Tax Ramifications on Individuals and Employers of CA SB78
While the federal government eliminated the minimum health care coverage mandate under the Affordable Care Act, Californians are not off the hook.
The California Legislature recently passed SB 78, which among many other things, in chapter 38, section 7, requires California residents and their dependents to obtain minimum health care coverage by January 1, 2020.
The Legislature’s action is meant to reverse the revocation by Congress of the federal mandate that was an integral part of the Affordable Care Act. Supporters of the new California law voiced fears that without the mandate, the insurance market could fall apart.
According to Covered California, new enrollment for health insurance within their system dropped about 24 percent this year, which the agency attributes to the removal of the federal mandate.
In 2018, 3.4 million, or seven percent of Californians were uninsured. That is up from 2017 figure of about 2.7 million. That 2017 figure actually represented a decrease in the number of uninsured from previous years as the following chart demonstrates.
Since 93% of Californian’s have insurance, they already meet the State’s new mandate. If you are one of those individuals without insurance, you will need to get insurance, or pay a penalty to California. Some people categorize this as forcing young, healthy people to buy insurance, to help subsidize the sick. But not all people who lack insurance are young, as this chart indicates.
California Residents are No Longer Exempt from Mandated Health Insurance
Whether you are young or old, you may need to buy Individual Health Insurance in California if:
- Your employer does not offer group plans.
- You are enrolled in a group plan, but it does not cover your spouse or dependents.
- You are enrolled in a health plan, but the premiums are too high.
- You are enrolled in a health plan, but your benefit needs have changed.
- You are self-employed.
You can explore a variety of coverage options through a site like Health for California.
Fortunately, the bill provides for California tax-exempt subsides to assist residents to obtain health insurance if their incomes fall below 600% of the federal poverty level:
- $74,940 for an individual
- $154,500 for a household of four
If you, or someone you know is concerned about health care insurance, check out whether you qualify for the subsidies that can reduce your monthly payments for insurance plans through Health.gov.
The Franchise Tax Board (FTB) is authorized to impose a penalty of up to $695 annually against individuals if you fail to comply with the mandate. Obviously, some individuals may decide to risk the penalty, rather than pay premiums for insurance they can’t afford, since many middle-income earners get caught, well, in the middle. They don’t qualify for the tax-exempt subsidies, but don’t make enough to pay high premiums, and more employers are expecting their employees to pay larger and larger shares of health care coverage.
As an individual taxpayer, if you are not covered by health insurance through your employer, you need to know about this change. The penalty will be paid to the State of California and not to the federal government. You can access the actual bill language here.
The insurance mandate applies to individual California residents, but it also involves employers.
The Tax Cuts and Jobs Act, passed in December 2017, repealed the federal individual mandate starting in 2019, and that decision continues in various court challenges to the Affordable Care Act (ACA – aka Obamacare). SB 78 reinstates it for California. What didn’t change is the employer mandate.
If you are an employer, your responsibility remains as a gatekeeper to information, since your company is tasked with providing coverage information on your employees to the FTB by March 31, annually. The IRS needs that information, too, and explains an employer’s responsibility this way:
- The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD.
- Many employers are eligible for transition relief for tax year 2012 and will continue to apply to future calendar years until the IRS publishes additional guidance for this reporting requirement.
- More information about the reporting, and which employers are, or are not, required to report this on the Form W-2 can be found on the Form W-2 Reporting of Employer-Sponsored Health Coverage page.
The ACA employer mandate that remains in effect, mainly impacts large employers.
What Constitutes a Large Employer?
A large employer is any organization that on overage, employs, a combined total of 50 or more full-time and “full-time equivalent” (FTE) employees during six months or more of the previous year.
Thus, for example, any employer with 50 or more employees in 2018 will be a large employer subject to the mandate in 2019.
Factoring the employee count can take a little work, so here is how the IRS explains how to count full-time employees and full-time equivalent employees:
- A full-time employee for any calendar month is an employee who has on average at least 30 hours of service per week during the calendar month, or at least 130 hours of service during the calendar month.
- A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee. An employer determines its number of full-time-equivalent employees for a month in the two steps that follow:
- Combine the number of hours of service of all non-full-time employees for the month but do not include more than 120 hours of service per employee, and
- Divide the total by 120.
If you qualify as a large employer, or Applicable Large Employer (ALE) in IRS-speak, your organization is required to provide a specified percentage of your full-time equivalent employees and the families of those employees with minimum essential health insurance coverage, that must pay for at least 60% of covered services.
As an employer, you can require that your employees contribute toward their insurance premiums, but you can’t require them to pay more than 9.8% of their household income toward it.
Any ALE who fails to comply with the coverage mandate must pay a no-coverage penalty to the IRS.
If this all sounds a bit complicated, it is.
Tax planning may be in your future if you want more guidance on these topics.
The new California SB78 health insurance mandate for individuals does not go into effect until 2020.
We’d love to talk with you about how the mandate may impact you. Call our Corte Madera office today at (415) 924-6240 to schedule a free consultation session with Georgia Rogers, tax advisor.