US citizens living abroad are not required to purchase health insurance as outlined in the Affordable Care Act, often affectionately referred to as Obamacare.
The definition of “living abroad” is clear; nomads such as ourselves are limited to visiting the US for no more than 35 days every 12-months, else we are required to purchase minimum essential care insurance policies on a Health Exchange.
Were we actually in the US, we would do just that. But these policies provide no coverage for routine care Internationally, let alone across multiple States, which makes them effectively useless for our lifestyle. Thus the purpose of an exemption.
But limiting visits to the US to 35 days every 12 months seems awfully restrictive. If I wanted limitations in life, I would just get a job. So what is going to happen when we visit the US later this year for 2 to 3 months?
Qualifying for the Living Abroad Exemption
To qualify for the living abroad exemption we must pass either the Bona Fide Residency Test or the Physical Presence Test. (These are the same tests that are used for the Foreign Earned Income Exclusion (FEIE), a nifty option that also allows expats to pay zero income tax.)
Bona Fide Residency Test – this requires establishing permanent residency in another country, accomplished by legally moving to a new country for an extended period. If you are a Bona Fide Resident of a foreign country for a whole tax year (January 1st to December 31st) then you are exempt from the ACA.
Anybody who is truly a Bona Fide Resident of another country has a lot of flexibility when visiting the US. The Bona Fide Resident Test is highly nuanced / subject to interpretation, but if you live and work in another country, pay taxes, own a house, your kids go to school… nobody is going to blink an eye if you spend 3 months visiting Grandma every summer. Clearly you have established permanent roots in your new home.
Those of us without residency must instead pass the Physical Presence Test.
Physical Presence Test – If you are present in a foreign country (or countries) for at least 330 days in a consecutive 12-month period, you are considered to live abroad. Sailors and Explorers take note: International Waters and Antarctica don’t count.
If neither of these conditions apply, we must purchase minimum essential coverage through a Health Exchange (and will be unable to claim the FEIE.)
Since nomads don’t have a permanent tax home, we must pass the Physical Presence Test.
Unlike the Bona Fide Residency Test, we aren’t required to use the calendar or tax year. Any consecutive 12-month period can be used, and we can choose the dates that are most advantageous. Our 35 days of presence in the US can occur anytime within those 12 months… including the last 35 days.
If we happen to arrive in the United States in August of 2016 (for example), assuming no prior visits in the previous year, it will be the end of September before we approach 35 days. We may even get a free day since it is a leap year.
Stacking 12-month Periods
At the end of September, we will have been in the US 36 days. And then 37, 38, …
Or as I prefer to think of them, Day 1, 2, 3… of the next 12-month period.
By stacking two 12-month periods together, we can remain in the US up to 70 days in 2016.
However, it won’t be clear that we have two valid sequential 12-month periods until September of 2017. This can be resolved with a simple extension of our tax filing until after this date.
Please Sir, I Want Some More
70 days is a long time. But what if we want more?
Technically speaking we are required to purchase health insurance effective the 1st day we are not covered by the living abroad exemption. If we don’t, the individual mandate penalty will be assessed. Additionally, we would not be able to claim the FEIE during the non-exempt time frame. (We won’t claim the FEIE anyway. Stay tuned for another exciting tax post.)
In 2016, the individual mandate penalty is fairly steep at $695 per adult (children get in for half price) or 2.5% of household income, whichever is higher. Fortunately this is prorated on a monthly basis, so ~$58/month/adult or ~0.2% of household income/month (equal penalty at $55,600 annual income for MFJ.)
So in theory, we could stay an extra 30 days for the price of a nice dinner.
But I’d rather have a nice dinner.
The “Short Gap” Exemption
For whatever reason, the ACA has a specific exemption from the Individual Mandate penalty as long as a gap in health coverage is less than 3 months in duration. This is known as the “short gap” exemption.
The phrase “less than 3 months” is a little misleading. Essentially it means that you can have no coverage for two full months but not three, and still pay no penalty. But even a single day of coverage in any given month qualifies as having minimum essential coverage for the whole month, so having no coverage from September 2nd to Dec 30th still counts as less than 3 months even though it is closer to 4.
For nomads, citizens who pass the Physical Presence Test are treated as having minimum essential coverage for the 12-month period whether they have health insurance or not. Or at least that is how I read it.
Since we control our schedule… day 2 of a given month seems like a good terminal date for a 12-month living abroad exemption, and day 31 seems like a good time to start the next one.
By combining two non-overlapping 12-month living abroad exemptions and a short gap exemption, it should be possible for us to remain in the US for more than 6 months every two years without minimal essential coverage and without penalty.
While that sounds nice, I don’t think it wise to be self-insured in a country with a health system with zero price transparency and disproportionate fees.
If we were visiting only one location in the US, signing up for an ACA compliant health plan would be one option for coverage (it might even be free.) This policy would then be cancelled when leaving the US.
Since we plan to visit multiple States, a travel insurance policy will be a better fit. As one example, World Nomads offers policies with $5 million in coverage for serious illness or injury for a low fee.
With some advance planning, every two years the living abroad exemptions and short gap exemption should allow nomads to stretch visits to the US to 70 days for those who claim the FEIE and to over 6 months for those who don’t.
I don’t see many future visits that extend beyond two months, but I find that a lot easier to work with than a hard 35 day limit. We’ll test these limits later this year. Enjoy.