The Tax Cuts and Jobs Act signed into law December 22, 2017, effectively eliminated the Affordable Care Act’s “Individual Mandate” to carry required health coverage beginning in 2019, but taxpayers and employers still must comply with their respective mandates. Specifically, taxpayers must report whether they complied with the Individual Mandate on their 2017 and 2018 tax returns, and Employers subject to the ACA still must offer qualifying coverage, provide proof of coverage to the IRS, and pay their own Employer Mandate penalty for any failure to comply.
For a number of reasons, many taxpayers may incorrectly think they are not required to report their compliance with the Individual Mandate on their 2017 tax returns, but in October 2017, the IRS confirmed it will reject 2017 tax returns that fail to indicate whether the taxpayer complied with the Individual Mandate. Returns filed electronically will be rejected outright and paper returns will likely be suspended until the taxpayer provides the required information. Either way, taxpayers who are entitled to a refund but fail to report whether they complied with the Individual Mandate will see a delay before getting any money back from the federal government.
Some confusion arose last year following an IRS announcement in February 2017 that it would not reject 2016 tax returns that failed to indicate whether the taxpayer complied with the Individual Mandate. This announcement came shortly after President Trump’s Executive Order that the federal government defer enforcing ACA provisions “to minimize the unwarranted economic and regulatory burdens” the ACA may have on individuals and families. Despite that announcement from the IRS, the Individual Mandate and its consequences remained unchanged for the 2016 tax year.
Many thought that the ACA would be (or actually had been) repealed and replaced by now by a Republican-led Congress and President Trump. In 2017, there were multiple attempts to repeal and replace or simply dismantle the ACA, but there were never sufficient votes to pass those bills. There have been executive orders and administrative changes intended to minimize the effectiveness of the ACA outside of the legislative process but the law for 2017 remains unchanged, including the health care exchanges, Medicaid expansion, the Employer Mandate, and even the Individual Mandate and its penalty.
The recent tax reform legislation reduces the penalty for failing to comply with the Individual Mandate (referred to as the “Shared Responsibility Payment”) to zero for the 2019 tax year. That is, the Individual Mandate was not actually repealed but the penalty for failing to comply will be eliminated beginning in 2019. Importantly, the elimination of the penalty does not apply to the 2017 tax year, or even the 2018 tax year. So for the time being and without further guidance from the IRS, individuals and families will still need to report compliance with the ACA’s Individual Mandate for the 2017 and 2018 tax years and pay any associated penalties.
While the Individual Mandate may be on its way out, nothing has changed employers’ obligations under the ACA. Employers with 50 or more full-time equivalent employees must offer qualifying health coverage to employees and their dependents. Employers must report such coverage to the IRS using Forms 1094-C and 1095-C and abide by essential health benefit requirements and cost sharing limits. In fact, the IRS recently began enforcing the “Employer Shared Responsibility Payment” penalty by issuing notices to non-compliant Employers for 2015—the first year the Employer Mandate penalty was effective. These notices come as a “Letter 226J” when an employer’s 1094-C and 1095-C forms indicate that one of the employer’s full-time employees was enrolled in an ACA Marketplace plan, received a premium tax credit, and the employer did not qualify for an affordability safe harbor under the ACA.
The Employer Mandate penalty can be significant, but Letter 226J is not actually a penalty assessment. Rather, it gives an employer the opportunity to take appropriate action before the IRS assesses the penalty. Employers who receive Letter 226J from the IRS should immediately review the letter and determine the appropriate response as the letter only provides 30 days to respond and challenge the assessment of the penalty.
The political fight over health care reform continues. There may be additional efforts to repeal and replace the Affordable Care Act in its entirety and the upcoming midterm elections could affect the current majorities in Congress and the long-term future of the ACA. For now, taxpayers must report whether they complied with the Individual Mandate and pay the penalty if they do not comply. Compliance with the Individual Mandate is reported at line 61 on the 1040 U.S. Individual Income Tax Return (or line 11 on Form 1040EZ). Further, employers should maintain their systems and practices to ensure they can continue to accurately report their compliance with the Employer Mandate to the IRS on Forms 1094-C and 1095-C and timely respond to a Letter 226J if necessary.