Phase II, Part 3: Elimination of the Penalty for Individuals Failing to Maintain Minimum Health Insurance Coverage

What is it?

To understand this provision, we’ll first need a little background on the Affordable Care Act of 2010 (ACA). Generally, under the ACA, it is illegal for insurance companies to increase premiums for an individual or a small group on a policy or plan and not for others on the policy or plan, except in light of family size, geography, age or tobacco use. In addition, insurance companies generally must cover all who apply, provided that they pay their premiums.

Nevertheless, if premiums for healthy people and premiums for less healthy people are the same and if less healthy people must be covered, then healthy people may have to pay more and may choose to be uninsured. In turn, premiums may increase even more, and additional healthy people may choose to be uninsured. The result could be a “death spiral,” in which more and more healthy people choose to be uninsured as premiums escalate.

The solution, under the ACA, is an “individual mandate” coupled with tax subsidies. Individuals in the United States must maintain minimum coverage unless they are eligible for an exemption. The uninsured and underinsured must pay a penalty to the IRS of $695 or 2.5% of household income, whichever is greater. Meanwhile, there are tax subsidies, so that insurance is more affordable for lower- and middle-income households.

Under the TCJA, beginning in 2019, neither the uninsured nor the underinsured will be required to pay a penalty to the IRS. There still will be an individual mandate, but the mandate effectively will be toothless, at least from the perspective of federal law.

What are the key planning implications?

According to general ACA theory, in the absence of a penalty for the uninsured and the underinsured, premiums for individuals could increase substantially. Some insurers already have announced an increase in premiums for 2019 in anticipation of the repeal. Nevertheless, there is still considerable uncertainty with respect to the direction of post-TCJA premiums.

Remember that some uninsured and underinsured Americans already were eligible for exemptions before the TCJA. For example, there are “hardship exemptions,” which apply to anyone who has experienced personal circumstances that create a hardship in obtaining health insurance coverage.

Additionally, even though there will be no penalty at the federal level, there still can be penalties at the state level. Massachusetts has had an individual mandate since 2006; and more recently, New Jersey, Vermont and Washington passed individual mandates of their own.