The Affordable Care Act (ACA), passed into law in 2010, requires most individuals to have health insurance coverage that meets certain minimum standards. There are exceptions for those individuals who qualify for a coverage exemption that meets certain standards. Under Internal Revenue Code Section 500A, individuals must maintain Minimum Essential Coverage (MEC) for themselves and their dependents. Those individuals who do not maintain MEC or qualify for an exemption will be required to pay a penalty for each month of noncompliance, commonly known as the “individual shared responsibility” payment penalty.
The new tax law, the Tax Cuts and Jobs Act of 2017 (TCJA), will affect how much federal employees and annuitants will likely be paying for their medical care both in the short-term and in the medium-term. This column discusses how the TCJA will affect health care costs for federal employees and retirees.
Short-Term Effects of New Tax Law
The short-term effects resulting from the TCJA passage are:
- The “individual mandate” requiring individuals to have health-care coverage is in full force during 2018 but will be eliminated effective Jan. 1, 2019; and
- there is a temporary reduction in the medical expense deductions floor from 10 percent of an individual’s adjusted gross income (AGI) to 7.5 percent of an individual’s AGI.
Federal employees and retirees must therefore be sure that they indicate on their 2017 and 2018 Federal income tax returns that they have maintained MEC for themselves and for their tax dependents throughout 2017. For 2017, they do so by checking a box on line 61 of the 2017 IRS Form 1040. Employees and annuitants who are enrolled in the Federal Employees Health Benefits (FEHB) program should have received from their FEHB program carrier either a 1095-B (Health Coverage) and/or a 1095-C (Employer Provided Health Insurance Offer and Coverage) that indicates officially their fulfillment of ACA shared responsibility for 2017. According to the IRS, the IRS will not accept electronically filed returns that fail to address the ACA’s health coverage requirements. Paper returns that do not indicate official health coverage during 2017 may also be suspended pending the receipt of additional information. Any tax refunds may be delayed.
Individuals who do not maintain MEC are subject to a penalty in the form of a “shared responsibility” payment that the IRS collects. The 2017 shared responsibility payment is 2.5 percent of yearly household income or $695 per uncovered person, whichever is higher. That penalty is calculated into the 2017 Federal income tax return.
The other change that will affect medical expenses and taxes resulting from the passage of the TCJA is the temporary reduction (for tax years 2017 and 2018 only) in the medical expense deduction “floor” from 10 percent to 7.5 percent of an individual’s AGI. This change may benefit more individuals than one could imagine. Many of us imagine that the only individuals who can deduct their medical expenses are those individuals who are quite ill with inferior medical insurance, or individuals living in nursing homes and paying $100,000 to $150,000 per year for their long term care. IRS Publication 502 (Medical and Dental Expenses) includes a wide array of health-care goods and services that could qualify as potentially deductible medical, dental and vision expenses. The list includes dental and vision expenses, eyeglasses and contacts, improvements made to a home in order to accommodate the needs of a disabled or elderly resident, such as ramps for a wheelchair, shower bars, lead-paint abatement, and medical alert systems. When added together the costs for all of these improvements, together with co-payments, deductibles and co-insurance could exceed the 7.5 percent of AGI threshold and result in some tax relief.
Increased FEHB and Medicare Premiums
The downside to this temporary medical expense tax deduction relief, together with the temporary reductions to most of the individual marginal tax brackets, will cause a significantly increase in the medium term of the federal budget deficit, magnified by anticipated net federal government tax revenue losses. There will also be increasing pressure on Congress to deal with cost escalations of all major federal government expenditures, especially health-care spending on Medicare, Medicaid and military and veterans’ health care. The result is that federal employees and annuitants will undoubtedly pay more in the future for their FEHB program premiums, in addition to paying for Medicare Part B which will also likely significantly cost more.