Legal implications of the individual mandateOctober 13, 2013
Henry H. Robinson
The Affordable Care Act’s individual shared responsibility requirement is referred to as the individual mandate. The U.S. Supreme Court has held that the mandate is constitutional under Congress’ taxing authority. The Internal Revenue Service has released final rules on the mandate and it becomes effective Jan. 1.
Description of mandate
An individual must have minimum essential health coverage each month. An individual’s dependents are also subject to the mandate. Minimum essential coverage refers to health coverage under a government-sponsored program, an eligible employer-sponsored plan, a plan in the individual market, a grandfathered health plan or other health care benefits. Examples of what would satisfy the mandate would be health coverage through employment or Medicare or insurance obtained through an agent or a government exchange. Individuals who meet certain criteria may qualify for a government subsidy available only for insurance purchased through an exchange. Individuals report coverage or non-coverage when filing income tax returns. For example, coverage or non-coverage for 2014 will be reported when returns are filed in 2015.
The mandate applies to individuals unless they qualify for an exemption. The Affordable Care Acts exempts the following: (a) members of religious groups having a religious conscience exemption certification; (b) ministries that share medical expenses and whose members retain membership after developing a medical condition; (c) nonresident aliens; (d) individuals not lawfully present; (e) incarcerated individuals; (f) members of American Indian tribes; (g) individuals holding a hardship exemption certificate issued by an exchange; (h) individuals whose lack of minimum essential coverage is a continuous period of less than three months; and (i) individuals with no affordable coverage. An individual lacks affordable coverage if his/her required annual contribution for minimum essential coverage exceeds 8 percent of his/her household income. An individual may claim an exemption when he/she files tax returns or by going to an exchange.
Legal implications for individuals
The individual mandate will have negligible implication for most people. For individuals who have health coverage – the majority of people – there will not be any tax consequence. The only legal implication will be reporting coverage when filing federal income tax returns.
The final rules provide that, for any month during which an individual does not have at least one day of coverage, he/she must pay a shared responsibility payment or tax. An individual is also liable for shared responsibility payments for dependents who lack coverage. Payments are made in conjunction with the individual’s filing of his/her federal income tax return.
A complicated formula is used to calculate the amount of the tax. Under the final rules, the tax is the lesser of (i) the “monthly penalty amounts,” or (ii) the sum of the monthly national average bronze plan premiums for the shared responsibility family. The “monthly penalty amount” is one-twelfth multiplied by the greater of (i) a “flat dollar amount,” or (ii) an “excess income amount.” The “flat dollar amount” is the lesser of (i) $95 in 2014 (up to $695 in 2016) for each individual in the taxpayer’s shared responsibility family except that for individuals under 18, the amount is one-half, or (ii) 300 percent of $95 in 2014 (up to $695 in 2016) for the calendar year. For 2014, the “excess income amount” is 1.0 percent of the difference between the taxpayer’s household income and the gross income that would trigger an individual’s requirement to file a federal income tax return. For 2016, this percentage increases to 2.5 percent. A “bronze plan” is the least costly insurance plan available on exchanges.
Legal implications for employers
Employers will face direct and indirect implications. The individual mandate will directly impact employers in two relatively minor ways. First, employers will have to report additional information to the federal government. Employers will have to report whether minimum essential coverage is made available and whether employees avail themselves of the opportunity. The government will use these reports to help determine whether employees have health coverage in accordance with the individual mandate and whether employees are eligible for government subsidies available to certain qualifying employees who obtain insurance through exchanges.
The second direct implication on employers will be a negative one or prohibition. Employers are prohibited from retaliating against employees who receive a subsidy. Since the employee’s receipt of a subsidy through an exchange (enabling the employee to comply with the individual mandate) may trigger a tax against the employer, the law protects these employees from workplace retaliation. Eventually, as under Title VII, the ADA (Americans with Disabilities Act) and the ADEA (Age Discrimination in Employment Act), employers will adopt policies prohibiting retaliation under the Affordable Care Act.
The individual mandate will indirectly impact employers in two ways. The first indirect implication involves interaction between the individual mandate and the employer shared responsibility (referred to as the “employer mandate”), which has been delayed until Jan. 1, 2015. To be clear, the employer mandate does not apply to employers having fewer than 50 employees, and these employers will not be subject to a shared responsibility payment, penalty or tax (hereinafter “tax”). A minority of the employers having 50 or more employees will incur liability for the employer shared responsibility tax. For employers having 50 or more employees, what will trigger this employer tax will not be the failure to make the opportunity for health coverage available to employees. For employers of this size, what will trigger the tax will be the employee’s act – motivated in part by the individual mandate -- of going to an exchange and qualifying for and receiving a government subsidy. An employee going to an exchange cannot qualify for the subsidy unless (1) his/her household income is below a specified floor and (2) his/her employer does not make available health coverage that is affordable and provides minimum value. Most individuals who go to exchanges are not expected to qualify for subsidies.
The second indirect implication for employers will arise because employees who work for employers not making health coverage available are expected to gradually change employers and gravitate toward employers that make health coverage available. Thus, employers not making coverage available may experience an increase in employee turnover.
Exchanges opened Oct. 1 and the individual mandate will become a part of daily life starting 2014. The law is complex, politically contentious and widely misperceived. The individual mandate cannot be understood without examining its interrelationship with exchanges, subsidies, the tax associated with the individual mandate, tax reporting and the employer mandate.
Henry Robinson is partner and chairman of the Labor & Employment/Healthcare Law Group at Kelly Hart & Hallman LLP.