Tax Cuts and Jobs Act and the Future of the Shared Responsibility Penalty

August 15, 2018 | By: Sean Chi, Attorney

The Tax Cuts and Jobs Act passed in 2017 will have significant ramifications on all manners of tax filings going forward. However, one of the more substantial changes to tax laws relates to the 2009 Affordable Care Act. Of most importance to what changes happen under the Affordable Care Act is when the changes take effect.

The Affordable Care Act and the Shared Responsibility Penalty

The Affordable Care Act is a comprehensive health insurance reform law aiming to decrease health insurance costs to the general public with the caveat being that those who could afford health insurance must obtain it (aka the health insurance mandate). The IRS becomes involved via the mechanism for enforcing this health insurance mandate.

The Shared Responsibility Penalty (SRP) began in 2014 and applied to individuals and families who were not exempt from the health insurance mandate and who had failed to obtain health insurance for any part of the year. Starting at just the higher of 1% of income above the filing threshold or $95 per adult in 2014, the Shared Responsibility Penalty for years 2016 through 2018 now sits at the higher of either 2.5% of income above the filing threshold, or at the flat rates of $695 per adult and $347.50 per child, to a maximum per family of $2,085. Note that the total possible penalty cap is not $2,085; that is merely the cap for the flat rate penalty. The actual maximum penalty is the national average cost for a bronze level health plan available through the Health Insurance Marketplace.  In 2017, this was $3,264 per year for an individual.

The IRS Imposes the Shared Responsibility Payment

Health insurance providers began providing annual form 1095 to the IRS. The form informs the IRS that specified social security numbers had health insurance during the year. 1040 tax returns starting in 2014 had a line for the filer to indicate whether they had health insurance for the given tax year.  However, the IRS did not require completion of this line. Nonetheless, if the IRS processes a tax return and members on it did not have health insurance for any part of the tax year, a pro-rated amount of the Shared Responsibility Payment would be assessed against the tax filers.

For example, a person files an individual 2017 tax return with a balance of $100. If they did not have health insurance in 2017 and qualified for the flat dollar penalty amount, they would owe an additional $695 in taxes creating a total tax bill of $795. If their 2018 tax return next year reflected a refund of $1,000, they would only receive $205 minus the amount of accrued interest and failure to pay penalties from the 2017 balance.

Changes to the Shared Responsibility Penalty

With the passage of the Tax Cuts and Jobs Act, the Shared Responsibility Penalty becomes eliminated in full. However, it does not remove it until 2019! That means the Shared Responsibility Penalty remains in full effect for next year’s 2018 tax returns. Therefore, if you do not currently have health insurance, unless you qualify for an exemption (see, the penalty will be assessed against you at least in part even if you were to obtain health insurance today.

What This Means for You

For most people, the changes to the Affordable Care Act have absolutely no effect. The vast majority of Americans have health insurance through their employers, via government-sponsored health plans such as Medicaid, or obtained on their own through the marketplace. But what does this mean if you are uninsured and not exempt? Well, it might not mean that much either.

The Shared Responsibility Penalty ultimately has very little teeth. Yes, the IRS can assess the penalty against you, but it has very few ways of actually collecting on the penalty. The IRS cannot issue levies, liens, or pursue criminal prosecution to collect on the penalty. In reality, the only way the IRS can collect on the penalty is by taking it from a taxpayer’s future refunds. The IRS only has 10 years to collect on any given year’s penalty and if a taxpayer did not receive a refund for the following 10 years, then the IRS will walk away empty-handed.

Adjusting Your Withholdings Limits the IRS’s Ability to Collect

In essence, no one should have any fear of the SRP unless they are relying on their tax refunds. A taxpayer can minimize the issue by simply adjusting tax withholdings to minimize their annual refund amount.

The only exception where the penalty can truly have an adverse effect on a taxpayer is in the tax liability-based resolution brackets of the IRS such as the $50,000 assessed tax limit on streamlined installment agreements. The Shared Responsibility Penalty can actually push someone over these thresholds even if their actual tax liabilities are a lower number.

The Shared Responsibility Penalty is mostly a toothless punishment. As large as the number is, the IRS cannot take any hostile actions to collect it. The only ability it has to collect can be largely mitigated by simply taking the proper steps to reduce your annual refund. With the penalty phasing out of existence in 2019, most individuals have no pressing need to address the penalty unless they have other existing tax liability issues that already require a resolution anyways.