Starting in 2014, the Affordable Care Act (commonly called Obamacare) requires that all Americans obtain minimally adequate health insurance for themselves and their dependents. Those who fail to do so are required to pay a penalty to the IRS, called the shared responsibility payment. However, certain categories of Americans are exempt from the individual health mandate and will not be subject to the penalty if they fail to obtain coverage. Among those exempt are many expatriates.
Obamacare’s individual mandate only applies to U.S. citizens who lawfully reside in the United States. Thus, citizens who reside in a country other than the United States are not subject to the mandate. To be exempt, you must be able to prove your foreign residency under one of the following two tests:
- the physical presence test, or
- the bona fide residence test.
Physical Presence Test
Most expats will qualify for an exemption to the individual mandate under the physical presence test. You pass this test if you are physically present in a foreign country or countries for 330 full days for 12 consecutive months. The 330 days do not have to be consecutive. Under this test, all that matters is that you live abroad for the required time; the reason you were abroad is irrelevant. Thus, you can count days you spent abroad for a job, schooling, vacation time, or any other reason.
Bona Fide Residence Test
To pass this test, you must be a bona fide resident of a foreign country for an entire a calendar year. However, you do not automatically acquire bona fide resident status merely by living in a foreign country one year or more. Rather, you must be able to show that you intend to reside in the foreign country and have no immediate plans to return to the United States. Evidence showing this includes: the fact your family is with you; you buy a house in the country; you have a permanent foreign address; you speak the foreign country's language; you participate in community activities in the country.
Expats Who Fail the Exemption Tests
Expatriates who fail both of these tests will be subject to the individual mandate unless they qualify for another exemption. One exemption of particular importance to expats is for short coverage gaps. Under this exemption, a penalty may not be imposed due to a once-per-year gap in coverage lasting less than three months. Thus, an expat who lacks coverage while out of the country for up to three months is not subject to the penalty.
Expatriates may also be exempt from the penalty on other grounds—for example:
- you cannot afford coverage
- you have suffered a hardship that makes you unable to obtain coverage, or
- you don’t have to file a tax return for 2014 because your income is below the tax filing threshold ($10,000 for individuals and $20,000 for a couple filing jointly).
If you’re not exempt, you’ll need to obtain coverage or pay the penalty, which for 2014 is the greater of $95 or 1% of your adjusted gross income. The regular deadline for obtaining individual coverage for 2014 is March 31, 2014. However, if you’re living outside the U.S., you’ll be able to apply for coverage whenever you return.