Q: Will the IRS enforce the Affordable Care Act’s penalty for 2017 tax returns, given President Trump’s 2017 executive order and the GOP tax bill that passed in late 2017?
A: Yes, the individual mandate and its associated penalty are applicable to 2017 tax returns. And in fact, enforcement of the Affordable Care Act’s penalty will actually be a little more strict than it was in prior years, as the IRS is no longer accepting tax returns that don’t include an answer to the question about whether the filer had health insurance during the year.
The penalty amount ratcheted to its highest level in 2016, and remained at that level for 2017 (it is also at the same level for 2018), although the maximum allowed penalty under the percentage of income calculation has risen each year as average premiums have increased. [Note that there are two different penalty calculations — one is a flat rate, and the other is a percentage of income — and the IRS uses whichever one results in a greater penalty for a particular tax filer.]
The confusion over penalty enforcement 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, and also from the fact that the GOP tax bill enacted in late 2017 does eventually repeal the individual mandate penalty. But that repeal doesn’t take effect until 2019. There is still a penalty for people who were uninsured in 2017, and a penalty will be assessed on tax returns filed in early 2019 for people who are uninsured in 2018.
“Silent” tax returns were accepted for 2016 returns, but won’t be accepted for 2017 returns
Here’s what the IRS published on their site in February 2017, stating that they would accept 2016 returns that didn’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 postponed that change, and their statement in early 2017 noted 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 were 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.
And for 2017 tax returns, the IRS is no longer accepting “silent” returns. Returns will be rejected if they don’t include an answer to the question about whether the filer had health insurance in 2017.
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.
Individual mandate repeal doesn’t take effect until 2019
In December 2017, Republican lawmakers passed H.R.1, the Tax Cuts and Jobs Act. The far-reaching tax bill left most of the ACA’s taxes intact, but it did include repeal of the individual mandate penalty. However, the penalty repeal only applies to months after December 31, 2018. There is still a penalty for being uninsured in 2018, and it will be assessed on tax returns that are filed in early 2019. But there will not be a penalty for people who become uninsured starting in January 2019.
A weakened (and eventually, repealed) individual mandate will result in a less stable market
The week after the IRS quietly changed their stance on silent returns for 2016 tax returns, HHS introduced proposed regulations aimed at stabilizing the individual and small group health insurance markets (both on and off-exchange), and the market stabilization rule was finalized in April 2017. While the IRS decision to accept silent returns for 2016 was in line with Trump’s executive order, it was the opposite of a market stabilization measure, so it was somewhat ironic that the Trump Administration was simultaneously working on actions purported to stabilize the individual market.
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. Although the individual mandate remains in place until the end of 2018, there is widespread confusion about whether the mandate is still in effect. The uninsured rate rose in 2017, and the Congressional Budget Office projects that the number of uninsured Americans in 2027 will be higher by 13 million people than it would have been if the individual mandate penalty had remained in place. Although most areas of the country are expected to continue to have stable individual markets (thanks in large part to the premium subsidies, which keep coverage affordable for most enrollees) even without the individual mandate, there are concerns about market destabilization in some areas.