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The California Franchise Tax Board (FTB) just published Final Regulations on the Individual Shared Responsibility Penalty. The California Individual Mandate, in effect since January 1, 2020, will affect significant numbers of individuals and businesses in 2021. Here’s what you need to know.
What is the California Individual Mandate?
Also known as the Minimum Essential Coverage Individual Mandate, the California Individual Mandate is a requirement that certain individuals and dependents obtain a minimum standard of healthcare coverage (known as “minimum essential coverage”) beginning in 2020, qualify for an exemption, or pay a penalty. Individuals without coverage through their employer must report on health care coverage to the FTB when filing state tax returns. California state residents that fail to obtain adequate health coverage for the entire duration of the 2020 tax year will be subject to a penalty of $695–multiplied by a cost of living adjustment–per adult and half of that amount per child. As The ACA Times and Trusaic have previously discussed, the Individual Shared Responsibility Penalty is either a flat penalty per household member or 2.5% of gross household income that exceeds California’s filing threshold, whichever is higher.
The Individual Mandate also applies to certain employers and insurance providers. Insurance providers are required to report health coverage information to the FTB annually by March 31 or face a penalty. Employers are similarly required to report insurance information to the FTB by March 31, but only if their insurance providers do not report to the FTB. The penalty for not reporting is $50 per individual who was provided health coverage.
How Did We Get Here?
In June of 2019, California passed Senate Bill 78 into law. This bill aimed, in part, to fill in the hole left in federal healthcare legislation by the Tax Cuts and Jobs Act of 2017, which reduced the federal Individual Shared Responsibility Penalty under the Patient Protection and Affordable Care Act (ACA) Individual Mandate to $0. The impact of that congressional act on the ACA is the subject of a case currently before the Supreme Court, California v. Texas, a case which has elicited skepticism from a bevy of legal experts and even the Justices themselves. Nonetheless, in passing Senate Bill 78, California joined with other states such as Massachusetts, New Jersey, Rhode Island, and Vermont (as well as Washington, D.C.) to signal a broad coalition of support for the Individual Mandate.
What are the Key Takeaways from the Final Regulations?
For many Californians, the Individual Shared Responsibility Penalty Final Regulations will not hold many surprises. The FTB, which administers and enforces the Individual Mandate, urged Californians in late 2019 to “get health care coverage now and keep it through 2020 to avoid a penalty when filing state income tax returns in 2021.” Additionally, the FTB previously published an Individual Shared Responsibility Penalty Estimator, as well as the Exemption List so that the general public could more accurately plan compliance efforts.
The Final Regulations do solidify some key procedural points on the Individual Shared Responsibility Penalty:
- First, the Final Regulations require the FTB to give notice of an Individual Shared Responsibility Penalty to an employer or insurance provider within four years of the Individual Mandate filing deadline for a given year. See Cal. Code Regs. tit. 18, § 26000.61005(b)(1).
- Second, the Final Regulations codify an Individual Mandate filing extension from March 31 to May 31, with no penalty imposed if filers submit their insurance information by the latter date. Id. at subd., (b)(2).
- Also, insurance providers and employers must submit insurance information electronically if filing 250 or more 250 returns, obtain a waiver, or face a penalty. Id. at subd, (e)(1).
- Finally, the Final Regulations spell out special rules pertaining to dependants (Id. a § 26000.61010), penalty exemptions (Id. at § 26000.61020) and short coverage gaps. (Id. at § 26000.61005). In the coming weeks, as the filing deadline approaches, Trusaic will be diving deeper into these elements of the Final Regulations in further articles.
As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), the ACA’s Employer Mandate, Applicable Large Employers (ALEs) (organizations with 50 or more full-time employees and full-time-equivalent employees) are required to offer Minimum Essential Coverage 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 Internal Revenue Code (IRC) Section 4980H penalties.
