CALIFORNIA PASSES NEW STATE-WIDE HEALTHCARE INDIVIDUAL MANDATE
California is the most recent state to pass legislation that would create a state specific individual mandate requiring all of its residents to obtain qualified health insurance or face a tax penalty. The legislative action comes in the wake of the federal government’s decision to zero out the individual mandate from the Affordable Care Act, starting this year, effectively eliminating the individual tax penalty.
Gov. Gavin Newsome, in one of his first acts in office, had proposed a state individual mandate that would require all California residents to obtain health coverage or face a penalty, and having California become the first state in the nation to offer subsidies to individuals and families with income between 400% and 600% of the federal poverty level in an effort to address health insurance affordability issues. Currently, only individuals and families with income between 100% and 400% are eligible for government subsidies for purchasing health insurance through Healthcare.gov or a state-exchange.
Now California has brought its own state individual mandate closer to reality in 2020 with the passage of state legislation.
The new legislation establishes a state-wide Minimum Essential Coverage Individual Mandate. The new mandate, effective January 1, 2020, would require California residents, and any spouse or dependent, to enroll in qualified insurance coverage for each month of the year, with exemptions for individuals on the basis of financial hardship or religious beliefs as determined by the state’s healthcare exchange, Covered California. It includes the plan to offer subsidies to individuals and families with income at or below 600% of the federal poverty level in an effort to address health insurance affordability issues, as well as other affordability measures, such as additional premium assistance subsidies.
The bill would impose an Individual Shared Responsibility Penalty on state residents who fail to maintain Minimum Essential Coverage, as determined and collected by the state’s Franchise Tax Board, in collaboration with Covered California. It is anticipated that penalty collections will be the primary source of funding for the annual budget of $1.5 billion for the next three years established for the initiative.
According to the California Association of Health Plans (CAHP), 93% of California’s population is currently covered by health insurance. The new affordability provisions are anticipated to make it easier for certain individuals to obtain health insurance. The legislation also expands health coverage to more people within the state by raising the cut-off age from 18 to 26 for undocumented residents. These residents have had access to health care services since 2016 from Med-Cali, the state’s version of the federal Medicaid program.
New Jersey, Massachusetts, Vermont and the District of Columbia have already passed their own statewide individual mandates. Other states, such as Maryland, are seriously considering establishing a state-wide individual mandate.
As more states like California pass their own individual healthcare mandates, expect healthcare regulations at the state level to become more complicated and fragmented, adding new layers of complexity to what employers’ face in addressing compliance with the federal ACA, which itself continues to evolve.
For example, the California legislation also calls for additional reporting obligations under Internal Revenue Code 6055 on “applicable entities,” which are those providing coverage, including insurance carriers and employers that sponsor health coverage. While the specifics of such additional reporting obligations have not yet been specified, the reporting information is expected to be the same information required under the ACA and must be filed annually with the Franchise Tax Board by March 31, starting in 2021. Failure to do so may result in a penalty to the reporting entity of $50 per applicable individual.
Entities must also provide written statements to covered individuals by January 31 each year, starting in 2021. The January 31 deadline is similar to the deadline established by the IRS for this purpose (even though this deadline has been extended by the IRS in prior years.)
A different approach is being taken by the State of New Jersey, which recently issued guidance that provides instructions on employers’ responsibilities for state-level reporting as a result of that state’s individual mandate, which went into effect on January 1. The state is requiring Applicable Large Employers – companies with 50 or more employees – to use IRS forms 1094-C and 1095-C, (1095-B, and 1094-B if self-insured) to communicate health insurance information to the state, in addition to their federal responsibilities for furnishing these forms annually to full-time employees and to the IRS.
Employers will have to submit their state-level ACA reporting information by February 15, 2020, using New Jersey’s system for filing W-2 forms. Filing instructions are anticipated to be provided in mid-2019. The IRS deadline for reporting ACA information electronically for the 2019 tax year is April 1, 2020.
In the event ACA reporting forms 1094-C and 1095-C are discontinued by the federal government, New Jersey will issue similar forms to employers to use to report on carrying out their healthcare responsibilities to the state and New Jersey taxpayers.
The guidance also notes that employers based out of state that withhold and remit New Jersey Gross Income Tax for New Jersey residents have the same filing requirements as businesses located in New Jersey.
In the meantime, the IRS is actively enforcing the ACA’s Employer Mandate. The ACA requires that Applicable Large Employers (ALEs), organizations with 50 or more full-time employees and full-time equivalent employees, offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to IRC Section 4980H penalties.
The IRS has been issuing penalty notices under IRC Section 4980H (Letter 226J) and IRC Sections 6721/6722 (Letter 5005A/Form 886A). The tax agency is projected to issue more than $228 billion in penalty assessments by the year 2026.
The IRS is expected to start issuing Letter 226J penalty notices for the 2017 tax year this month.
As ACA reporting grows more and more complex as it expands and manifests itself at the state level, employers need to ensure they are in full compliance to reduce their risk of receiving an ACA penalty assessment, either from the IRS or state agencies.
To that end, employers may want to consider undertaking a cost-free ACA Penalty Risk Assessment to ensure that they are operating within the regulatory requirements of the ACA. Usually, these reviews are at no-cost to the employer. Based on the cost, undertaking such a review is a tremendously worthwhile investment in understanding if your organization’s ACA compliance process is doing the job and helping you avoid significant ACA penalty assessments by the IRS.
To learn more about ACA compliance for the 2019 tax year, click here.
For ACA reporting deadlines in 2020 for the 2019 tax year, organizations should review this link for important dates and requirements.
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