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What the New Tax Law Means for Health Care, Individual Mandate

Feb 9th 2018
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Despite what you may have heard, the Affordable Care Act (ACA) and its regulations are still intact for 2018.

Over the past year, President Trump signed a number of executive orders attempting to dismantle various provisions of the ACA, but these orders have left the landscape largely unchanged. Similarly, attempts by Congress to repeal the regulation lacked the support to affect real change, particularly where employers are concerned.

The administration did score one recent win, by repealing the ACA individual mandate as part of the GOP tax reform bill. The change was announced just before tax season, which means reporting this year will be especially confusing.

As trusted tax and accounting professionals, it’s likely more individuals and employers will turn to you for filing guidance. Those who are up-to-date and understand the latest regulations are best positioned to help clients achieve ACA compliance and avoid steep penalties.

The Tax Bill and the Individual Mandate

In December Trump announced his most important health care decision: to repeal the individual mandate as part of the tax bill. But the tax bill doesn’t actually repeal this provision of the law. The bill only zeroes out the penalties for not carrying health insurance, and in fact, it won’t do so until 2019. This year, individuals are still required to have health coverage that meets the minimum essential coverage (MEC) standards, or risk being fined. Individuals won't see a difference on their tax forms until they file their returns in 2020.

The confusion doesn’t end there. Even though the penalties will eventually be phased out, this tax season is the first time individuals will have to tell the IRS whether they had coverage. In previous years, the IRS accepted tax returns with the ACA health coverage section left blank. This year, if an individual doesn’t submit this information, their returns will be rejected and they’ll pay a penalty.

The Tax Bill and the Employer Mandate

For employers, not much has changed. The employer mandate and ACA reporting requirements will remain in place, as do the penalties that come with failing to comply.

In fact, applicable large employers (ALEs) are beginning to experience the repercussions of ACA noncompliance. The IRS has begun sending out ACA penalty Letter 226J to ALEs that didn’t offer an affordable health plan that meets MEC standards to full-time employees in 2015, and will likely continue to do so for subsequent reporting years. Employers could also be fined if an employee purchases subsidized insurance from the individual markets. The penalties can add up — $173.33 per employee who didn’t receive an offer of health care coverage (which kicks in after the first 80 employees), or $260 per employee who wasn’t offered affordable coverage.

To avoid penalties, ALEs need to take the proper steps to ensure they’re offering affordable health plans. According to the ACA, “affordable” means the lowest-cost self-only coverage health care plan does not exceed 9.69 percent (adjusted annually) of an employee’s income. Employers have three options to determine affordability: the W-2 safe harbor, the rate of pay safe harbor, or the federal poverty level safe harbor. Whichever they choose, ALEs should document it, along with all offers of health coverage, in the case of an IRS audit.

Many politicians believe the individual and employer mandates go hand in hand, and the repeal of one may lead to the repeal or weakening of the other. But in addition, overt efforts by Republicans to dismantle the ACA or the employer reporting requirements will likely have to wait until after midterm elections, though we may see attempts to streamline the reporting process to make it less burdensome on employers.

Between the tax bill, executive orders, and multiple failed attempts to repeal the ACA, the country remains confused over who needs coverage, what needs to be reported, and who can get fined for what.

It boils down to this: The repeal of the individual mandate will not have an impact until 2019, and the employer mandate remains in place.

As advisors, it’s critical to reinforce to your clients that ACA reporting requirements must be fulfilled this year. Monitor for when real changes happen and make sure you understand all the nuances involved, so you’re prepared for any questions that may come your way.

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