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California is implementing its new state individual mandate in 2020. It requires all California residents to maintain Minimum Essential Coverage (MEC) – medical health insurance coverage – for themselves and their dependents beginning January 1, 2020. Californians who do not maintain this coverage, or otherwise meet exemption requirements, will be subject to a tax penalty that somewhat resembles the former penalty at the federal level.

Since 2014, the federal Affordable Care Act (ACA) has required individual taxpayers and their dependents to maintain MEC, or pay a federal tax penalty. However, Congress reduced that federal non-compliance penalty to $0.00 beginning in 2019 during a 2017 tax code overhaul.

Because of this and other factors, California saw a drop of enrollment in its individual state-run exchange (Covered California) by about 25% from 2018 to 2019. California is looking to restore the number of insured families in its state by enacting this new mandate and ensuring affordability of premiums.

California will also become the first state to provide health insurance premium assistance to middle-income individual Covered California enrollees who have household incomes between 400-600% of the Federal Poverty Level (FPL). This is in addition to the assistance the federal government provides to taxpayers who have household incomes between 138%-400% of the FPL, for those who also have individual coverage on the Covered California exchange.

California’s premium subsidies are funded by revenue from the mandate’s non-compliance penalty and other allotted state funds. California Governor Gavin Newsom pledged $1.45 billion over the next three years for this initiative.

While subsidies are attractive and welcomed by consumers, they will usually be less than the amount of premium funded by an employer’s contribution to an employee’s health plan in the group market.

Minimum Essential Coverage (MEC)

MEC is the type of coverage required to meet the Individual requirement of the ACA and the California Individual Mandate. MEC includes job-based medical coverage, individual market policies, Medicare, Medi-Cal/Medicaid, CHIP, TRICARE, etc. It does not include vision-only or dental-only plans, workers’ compensation plans, plans that offer only discounts on medical services, or coverage only for a specific disease or condition.

California Individual Mandate Penalties

California taxpayers will be subject to a tax penalty if they do not carry MEC for themselves and their dependents, or otherwise have an exemption. And, unfortunately, the California Individual Mandate penalty is complex.

It resembles the former federal penalty at first glance. A Californian taxpayer who fails to secure coverage (or have an exemption) will be subject to a minimum penalty of $695 when filing a 2020 state income tax return in 2021. The penalty for a dependent child is half of what it would be for an adult, or $347.50. However, the penalty fluctuates based on state income and the number of people in the person’s household. At a maximum, a person could be subject to a penalty that equals 2.5% of household income.

Refer to California’s new Individual Shared Responsibility Penalty Estimator for more details on the amounts of this penalty.

Premium Assistance

Both federal and state premium assistance are available to Californians who enroll in individual coverage on the state exchange, unless those employees have been made an offer of affordable coverage by their employer (of any size).

Taxpayers can learn more about credits available to them at CoveredCA.com. Options for low- and no-cost coverage are still available to those who qualify through the Medi-Cal program.

Exemptions

Californians will not be subject to the California Individual Mandate penalty if they meet certain exemptions. Californians can claim most exemptions from the state mandate directly on their state tax returns, but some must be processed by Covered California.

• Exemptions claimed on State Tax Return

-Income is below the tax filing threshold (e.g., person is not a taxpayer)
-Health coverage is considered unaffordable (exceeded 8.24% of household income for the 2020 taxable year)
-Families’ self-only coverage combined cost is unaffordable
-Short coverage gap of three consecutive months or less – common exemption
-Certain non-citizens who are not lawfully present
-Certain citizens living abroad/residents of another state or U.S. territory
-Members of health care sharing ministry
-Members of federally recognized Indian tribes including Alaskan Natives
-Incarceration
-Enrolled in limited or restricted-scope Medi-Cal or other coverage from California Department of Health Care Services

• Exemptions processed by Covered California

-Religious conscience exemption
-Affordability hardship
-General hardships

Reporting of coverage

California’s Franchise Tax Board is developing reporting requirements to demonstrate possession of MEC. It will be especially important for employers with self-funded plans to pay attention to this because they will have to report this to California. Although final reporting documents have not been released, they are expected to mirror current IRS 1095 forms, which demonstrate possession of MEC at the federal level (among other items). Entities that provide IRS Forms 1095-B or 1095-C will not have to provide duplicate state notices, unless the IRS significantly changes its 1095 form.

Stay tuned to Word & Brown throughout 2020 for more help with this mandate, ACA employer reporting responsibilities, and more.