How Will the GOP Tax Bill Affect Your Health Insurance?

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (H.R.1) into law. The legislation includes sweeping changes to the U.S. tax code, but it also caps off a tumultuous year of healthcare reform legislation. You may be wondering whether the GOP tax bill will affect your health insurance, as the Affordable Care Act (ACA) repeal has been a priority for Republican lawmakers and the Trump Administration.

Couple sorting out health insurance

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But the tax bill does not include most of the provisions that had been part of ACA repeal attempts earlier in 2017. It does repeal the individual mandate penalty as of 2019, but the rest of the ACA is left in place. And other tax-related healthcare reforms that had been proposed earlier in the year, such as changing the rules relating to health savings accounts (HSAs) were not included in the tax bill.

Repealing the Individual Mandate Penalty

The tax bill repeals the individual mandate penalty as of 2019. So there is still a penalty for people who are uninsured in 2018 (that penalty will be assessed when tax returns are filed in early 2019). This differs from GOP efforts to repeal the individual mandate penalty earlier in 2017, as the previous bills would have made the repeal retroactive. Ultimately, the tax bill keeps the individual mandate penalty in place for all prior years, and for 2017 and 2018. But 2019 tax returns filed in early 2020 did not include a penalty for being uninsured.

Repealing the penalty that goes along with the ACA’s individual mandate has long been a priority for Congressional Republicans, and the mandate itself is certainly among the least popular provisions of the ACA. But despite its unpopularity, it’s one of the provisions that allow the ACA’s much more popular guaranteed-issue rule to work. Guaranteed-issue means coverage that’s issued to all applicants, regardless of their medical history. The ACA also uses modified community rating, which means that a given insurer’s premiums in the individual and small group markets only differ based on age, tobacco use, and zip code. Prior to the ACA, premiums were also typically based on things like gender and health status.

Changing the rules so that medical history no longer plays a role in eligibility or premiums has been decidedly popular. But it’s easy to see how people might be tempted to go without coverage when they’re healthy, and sign up when they’re sick if they know that they can’t be rejected—and that would be clearly unsustainable. So the ACA included two provisions to prevent this: The individual mandate that penalizes people who choose to go without insurance, and the open enrollment windows and special enrollment periods (i.e., you can’t just enroll anytime you like).

The open enrollment and special enrollment windows will remain unchanged, which does make it challenging for people to wait until they’re sick to enroll in individual market health insurance (employer-sponsored health insurance has long used open enrollment periods too; people cannot sign up for their employer’s health plan whenever they like).

But repealing the individual mandate will have a deleterious effect on the individual health insurance market. The Congressional Budget Office (CBO) projects that by 2027, there will be 13 million fewer people with health insurance than there would have been if the mandate penalty had remained in place.

Of those 13 million fewer insureds, 5 million would have otherwise had coverage in the individual market. And that's a significant portion of the individual market, which is estimated at under 18 million people as of 2017 (for perspective, CBO projects that just 2 million of the 13 million fewer insureds will be people who would otherwise have had coverage under employer-sponsored health plans, and 157 million people have coverage under employer-sponsored plans).

The people who will drop their coverage without a mandate tend to be healthy, as sick people will generally do whatever it takes to maintain their coverage. The tilt towards a sicker risk pool results in higher premiums, which in turn drives even more healthy people out of the market.

Overall, CBO estimates that premiums in the individual insurance market will grow by an additional 10% per year, over and above the amount they would have grown if the individual mandate had remained in effect.

But CBO also notes that the individual insurance market will “continue to be stable in almost all areas of the country throughout the coming decade.” In other words, they believe that most areas of the country will still have insurers offering individual market coverage, and an adequate number of enrollees to keep the plans stable.

This is due, in large part, to the fact that the ACA’s premium subsidies grow to keep pace with premiums. So although the elimination of the individual mandate will drive premiums higher, the premium subsidies will also grow as much as necessary to keep net premiums at an affordable level.

For people who get premium subsidies, which includes a family of four earning up to $103,000 in 2020, the increase in premiums will be offset by commensurate increases in subsidy amounts. But for people who don’t get premium subsidies, coverage in the individual market could become increasingly unaffordable in future years.

It’s important to understand that contributions to pre-tax retirement plans and/or a Health Savings Account (HSA). If you buy an HSA-qualified health plan, it will result in lower modified adjusted gross income, which is ACA-specific and not the same as regular Modified Adjusted Gross Income, which could potentially make you eligible for premium subsidies. Talk with a tax adviser before assuming that you’re not eligible for subsidies.

But in general, the premium increases that result from the elimination of the individual mandate penalty will hit people who shop in the individual market and do not qualify for premium subsidies (i.e., those who have household income above 400% of the poverty level, are in the Medicaid coverage gap, or ineligible for subsidies due to the family glitch).

And although CBO projects that the individual market will remain stable in most areas of the country, there could be some areas where the individual market simply collapses, and no insurers offer coverage. That would have to be handled on a case-by-case basis, potentially with federal and/or state legislation. But it’s an eventuality that may or may not come to pass.

The Effect on Employer-Sponsored Health Insurance

Most non-elderly Americans get their health insurance from their employers, and the tax bill doesn’t change anything about employer-sponsored health insurance. The employer mandate will remain in effect, as will all of the various rules that the ACA imposes on employer-sponsored health plans.

The various ACA repeal bills that were considered earlier in 2017 would have repealed both the individual mandate and the employer mandate, but the tax bill repeals only the individual mandate. So employers with 50 or more full-time equivalent employees will continue to be required to offer health insurance to their full-time employees.

But those employees will no longer be penalized by the IRS if they fail to maintain coverage. The CBO projects that by 2027, there will be about 2 million fewer people with employer-sponsored coverage than there would have been if the individual mandate had remained in place. But by and large, this decline will result from employees declining their employers’ coverage offers, as the employers will still have to offer coverage in order to avoid potential penalties under the employer mandate.

HSA Contributions and Rules Unchanged

HSA allow people with HSA-qualified high deductible health plans (HDHPs) to set aside pre-tax money to fund their future healthcare expenses (or to use as a retirement account). Republican lawmakers have long focused on efforts to expand HSAs by increasing the contribution limits and allowing the funds to be used to pay health insurance premiums. More recently, GOP lawmakers have also sought to reduce the penalty increase that the Affordable Care Act imposed on withdrawals for non-medical expenses prior to age 65.

Some or all of these provisions were included in the various ACA repeal bills that GOP lawmakers considered in 2017. But none of them made it into the Tax Cuts and Jobs Act. GOP lawmakers may consider additional legislation in 2020 to make changes to HSAs, but for the time being, they are unchanged.

The contribution limits for 2020 are $3,550 for people who have single coverage under an HDHP and $7,100 for those with family coverage. There is still a 20% penalty on withdrawals taken before age 65 if the money is not used for medical expenses, and health insurance premiums cannot be paid with HSA-funds, with the exception of Consolidated Omnibus Budget Reconciliation Act (COBRA) premiums, premiums paid while you're receiving unemployment, and premiums for Medicare Parts A, B, and/or D.

Deducting Medical Expenses Was Easier in 2017 and 2018

Medical expenses are tax-deductible, but only if they exceed 7.5% of your income. It used to be 7.5%, but the ACA changed it to 10% in a revenue-saving measure. People who were 65 or older were allowed to continue to use the 7.5% threshold until the end of 2016, but the 10% threshold had kicked in as of 2017 for all tax filers.

In an effort to sweeten the tax bill for consumers, Senator Susan Collins (R, Maine) championed a push to return to the 7.5% threshold. Ultimately, the tax bill did include this change, and has been extended through 2025.

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By Louise Norris
 Louise Norris has been a licensed health insurance agent since 2003 after graduating magna cum laude from Colorado State with a BS in psychology.