Q: I heard that the IRS isn’t going to enforce the Affordable Care Act’s penalty for 2016 tax returns. Is that true?
A: No. Everything about the Affordable Care Act’s penalty enforcement is the same as it was for 2014 and 2015 – although the penalty amount is significantly higher for people who were uninsured in 2016.
The confusion stems from headlines in February 2017 indicating that the IRS was going to be more lenient with regards to the question about health insurance coverage on 2016 tax returns.
Here’s what the IRS published on their site in early February, stating that they’ll accept 2016 returns that don’t answer the question about whether or not the tax filer had health insurance in 2016. (You’ll find the question on Line 61 on the 1040).
That’s the same way they handled returns for 2014 and 2015, but a change had previously been scheduled for 2016 returns. The IRS had intended to reject returns that didn’t state whether or not the tax filer had health insurance in 2016 (ie, a “silent” return). But they’ve eliminated that change for the time being, and their statement notes that the change in course was a result of President Donald Trump’s executive order directing federal agencies to “[minimize] the economic burden” of the ACA.
So tax returns for 2016 will be processed the same way 2014 and 2015 returns were processed. It’s worth noting that even though the IRS accepted silent returns for 2014 and 2015, most people still answered the question about health insurance. The majority did have coverage, but 7.9 million tax filers reported $1.6 billion in penalties for being uninsured in 2014, and 6.5 million tax filers reported $3 billion in penalties for being uninsured in 2015.
To clarify, it is always illegal to lie to the IRS. So you can’t say you had coverage when you actually didn’t. (Employers, exchanges, and health insurance companies also report to the IRS; this isn’t just the honor system.) And although the IRS can’t use their normal enforcement avenues for collecting the penalty, they can deduct it from current or future tax refunds.
A weakened individual mandate will result in a less stable market
The week after the IRS quietly changed their stance on silent returns, HHS introduced regulations aimed at stabilizing the individual and small group health insurance markets (both on and off-exchange). While the IRS decision to accept silent returns for 2016 is in line with Trump’s executive order, it will not help to stabilize insurance markets.
The ACA’s main insurance reforms (guaranteed-issue coverage, premium subsidies, and the individual mandate) are often described as a three-legged stool. Insurers can no longer reject people based on medical history, and that pushes premiums upwards. But the individual mandate ensures that healthy people purchase coverage, helping to keep premiums in check. And premium subsidies offset a significant portion of the cost for low-income and middle-class enrollees, making coverage affordable in situations where it would otherwise be unaffordable.
Remove or weaken any leg, and the stool (in this case, the insurance market) becomes unbalanced. The original IRS plan to disallow silent returns for 2016 would have served to strengthen the individual mandate. By reversing course on that plan, the individual mandate is slightly weakened, resulting in less stability for the individual health insurance market. Less stability leads to higher premiums and increases the odds that more insurers will opt out of the individual market for 2018.