Repeal of the Personal Health Insurance Mandate: Estimated Impacts
Disclaimer: At the time of this article, the proposed tax legislation has not been voted upon. Therefore, all aspects of the Patient Protection and Affordable Care Act (ACA) are still in place. We encourage everyone to be compliant with all regulations as they are currently enforced. We will send more updates as you may be impacted by the ACA legislative changes.
When the Supreme Court upheld the Patient Protection and Affordable Care Act in 2012, it identified the legislation was allowed through the Constitution and is not under the purview of the Supreme Court because it was identified as a tax.
“The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax,” Chief Justice Roberts wrote in the majority opinion. “Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”
With that “tax” label, the ACA is not just open to general regulatory changes, but potentially more at risk with adjustments in new tax legislation.
Proposed Tax Reform Impact on ACA's Individual Mandate
The proposed compromise tax reform bill would eliminate all of the penalties for the ACA’s individual health insurance mandate (individual mandate) requiring everyone to have health insurance. The penalty for not having health coverage in 2017 is $695 per adult and $347.50 per child, or 2.5 percent of one's household income, whichever is greater. Some four million taxpayers paid the penalty in 2016. Should the legislation be passed, the repeal will start in 2019 as currently proposed.
The individual mandate was designed as a critical part of the ACA due to its ability to balance the risk of health care costs between people who are older requiring stereotypically more services and the younger, typically healthier population requiring fewer medical services. Both groups pay premiums for health care insurance, allowing for more balanced insurance costs when individuals are required to purchase coverage using the insurance exchanges.
The proposed tax legislation would reduce the federal budget deficit by about $338 billion due to the decrease of government spending with the reduction of additional Medicaid enrollees and the reduction of paying premium tax credits (PTCs) or subsidies for those low-income individuals buying insurance through an insurance exchange. According to the Congressional Budget Office, repealing the mandate will increase insurance premiums by 10 percent and cause 13 million more people to be uninsured over a decade.
Without the individual mandate, those purchasing health insurance may be skewed toward those requiring more services with their premiums paid not covering the cost of their health care needs. This could lead to increases in premiums for those buying health insurance, and the availability of insurance carriers may be even more limited, leaving some without coverage. Some insurers may drop out of the market since they would still be required to cover those individuals with pre-existing conditions, but would not be able to charge them a higher premium based on their medical conditions.
Currently, 29 percent of those enrolled in the federal exchange have only one option in 2018, according to CNN Money. Residents in eight states – Alaska, Delaware, Iowa, Mississippi, Nebraska, Oklahoma, South Carolina and Wyoming – have only one insurer next year. Further, according to Bloomberg, “there are 120 counties where every insurance company that sold marketplace plans in 2017 is exiting.”
Impact on the Employer Mandate
As mentioned, if the individual mandate repeal occurs as proposed, it will not take effect until 2019. However, this will not change the employer mandate and the related filing requirements. Part of the employer requirements include correctly completing and filing forms 1094-C and/or 1095-C. The IRS began issuing IRS Letter 226J with notification to applicable large employers (ALEs) who have not been compliant for 2015 ACA filings. The penalties range from the thousands of dollars to millions of dollars according to the ACA Times.
There is a process in place for ALEs to respond to the 226J letters regardless of the individual mandate implications. Anyone receiving this notice of penalties will typically have 30 days to respond to the IRS from the date of issuance, not the date received. The letter should have instructions on how to respond correctly and give you the opportunity to either agree with or contest the penalty. You should communicate in writing to the IRS and they will subsequently send you a 227 letter acknowledging your response.
If you need assistance with the provisions of the ACA, please contact Ron Present, Partner, Health Care Industry Group Leader.