Repeal of the Individual Mandate Penalty: How Will It Affect Small Businesses?

David Rodeck

Repeal of the Individual Mandate Penalty: How Will It Affect Small Businesses?

In 2017, no bill was passed to repeal the Affordable Care Act (ACA). However, there was one major change as part of the tax reform bill in December: the individual mandate penalty was removed. This change could have significant long-term effects on health insurance plans.

What Is the Individual Mandate?

The Affordable Care Act launched a new tax penalty for people who did not have health insurance. According to Healthcare.gov, if someone did not have coverage, they would owe the greater of either 2.5 percent of their household income or a flat $695 per adult penalty in 2017. The ACA included this penalty to motivate people to buy insurance.

ACA plans do not underwrite based on health, meaning someone who is sick does not pay more and cannot be denied insurance. Without the individual mandate, it’s possible that a healthy individual would not buy insurance and only sign up after they get sick. This would drive up premiums for the market.

The Republican tax reform bill removed the individual mandate penalty starting in 2019. However, the other parts of the ACA will remain intact for now.

Potential Impact

It is difficult to predict exactly how removing the individual mandate will impact the health insurance market. The Congressional Budget Office (CBO) forecasts that removing the mandate will cause the number of Americans with health insurance to fall by about 13 million over the next decade.

Premiums could also increase as younger, healthier Americans drop coverage. The CBO predicts average premiums will be about 10 percent higher over the next decade for nongroup plans, like those on the marketplace exchanges. It’s also possible that insurers may stop offering plans in some areas because not enough people sign up to make it worthwhile. However, the CBO expects the health insurance market overall will remain stable.

Other experts do not think removing the mandate will have as large of an impact on premiums or enrollment rates. They say the individual mandate was too small to be effective and so removing it will not be as consequential as the CBO predicts.

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Removing the individual mandate penalty will not directly affect business owners too much. Insurance plans will continue following the same rules as under the ACA. Perhaps fewer employees will sign up since they will not owe a penalty for not having coverage.

Over time, premiums could increase because of the mandate removal, but it’s not clear yet. Finally, the tax bill did not remove the employer mandate, which requires employers with 50 or more full-time equivalent employees to offer insurance or else they owe a tax penalty. Only the individual tax penalty was removed.

The tax reform bill showed that Congress has not given up on reforming the ACA. Readers should keep an eye on future legislation, even bills not related to health care because they could still include future changes for health insurance.

This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.

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