can begin on ANY day within a month – it ends the day before the same calendar day, twelve months later 

• The period must be of 365 consecutive days or 12 month periods.  The 330 day period must fit within this time frame 

• The 365 day period does not have to begin with the first day in the country.

• In determining whether the 365 day period falls within a longer stay in the foreign country, 365 day periods can overlap each other.

"Bona Fide Resident" test. The Bona Fide Resident test is also three-pronged to prove that a taxpayer has established a residence in a foreign country.  The taxpayer must meet requirements of income, establishment of a tax home, and establishment of "bona fide" residency.

1. Income requirements -  Like the physical presence test, the taxpayer must have earned foreign income.  Income includes salaries (including self-employment income), wages, and bonuses.  Income does not include passive income such as dividends, interest, pension distributions or short or long term capital gains.

2. Tax home – Again, the taxpayer must have a "tax home" in a foreign country.  As with the physical presence test, a tax home is where a person is permanently or indefinitely engaged in work, regardless of where their personal residence is.  To establish a tax home, a person must have a work engagement expected to last at least a year. Furthermore, if the individual retains a personal residence in the United States, they cannot be considered to have a "tax home" in a foreign country.   In the case of contractors working abroad, this is often a difficult hurdle to overcome because they have often retained US-based assets and connections, therefore they are deemed to have not established the "tax home" overseas.  Often, expats will find the "physical presence" test requirements easier to meet than the bona fide resident requirements.

3. Bona fide resident – The taxpayer must have been a bona fide resident of a foreign country for an entire tax (most often calendar) year. An entire tax year is from January 1 through December 31 for taxpayers who file on a calendar year basis. It can vary for others filing on a different time frame. However, one does not obtain status as a bona fide resident by simply living in a foreign country for a year.  It must be demonstrated that there is an intention to stay in the foreign country for at least a year or permanently.  Individuals claiming this status must be either U.S. citizens or have resident alien status. The IRS' definition of a "bona fide resident" is admittedly somewhat vague.  

• Firstly, the IRS makes a distinction between "residence" and "domicile."   A domicile is the location or country that the taxpayer intends to return at some point for a permanent location.

• Intentions of the taxpayer control: The intentions of the taxpayer play a great role in whether bona fide residency abroad is established. 

• Even if the taxpayer intends to return to the United States, if they take an assignment abroad and live there for a year or more, it is possible to establish bona fide residency.  On the other hand, however, if the individual maintains property such as a home in the US, automobiles, or returns frequently – the IRS will likely question whether there is an actual intent to establish residency.

• Intent can be exhibited through many factors, such as acquiring or leasing a residence overseas, establishing bank accounts, joining professional and social organizations, etc.  The taxpayer is permitted to leave the country for trips back to the US if they are brief or temporary.

• The IRS will decide on the legitimacy of a bona fide residency claim based on what is reported on IRS Form 2555, Foreign Earned Income.  In addition, bona fide residency will not be established if a claim of non-residency is filed in the foreign country and the government of that country finds the expatriate is not subject to their income tax laws as a resident (see Part II, Question 13A of Form 2555, where this question is directly asked).  Once bona fide residency is established though an uninterrupted entire tax year, it is possible that parts of other years will be recognized as well.

Expatriate health care plans.  An additional way to qualify for an exemption is to have a qualifying U.S. expatriate health care plan. Additionally, there are some foreign health insurance plans that cover expats both inside and outside of the US which would qualify them as having "minimum essential coverage."

However, each plan needs to be carefully reviewed and should specifically state that it conforms to the ACA "minimum essential coverage" standards.

The provider can generally confirm this compliance.

On June 8, 2016, a Notice of Proposed Rulemaking was jointly issued by the Departments of Labor, Treasury and Health & Human Services.  This proposed rulemaking is designed to help implement the Expatriate Health Coverage Clarification Act of 2014 (EHCCA). Congress, through the EHCCA specifically defined expatriate coverage and detailed the requirements that the expatriate coverage must meet to be exempt from the ACA requirements.  In July 2015, the IRS published interim guidance (see IRS Notice 2015-43) and promised that rulemaking would follow to implement the EHCCA. 

The Notice of Proposed Rulemaking issued on June 8 defines those proposed regulations. 3 Effect of the Proposed Rules The proposed regulations define "expatriate health plan" as a plan that is made available to "qualified expatriates" and that satisfies other requirements. Substantially all primary enrollees in the expatriate health plan must be qualified expatriates. A primary enrollee is the individual covered by the plan who is not a dependent, a spouse or a beneficiary. A plan meets the "substantially all" enrollment requirement if, on the first day of the plan year, fewer than 5 percent of the primary enrollees (or fewer than 5 primary enrollees if a small plan) are not qualified expatriates.  Effectively, "substantially all" is 95 percent.

Expatriate health plans must meet the following requirements to be qualified plans:

• Must not be plans that are substantially "excepted benefits"  

• Cover inpatient hospital services, outpatient services, physician services, and emergency services in the United States and in the country from which the qualified expatriate was assigned or employed, and in countries designated by the departments of Labor, Treasury and HHS

• Must meet the minimum value requirements of 60 percent actuarial

• Provide dependent coverage through age 26 

• The insurer or plan administrator must be licensed to operate in more than two countries, have provider networks in eight or more countries, maintain call centers in three or more countries and in eight or more languages, process at least $1 million in claims in a year, offer global evacuation and repatriation agreements, maintain legal and compliance resources in three or more countries; and offer reimbursement for items and services in the local currency of eight or more countries;  

• Satisfy health reform requirements applied before the ACA, including the pre-existing condition exclusion limitations (63 day break in coverage) imposed by HIPAA

Waiver of requirements. A waiver to the 330-day requirement is possible because of war, civil unrest of similar adverse conditions within the country.  The taxpayer has the burden of proving that they had a tax home in the country and were physically present or a bona fide resident in the country on or before the date of the waiver as well as being able to show that it would have been reasonably possible to meet the 330 day requirement in not for the conditions. In addition, if the individual is in a foreign country in violation of US law, the time there will not count as being "physically present." 

3. Claiming the exemption

Just like the Foreign Earned Income Exclusion, if the expatriate qualifies for an exemption from the ACA, they need to make sure that they file Form 8965 Health Coverage Exemptions. The IRS will not assume that that an expatriate qualifies for an exemption just because they file a tax return with a foreign address or even if they are claiming the Foreign Earned Income Exclusion.

If qualifying only for a partial year foreign earned income deduction, the expatriate needs to make sure that they have "minimum essential coverage" for the part of the year that they don't qualify for the Foreign Earned Income Exclusion. This is generally the case when moving during the year either into or out of the United States.

4. Gaps in coverage

A few final things to note regarding gaps in coverage: Each year, the law allows a short gap in coverage without incurring penalties.  The gap consists of one continuous gap of up to three months during the year.

Also remember that coverage for even one day of a month is considered as coverage for the entire month.

Returning to the United States from abroad is considered as a "qualifying event" which gives an individual 60 days to enroll in a plan through the Marketplace – even if outside of the enrollment period.  This can provide a reduced-cost plan (based on gross income), so it might offer a good deal to some.

Additional problems exist for some overseas contractors who take on short-term assignments.  These contractors may not qualify for expat policies because they weren't out of the country long enough, but also are unable to purchase through the exchange because they don't meet the exchange requirements of living in a US state.  These individuals will either have to purchase expatriate coverage through a US plan, if they can – or pay the tax.

5. Owing the penalty

If an expatriate ends up owing the penalty, he or she can expect the same penalties that US-based individuals will owe.

For 2016 and after, the penalties are the greater of $695 per adult and $347.50 per child (up to $2085 for the family) or 2.5% of family income (defined as income over and above the filing threshold) With proper planning, the expatriate can ensure both proper health care coverage as well as avoid the penalty of the individual responsibility mandate.