8965 Exemption Types for Health Coverage
Understand the purpose of IRS Form 8965 and the criteria for claiming a health coverage exemption, relevant for amending tax returns prior to 2019.
Form 8965, Health Coverage Exemptions, was a tax form used to claim an exemption from the individual shared responsibility payment. This payment was a penalty under the Affordable Care Act (ACA) for not maintaining minimum essential health coverage. The Tax Cuts and Jobs Act of 2017 reduced the federal penalty to zero, starting in the 2019 tax year, making Form 8965 no longer used for federal tax returns from 2019 onward. The form’s current relevance is limited, as individuals amending a tax return for a year prior to 2019 may still need to file it.
Categories of Health Coverage Exemptions
A variety of exemptions were available to taxpayers who did not have health coverage for all or part of a year. These exemptions were grouped into several categories, each with specific qualification criteria. The exemptions were claimed on Form 8965 by using a specific code for each month.
One category related to the affordability of health insurance. A taxpayer could claim an exemption, using Code A, if the lowest-cost health plan available would have cost more than a certain percentage of their household income; for 2018, this threshold was 8.05%. Another exemption, Code B, was for a short gap in coverage. An individual could be uninsured for less than three consecutive months without owing a penalty, but this exemption could only be used for the first such gap in a year.
Income-based exemptions were also available. A person whose household income was below the threshold for filing a federal tax return could claim an exemption. This exemption did not require a specific code on Form 8965; instead, taxpayers could check a box on their Form 1040.
Hardship exemptions covered a wide range of difficult life circumstances. For the 2018 tax year, many hardship exemptions could be claimed directly on the tax return using Code G. Common hardships included homelessness, eviction or foreclosure, receiving a utility shut-off notice, or filing for bankruptcy. In some cases, an Exemption Certificate Number (ECN) from the Health Insurance Marketplace was required, but for many common hardships, this was no longer necessary for 2018 returns. Residing in a state that did not expand its Medicaid program also qualified as an exemption under Code G.
Certain group memberships provided a basis for an exemption. Members of a health care sharing ministry (Code D), a federally recognized Indian tribe (Code E), or a recognized religious sect with objections to insurance could claim an exemption. Other exemptions included being incarcerated (Code F) or not being lawfully present in the United States (Code C).
Required Information and Form Completion
To complete Form 8965 for a pre-2019 tax year, specific information was necessary. The required details depended on the type of exemption being claimed.
For an affordability exemption, the taxpayer needed to calculate their required contribution and compare it to their household income. For those eligible for employer-sponsored coverage, this was based on the employee’s cost for the lowest-cost self-only plan. For Marketplace coverage, the calculation involved the premium for the lowest-cost Bronze plan and the premium tax credit the person would have been eligible for. For certain hardship exemptions, the Exemption Certificate Number (ECN) had to be entered onto Part I of Form 8965.
The form itself is divided into three parts. Part I was for listing Marketplace-granted exemptions that came with an ECN. Part II was used to determine if a taxpayer was exempt because their income was below the filing threshold. Part III was a grid where taxpayers would claim all other exemptions by entering a specific code.
In Part III, the filer had to enter the appropriate exemption type code for each individual in their tax household who was without coverage. This required filling in a column for each person and for each month an exemption was being claimed. Using the correct code, such as “A” for unaffordable coverage or “B” for a short coverage gap, was necessary.
How to File Form 8965
Filing Form 8965 was not a standalone action; it had to be included with a taxpayer’s annual federal income tax return. The completed form was attached to the Form 1040 for the specific tax year in question, such as 2018 or an earlier year. The information from Form 8965 directly impacted the main tax form. Successfully claiming an exemption meant that the taxpayer would not have to calculate and report a shared responsibility payment on their Form 1040, which prevented the penalty from being added to their total tax liability for the year. Once the tax return with the attached Form 8965 was submitted, the IRS would process it.