How Did the Tax Cuts and Jobs Act Affect Individual Health Insurance?

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (H.R.1) into law. The legislation included sweeping changes to the U.S. tax code, but it also capped off a tumultuous year of healthcare reform legislation.

Throughout 2017, GOP lawmakers were persistent, although unsuccessful, in their effort to repeal and replace the Affordable Care Act (ACA, also known as Obamacare). But the Tax Cuts and Jobs Act did eliminate the federal individual mandate penalty (shared responsibility penalty), starting in 2019.

This article will explain how that change affected the individual/family health insurance market, and how the ACA's other provisions, including premium subsidies and limited enrollment windows, ensured that the market remained stable even after the penalty was eliminated.

It's important to note that the Tax Cuts and Jobs Act did not include most of the provisions that had been part of ACA repeal attempts earlier in 2017. It did repeal the individual mandate penalty as of 2019, but the rest of the ACA was left in place, and that continues to be the case.

And other tax-related healthcare reforms that had been proposed earlier in 2017, 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The tax bill repealed the individual mandate penalty as of 2019. The individual mandate still exists, but there is no longer a federal penalty for non-compliance. So there was still a penalty for people who were uninsured in 2018, which was assessed when tax returns were filed in early 2019. (Note that four states and the District of Columbia have their own individual mandates, with penalties for non-compliance.)

This differed 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 Cuts and Jobs Act kept 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 had 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 was included in the ACA in order to 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. Pre-ACA, this was already the case for eligible employees enrolling in an employer's plan, but it was not the case in most states when people needed to purchase their own coverage in the individual/family market.

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.

One of the ACA's most popular provisions was the rule change that ensures that medical history no longer plays a role in eligibility or premiums. 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 penalized people who chose 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 are still applicable, and people cannot enroll outside of open enrollment unless they have a valid qualifying life event. This 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).

Individual Mandate Penalty Repeal: The Effect on Premiums and Enrollment

But repealing the individual mandate was still expected to have a deleterious effect on the individual/family health insurance market. In 2017, the Congressional Budget Office (CBO) projected that by 2027, there would be 13 million fewer people with health insurance than there would have been if the mandate penalty had remained in place.

The people who were expected to drop their coverage 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 estimated that premiums in the individual insurance market would 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 noted that the individual insurance market would “continue to be stable in almost all areas of the country throughout the coming decade.” In other words, they believed that most areas of the country would 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 was expected to drive premiums higher, the premium subsidies would also grow as much as necessary to keep net premiums at an affordable level.

For people who are eligible for premium subsidies, higher premiums are offset by increases in subsidy amounts. But for people who don’t get premium subsidies, there were concerns that coverage in the individual market could become increasingly unaffordable in future years.

Fortunately, subsequent legislation (the American Rescue Plan in 2021, and the Inflation Reduction Act in 2022) eliminated the "subsidy cliff" by removing the income limit for subsidy eligibility, which had previously been set at 400% of the poverty level. This change is in place through at least 2025.

Now that several years have passed, we can look back and see how premiums actually changed in the individual market after the mandate penalty was eliminated. There was indeed one round of fairly significant rate increases for 2018, averaging roughly 12%. Many insurers cited the efforts to eliminate the individual mandate penalty as a driving factor for their rate increases that year (the legislation had not yet been passed when rates were finalized for 2018).

But since then, rates have been much more stable, staying nearly unchanged in some years and increasing by just a few percentage points in other years.

And enrollment in individual/family plans through the exchanges hit an all-time high in 2022, due in large part to the affordability enhancements created by the American Rescue Plan.

The premium and enrollment stability in the individual market have demonstrated that the premium subsidies (enhanced since 2021 by the American Rescue Plan and Inflation Reduction Act) and limited enrollment windows have been able to keep the market stable, even without the individual mandate penalty.

The Effect on Employer-Sponsored Health Insurance

Most non-elderly Americans get their health insurance from their employers, and the Tax Cuts and Jobs Act didn't change anything about employer-sponsored health insurance. The employer mandate remains in effect, as do all of the 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 Cuts and Jobs Act repealed only the individual mandate penalty. So employers with 50 or more full-time equivalent employees continue to be required to offer health insurance to their full-time employees.

But those employees are no longer penalized by the IRS if they fail to maintain coverage (as noted above, some states impose their own penalties via the state/district tax return). The CBO projected that by 2027, there would 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 was expected to result from employees declining their employers’ coverage offers, as large employers 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. And GOP lawmakers had 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. So HSA rules have remained unchanged.

As has always been the case, the parameters for HDHPs (minimum deductibles and maximum out-of-pocket limits) are adjusted by the IRS each year, and so are the contribution limits for HSAs.

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, C and/or D (but not Medigap premiums).

Threshold to Deduct Medical Expenses Was Reduced for 2017 and 2018 (Subsequently Made Permanent)

Medical expenses are tax-deductible, but only if they exceed 7.5% of your income. The ACA had increased this limit to 10% of income as of 2017. But the Tax Cuts and Jobs Act temporarily reset the threshold to 7.5%, for 2017 and 2018.

The threshold for deducting medical expenses was scheduled to return to 10% as of 2019, but the Further Consolidated Appropriations Act, 2020, which was enacted in late 2019, maintained the 7.5% threshold for 2019 and 2020. The threshold was then permanently set at 7.5% of income by the Consolidated Appropriations Act of 2021.

The lower threshold makes it easier for tax filers to continue to qualify for this deduction, as their medical expenses (relative to their income) don't have to be as high. But it's important to note that you can only use the medical expense deduction if you itemize your deductions, and most people end up being better off with the standard deduction. This is especially true as a result of another provision of the Tax Cuts and Jobs Act, which nearly doubled the standard deduction.

Summary

The Tax Cuts and Jobs Act was enacted in late 2017. It was a wide-ranging tax bill, but it did include the elimination of the ACA's individual mandate penalty. This came after several months of effort among GOP lawmakers to repeal (and potentially replace) the entire ACA, but those efforts were unsuccessful. The Tax Cuts and Jobs Act also temporarily reset the threshold for medical expense deductions to 7.5% of income (instead of 10% of income), and that was later made permanent by subsequent legislation.

The mandate penalty elimination took effect in 2019, so there is no longer a federal penalty for going without health insurance. There were widespread concerns that this would result in fewer enrollees and significantly higher premiums for health plans purchased in the individual/family market. But other ACA provisions, including premium subsidies and limited enrollment windows, kept the market remarkably stable. Enrollment through the exchanges reached a record high in 2022, due to the enhanced subsidies under the American Rescue Plan. And premium increases have been quite modest over the last several years.

A Word From Verywell

Although there's no longer a federal penalty for not having health insurance (and only a few states that have this type of penalty), it's still in your best interest to maintain health insurance coverage.

You can only enroll in coverage during open enrollment or a special enrollment period triggered by a qualifying life event (this is true for employer-sponsored coverage as well as coverage you buy on your own). So if you go without health insurance and then get very sick or injured, you may have to wait many months before you can get coverage.

Maintaining continuous coverage is a much better approach. And it comes with a variety of free preventive care coverage that can be helpful even if you're perfectly healthy.