The Tax Bill And The Individual Mandate: What Happened, And What Does It Mean?

As has been widely reported, both houses of Congress have now voted to repeal the Affordable Care Act’s (ACA) individual shared responsibility penalty, effective for 2019, as part of the 2017 tax reconciliation act. The President has now signed this Act into law. This post discusses first what the repeal does and does not do. Second it discusses the repeal’s possible effects.

What The Repeal Does And Does Not Do

First, the tax cut act does not repeal the individual mandate as such. Rather it zeros out both the dollar amount and percentage of income penalties imposed by the mandate. Section 5000A remains in the statute and still provides:

An applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.

The Congressional Budget Office (CBO) in its analysis of the effects of the individual mandate repeal assumed that as long as the requirement remained in the law, some individuals would continue to purchase individual coverage because it was legally required, even if the penalty was repealed. This no doubt explains why the CBO concluded that the repeal of the mandate would reduce federal expenditures over ten years by $338 billion, but opined that repeal of the penalty in the tax bill would reduce expenditures by only $318 billion. A majority of the Supreme Court in NFIB v. Sebelius, however, held that Congress did not have the constitutional authority to require individuals to purchase insurance under its authority to regulate interstate commerce, rather upholding the mandate as a tax. Without the penalty, therefore, any lingering authority of the mandate itself is presumably merely hortatory.

The fact that the bill repeals only the penalty and not the entire section that imposes it, however, is important for other reasons. Section 5000A of the ACA not only contains the individual mandate requirement and penalty, but also definitions of terms used in the mandate provisions. These include, for example, the term “minimum essential coverage, “eligible employer-sponsored plan,” and “modified adjusted gross income,” and are used elsewhere in the ACA, for example in the premium tax credit provision. These definitions remain.

Moreover, other provisions of the ACA that support the individual mandate remain in force. Section 6055 of the Internal Revenue Code, adopted through the ACA, requires anyone who provides “minimum essential coverage,” including insurers, employers, and government programs, to report specific information to the Internal Revenue Service (IRS) regarding covered individuals, and to provide covered individuals with a statement evidencing this coverage. It further imposes penalties on entities that fail to report. The tax bill repeals neither the reporting requirement nor the penalties.

The ACA requires exchanges and the IRS to accept applications for and to determine eligibility for exemptions from the mandate. These provisions remain in place, although it is unlikely that individuals will continue to apply for exemptions after the penalty is repealed. There is likely to be confusion about the need for an application, however, which the exchanges and IRS will have to sort out.

The Effect On The Employer-Sponsored Insurance Market And The Employer Mandate

The individual mandate penalty repeal has other ramifications. The ACA also imposes an employer responsibility requirement imposed on large employers. The employer mandate, the penalties that enforce it, and the reporting requirements that accompany it remain in place. There are two employer mandate penalties:

• a penalty imposed on employers who fail to offer minimum essential coverage to full-time employees if any employee receives premium tax credits to enroll in coverage through an exchange, calculated on a per-employee basis for all full-time employees; and
• a larger penalty imposed on employers who offer minimum essential coverage but fail to offer “minimum value” coverage, which applies for each full-time employee who in fact receives premium tax credits for exchange coverage.

While these requirements and penalties are not affected by the individual mandate penalty repeal, it is likely that fewer employees will enroll in employer-sponsored coverage in the absence of the mandate. The CBO predicts that over the next decade two to three million fewer individuals will have employer coverage in the absence of the mandate. If fewer individuals seek coverage through the exchange, moreover, it is likely that some employers will escape the employer mandate penalties, which are, again, only imposed if one or more employees receive premium tax credits through the exchange.

The mandate repeal may thus undermine the employer mandate as well (although it will not affect the reporting requirements, which are arguably the most burdensome feature of the employer mandate). On the other hand, 150 million Americans have employer-sponsored coverage, so any effects of the individual mandate repeal on the employer-sponsored market will be marginal.

Finally, the individual mandate penalty repeal only applies as of 2019. Individuals remain responsible for having insurance or paying the penalty for the 2017 filing season and for 2018. The IRS has announced that it will reject electronic filings of taxes for 2017 that do not claim coverage or an exemption, or include a payment of the penalty. The repeal is being widely publicized, however, and there will undoubtedly be widespread confusion as to when it will be effective. It is likely that many people will fail to apply for coverage or drop or fail to effectuate coverage that they already have. The effect of the mandate repeal will undoubtedly be felt before it goes into effect.