“Repeal” of the Individual Mandate

Under the tax bill formerly known as the Tax Cuts and Jobs Act, the individual mandate has not been repealed, it has just been told to stand quietly in the corner in 2019.

Or, if you prefer, it has been frozen in ice so that it can be thawed out to wreak havoc later.

Under the Patient Protection and Affordable Care Act (aka Obamacare), individuals must maintain a minimum level of health insurance. Failure to maintain “minimum essential coverage” triggers a tax or penalty, euphemistically referred to as an “individual shared responsibility payment.” See I.R.C. § 5000A(c).

Calculating the penalty is no easy feat. For each month that a taxpayer is out of compliance, the basic calculation is as follows:

1/12 * Greater of:

(1) FLAT DOLLAR AMOUNT (FDA), or

(2) EXCESS INCOME AMOUNT (EIA)

Where:

  • FLAT DOLLAR AMOUNT (FDA) = APPLICABLE DOLLAR AMOUNT (ADA) * members of the taxpayer’s family who did not have minimum essential coverage
    • Cannot exceed 3 * ADA
    • ADA for 2016, 2017, and 2018 = $695
    • Therefore maximum FDA for these years is $2,085
  • EXCESS INCOME AMOUNT (EIA) = 2.5% (household income – income tax return filing threshold)
    • In 2016, the filing threshold for a single individual under age 65 was $10,350
    • Thus, if a single taxpayer under age 65 had household income of $40,000 in 2016, the EIA would be .025*(40,000 – 10,350), or $741.25

However, the cumulative penalty for the taxable year may not exceed the national average annual premium for bronze level health plans offered through the Exchanges that year for the applicable family size. For 2016, that number was $2,676 annually for an individual and $13,380 annually for a family with five or more members.

The tax bill formerly known as the Tax Cuts and Jobs Act does not eliminate the penalty/individual shared responsibility payment. It does, however, greatly simplify the calculation. It does so by reducing the Applicable Dollar Amount, and thus the Fixed Dollar Amount, to $0. It also changes the percentage in the Excess Income Amount calculation from 2.5% to 0%. Thus the penalty still exists, but under the new rule it will be $0. 

The new rule does not take effect until 2019.

Nothing prevents a future Congress from changing the FDA and EIA numbers, respectively, back to $695 and 2.5% (or something higher).

Notably, the net investment income tax, which was adopted at the same time as the Affordable Care Act apparently as a means of providing a funding mechanism, is not mentioned at all in the Tax Cuts and Jobs Act. It stays in place.

Here is the full text of the provision:

SEC. 11081. ELIMINATION OF SHARED RESPONSIBILITY PAYMENT FOR INDIVIDUALS FAILING TO MAINTAIN MINIMUM ESSENTIAL COVERAGE.

(a) IN GENERAL.—Section 5000A(c) is amended—

(1) in paragraph (2)(B)(iii), by striking ‘‘2.5 percent’’ and inserting ‘‘Zero percent’’, and

(2) in paragraph (3)—

(A) by striking ‘‘$695’’ in subparagraph (A) and inserting ‘‘$0’’, and

(B) by striking subparagraph (D).

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to months beginning after December 31, 2018.

For more on the Tax Cuts and Jobs Act, click here.

Source: Tax Cuts and Jobs Act, pp. 103 – 104; Joint Explanatory Statement of the Committee of Conference, pp. 153 – 154 (pdf)

Posted by Joel D. Roettger, JD, LLM, EPLS

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