The end of penalties for being uninsured: Implications for your 2017 tax return and beyond

The Affordable Care Act’s penalty for choosing to go without health insurance was eliminated as part of the nation’s new tax law, passed at the end of 2017. This penalty, also referred to as the “individual mandate,” will stop as of January 1, 2019.

But until 2019, the penalty stays in place. That means reporting about your health insurance coverage is an important part of your 2017 income tax return.

According to the Internal Revenue Service, if you do not include information about your insurance, you will risk delays in processing your return. That includes reporting whether you were uninsured, and reporting any penalty you owe. (The IRS calls the penalty “the individual shared responsibility payment.”)

Failing to report about your insurance will sideline your tax return and could hold up that refund you were expecting.

The repeal of the individual mandate penalty may eventually change the insurance reporting requirements for tax returns. But the repeal could have other effects as well.

The end of the penalty may further undermine the Affordable Care Act’s health insurance marketplaces, where 8.7 million Americans, including nearly 400,000 Pennsylvanians, currently get their coverage. Because of the way insurance companies price health insurance plans, repeal of the penalty may cause premiums to increase and lead more insurers to exit the marketplaces.

Insurance companies have a better shot at offering more affordable plans when they cover more people, including those who are young as well as old and healthy as well as sick. Selling insurance to a larger group of people at different ages and with various levels of “healthiness” can have a moderating effect on premiums. People who need less health care (and therefore cost less to cover) can offset those who need more (and cost more).

That dynamic helps extend access to affordable coverage to more people, including those who might not be as healthy as others. And naturally, a bigger pool of potential insurance buyers helps attract insurers who want to sell coverage.

Reverse the dynamic and you may get what policy experts call a “death spiral.” In the extreme, marketplaces could collapse, with insurers unable to offer affordable plans for a dwindling group of buyers.

By nudging people toward buying insurance, the penalty was intended to help create healthy insurance markets to serve the many Americans unable to get insurance through their jobs. You might think of the penalty as the “stick” to go along with substantial “carrots,” such as financial assistance in the form of advance premium tax credits, offered on the marketplaces.

The health insurance marketplaces are already reeling from uncertainty created by actions in Washington. Federal policymakers have been taking steps to chip away at the marketplaces without advancing alternatives that promote affordable, comprehensive coverage.

Meanwhile, some states are taking steps to shore up their own marketplaces. A report by the American Hospital Association suggests ways they can do this. And a coalition of Pennsylvania health care organizations, including the hospital association, have proposed specific steps for Pennsylvania.

In the meantime, remember that the requirement to maintain coverage remains in force for 2018. But stay tuned for further developments.