What Does the New Individual Health Insurance Mandate Mean for California Taxpayers?

What Does the New Individual Health Insurance Mandate Mean for California Taxpayers?

Effective January 1, 2020, all California residents are required to have health insurance coverage. This applies to all California residents, regardless of income level, status, and whether they are self-employed or employees in a similar manner to the federal individual mandate that was part of the Affordable Care Act (ACA).

The individual mandate portion of the ACA was repealed in 2019, so uninsured taxpayers no longer have to pay a penalty on their federal tax returns if they lacked health insurance for the year and did not qualify for any exemptions. The chief purpose of this legislation is to stabilize markets so that risk pools will grow and thus cause health insurance premiums to drop. Subsequently, several state legislatures proposed their own bills requiring residents to obtain health insurance once the federal mandate's repeal caused some premiums to skyrocket. To date, Maryland, Hawaii, and Connecticut proposed individual mandate bills but did not pass them. However, Washington, D.C. and the following states did:

  • New Jersey
  • Vermont
  • Massachusetts

All individual taxpayers who reside in Washington, D.C., or these states are subject to specific guidelines and penalties, though the ACA model is generally followed and requirements are based on the taxpayer's income relative to the federal poverty level (FPL) and household size rather than adjustments for cost of living in these areas. For New Jersey, in particular, taxpayers are exempt from the mandate's penalty if they are not required to file a tax return for the year.

While the bill intends to increase access to health care, it does have the potential to cause an undue burden on individuals and families whose incomes are too high for Medi-Cal and other government programs but who still cannot afford private insurance after accounting for other living expenses in a state with a very high cost of living. Taxpayers who earn less than $45,500 per year will be subject to a $695 penalty, which is essentially a "poverty tax" given that the average monthly rent in San Francisco is $3,165 and $1,796 in Los Angeles. If the taxpayer has dependent children, the penalty is half the individual amount for each child who is not covered.

Covered California, the state insurance exchange, began open enrollment on October 15, 2019, and is giving California residents until January 31, 2020, to enroll. While the mandate states that you must be enrolled by January 1, 2020, there is a penalty exemption if your coverage gap is less than three months long. Federal subsidies to help pay for health insurance premiums are available based on your income being up to 400% of the FPL, while state subsidies are available for taxpayers who make up to 600% of the FPL. To prevent the "poverty tax" effect, this means that a family of four with income up to $150,000 will qualify for a state-level subsidy.

What the California Individual Mandate Means for Small Business Owners

Freelancers and non-employers who were already enrolled in plans available through Covered California may see their premiums decrease if the mandate is successful at getting more people to enroll.

Businesses that have employees in California can expect to see re-enrollment in group insurance plans if the federal mandate's repeal caused a drop in group coverage if employees weren't getting what they needed out of the plan. The administrative burden will also increase to comply with the law so the state is aware of which employees were and were not covered. If insurance is not offered to your employees and they are self-insured through other means, this information will still need to be reported. Penalties per unreported employee may be assessed and are likely to increase your administrative costs with ACA compliance vendors.

California Taxpayers Eligible for Exemption

If you get health insurance through a job, your spouse, parent, or a government program, you are considered covered and don't have to worry about the individual mandate penalty. If you have gaps in coverage, however, you need to gather sufficient evidence that buying insurance would cause you hardship or that you experienced a hardship that prevented you from finding a plan during open enrollment. Most of these exemptions are claimed on your state tax return, but affordability claims and other hardships preventing you from getting health coverage must be processed through Covered California.

  • If your income is below the gross income filing requirement for a tax return, then, like residents of New Jersey, you are exempt from the penalty.
  • To prove that you can't afford health insurance, premiums must represent 8.24% of your total household income for the year, or higher.
  • If you were incarcerated after January 1, 2020, you are exempt from the penalty. If you are also not lawfully present in the United States, you are exempt.
  • Members of federally recognized Native American tribes are exempt.
  • Certain expats and part-year residents who do not maintain full-time residency in California do not have to pay the penalty.
  • Coverage gaps are three months or less.

Complying with this new mandate will cause many administrative headaches for individuals and business owners alike. While it will hopefully widen the risk pool with insurers so that the market will stabilize and more people will have health coverage, the mandate's current form is rather punitive toward moderate-income Californians.

If you have questions about the individual mandate or how it may affect you, contact a tax professional today.

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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