California enacts new individual health care mandate

California will impose an individual health care mandate penalty if the federal government doesn't.

The Legislature has enacted SB 78 (Ch. 19-38), which requires California residents to maintain monthly health care insurance coverage or be subject to penalties.

California's new mandate is similar to the federal program adopted under the original Affordable Care Act, ensuring that plans maintain certain baseline coverage and subjecting individuals to penalties if they fail to obtain health insurance. The bill also provides subsidies to keep the insurance "affordable."

Unlike the ACA, there are no employer penalties for failure to provide health insurance.

The program is being jointly administered by the California Health Benefit Exchange (the agency that runs Covered California) and the Franchise Tax Board.

Because the bill was enacted on June 27, 2019, there are still a lot of details to be worked out. This article provides a broad overview of the new law and discusses some of the questions that still need to be answered.

Interplay with federal penalty

If the federal individual mandate penalty is reinstated in the future (it was reduced to $0 by the TCJA beginning with the 2019 tax year), California's penalty will be reduced by the amount of the federal penalty, but not below zero.

The mandate

California residents must maintain monthly minimum essential health care coverage for themselves and/or their dependents, as defined under R&TC §17056, unless they are exempt from the mandate. The following individuals are exempt:

• Individuals who have received a certificate of exemption from the Exchange for hardship or religious conscience (the exact process and procedure to obtain this certificate has not yet been determined);
• A member of a health care sharing ministry (as defined by IRC §5000A(d)(2)(B));
• Incarcerated individuals (other than those awaiting trial);
• Non-U.S. citizens or nationals who are not lawfully present in the U.S.;
• Members of an Indian tribe;
• U.S. citizens who have a tax home outside the U.S;
• Bona fide residents of another state or U.S. possession; and
• Individuals enrolled in limited or restricted scope coverage under the Medi-Cal program or similar state program.

Available subsidies

Similar to the ACA, California's program will provide financial assistance to taxpayers below specified income levels to help them obtain affordable health care coverage through the Exchange. California's subsidy program is more expansive, however, in that federal law provides assistance to individuals and families with incomes at or below 400% of the federal poverty level, whereas California will be providing subsidies to California residents at or below 600% of the federal poverty level (see chart). The subsidies may be paid in advance and will be paid directly to the health insurance plan.

The subsidies are not included in the individual's gross income for California income tax purposes. However, it does not appear there is any exclusion that would apply for federal purposes.

The Exchange must adopt an annual program design to set the exact amount of subsidies available, based on funds appropriated by the Legislature for the year. Only those individuals eligible for the federal premium tax credit under IRC §36B (using California income restrictions) are eligible for the subsidies. The subsidies are scheduled to be repealed beginning in 2023.

Reconciliation

Advanced premium assistance is available, and like the federal advanced premium tax credit, the advance is based on "projected income." How much will be provided will be set by the Health Care Exchange in its annual program design.

A "responsible individual," the person required to obtain insurance for themselves and/or their dependents, must reconcile the advanced premium assistance subsidies received with the amount they were actually entitled to receive based on actual household income, family size, and other factors for the coverage year.

How this will be done has yet to be spelled out, but it will likely be similar to the premium tax credit reconciliation process.

The reconciled amount must be reported on the responsible individual's tax return for the covered year. A return must be filed even if the individual is below the filing thresholds.

If the amount of the year's allowable subsidies exceeds the amount advanced, the responsible individual will receive a "premium assistance subsidy reconciliation refund" from the FTB (less any taxes, fees, and penalties owed by the participant to the state). If the advanced subsidies exceed the amount the participant was actually entitled to, the participant must pay the liability, up to a limit (yet to be determined) along with their California tax return.

Penalty

SB 78 imposes an individual shared responsibility penalty against California residents who fail to obtain minimum essential health care coverage. The penalty is equal to the lesser of either of the following amounts:

1. The sum of the monthly penalty amounts for the months in the taxable year during which the failure occurred; or
2. An amount equal to the monthly premium for a Bronze plan offered over the Exchange for the household size involved multiplied by the number of months in which the failure occurred.

For purposes of computing (1), the monthly penalty amount is equal to one-twelfth of the greater of the following amounts:

• An amount equal to the lesser of the following:
• $695 for each adult household member ($347.50 for all individuals under 18 years of age at the beginning of the month) who failed to enroll and maintain coverage (the amounts are adjusted annually for inflation) for the month, unless the lapse in coverage did not exceed three months; or
• $2,085 (adjusted annually for inflation); or
• An amount equal to 2.5% of the excess of the responsible individual's applicable household income (see "Key definitions") for the taxable year over the amount of gross income that would trigger the responsible individual's requirement to file a state income tax return based on the applicable filing threshold for the taxable year. (This amount is based on household size and the age of the taxpayer. For the 2018 tax year, the thresholds range from $17,693 for a single taxpayer under age 65 to $63,703 for an MFJ household with two dependents, and both spouses are age 65 and older. 2019 tax year figures have not yet been released.)

The penalty must be reported on and paid with the responsible individual's tax return for the year that includes the month(s) of no coverage.

Penalty exceptions

The bill provides an "unaffordable coverage exception" from the penalty. No penalty will be imposed for a month if the responsible individual's:

• Required contribution for the month exceeds 8.3% of the responsible individual's applicable household income for the taxable year;
• Applicable household income for the taxable year is less than the income tax return minimum filing threshold requirement based on AGI. (This amount is based on household size and the age of the taxpayer. For the 2018 tax year, the thresholds range from $14,154 for a single taxpayer under age 65 to $56,627 for an MFJ household with two dependents, and both spouses are age 65 and older. 2019 tax year figures have not yet been released); or
• Gross income for the taxable year is less than the income tax return filing threshold requirement based on gross income (see previous figures under "Penalty").

Also, like federal law, no penalty will be imposed if the individual's lapse in coverage did not exceed three consecutive months.

Employer filing requirement

Employers must file information returns with the FTB by March 31 each year, beginning in 2021, reporting the coverage provided for their employees and their dependents for the prior calendar year. A statement must also be provided to the covered individual by January 31 following the covered year. The statute states that the current IRS Forms 1095-A, Health Insurance Marketplace Statement, 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage, satisfy the requirement (or at least the forms for the 2018 tax year), but we do not yet know whether the FTB will develop a different form as well.

A penalty equal to $50 per applicable individual (covered employee, spouse and/or family member) will be imposed against employers that fail to file the information returns. However, the employer is not required to file the return if the health care plan files the required returns.