We get lots of questions about how the Patient Protection and Affordable Care Act will or will not apply to international students. In this previous post, we go through the history and answer most questions, except for one – how will the individual mandate apply to international students? In this post we tackle that one, and I’m happy to say there is a very clear answer. If you just want the answer, here it is: as non-resident aliens, international students on F, J, M and Q visas are not subject to the individual mandate for their first 5 years in the US. All other J categories (teacher, trainee, work and travel, au pair, etc.) get a 2 year pass (out of the past six). For the full analysis, read on.
What is the Individual Mandate?
The individual mandate is the requirement built into the law that everyone must have qualifying health insurance (“minimum essential coverage”), or pay a penalty. The mandate is a core part of PPACA, because in order to provide more extensive coverage to more people, without pre-existing condition exclusions, the system needs to require everyone to have insurance, even healthy people. Otherwise, healthy people would wait until they got sick to buy insurance, and the plans would not be sustainable as they would pay out more than they take in, raising rates and killing the plans. But for international students, being subject to the mandate would be burdensome as PPACA-qualifying coverage will be more expensive and will not meet their specific needs as well as purpose-built international student insurance plans.
The individual mandate is also the main piece of the legislation that was attacked as unconstitutional based on the argument that we can’t force someone to buy something. In June of last year, the Supreme Court upheld the constitutionality of the individual mandate; however, their ruling relied on treating the penalty for not having qualifying insurance as a tax. So enforcement of the individual mandate falls squarely on the IRS, and the IRS has provided very clear guidance relating to international students.
IRS on the Individual Mandate (“Individual Shared Responsibility Provision”)
The IRS provides a questions and answers page on the individual mandate, which they refer to as the “individual shared responsibility provision.” Question 11 asks whether all individuals living in the US are subject to the mandate. The answer makes clear that US citizens and permanent residents are subject to the mandate, as well as “foreign nationals who are in the United States long enough during a calendar year to qualify as resident aliens for tax purposes.” The answer further clarifies that foreign nationals that don’t qualify as resident aliens, even if they have to file a tax return, are not subject to the mandate.
Determining Alien Tax Status (Resident or Non-Resident)
So how do you determine whether someone is a resident alien or non-resident alien for tax purposes? The IRS gives very clear guidance on this point as well – you are a non-resident alien unless you meet either the green card test or the substantial presence test.
IRS Publication 519, Tax Guide for Aliens, describes the two tests. The green card test is self-explanatory – green card holders are resident aliens for tax purposes. The substantial presence test is a bit more complicated. It uses a formula to count the number of days present in the US over the past 3 years, but in any event generally it makes you a resident alien after half a year of presence in the US – unless you are exempt.
International Student Exemption That Confirms Non-Resident Status
Finally, we get to the heart of the matter – the international student exemption. Anyone “temporarily in the United States on an “F”, “J”, “M”, or “Q” visa for the primary purpose of studying at an academic institution or vocational school, and who substantially complies with the requirements of that visa,” is exempt from being treated as a resident alien, and is automatically a non-resident alien.
That exemption holds for 5 years. After 5 years, a student is no longer exempt, and the substantial presence test can begin. There are helpful examples here: http://www.irs.gov/Individuals/International-Taxpayers/Alien-Residency-Examples
Even after 5 years in the US, an international student can continue their status as a non-resident alien for tax purposes under the “Closer Connection” exception that allows the student to prove that they still have a closer connection to their home country than to the US.
So in short:
- The individual mandate applies to US citizens, green card holders and resident aliens, but not to non-resident aliens (regardless of their need to file a return).
- Alien tax status (resident or non-resident) is determined by the green card test or substantial presence test.
- F, J, M and Q visas are exempt from the substantial presence test for 5 years, and therefore are non-resident aliens for first 5 years in the US.
- After that, students can apply for an exception to continue their tax status as “non-resident alien.”
- As non-resident aliens, F, J, M and Q visa holders are not subject to the individual mandate.
- Since they are not subject to the mandate, international students are free to acquire insurance coverage more targeted to their specific needs, without concern as to whether their plan meets PPACA requirements.
The other J visa categories (teacher, trainee, work and travel, au pair, high school, etc.) generally get a 2 year exemption from the substantial presence test, but the exemption looks back 6 years. So as their exemption is a bit more complicated, we will provide a follow-up post to go through the analysis.