With the Fifth Circuit Court of Appeals on the verge of determining the constitutionality and continued viability of the Patient Protection and Affordable Care Act (“ACA”) in the case of Texas v. United States, the California legislature has enacted SB 78, which may represent the start of a California ACA. The legislation, which is generally effective January 1, 2020, creates an individual mandate requiring California residents to maintain health coverage and imposing a tax on those who fail to do so. It also provides financial assistance for the purchase of health insurance for residents with household incomes at or below 600 percent of the Federal poverty level, raising the income threshold that applies for eligibility for Federal subsidies from 400 percent of the Federal poverty level.
The California Individual Mandate
As part of the ACA, Congress added Section 5000A to the Internal Revenue Code (“IRC”), which imposes a tax on individuals who do not have health coverage. The tax under IRC Section 5000A is often referred to as the “individual mandate.”In 2017 Congress enacted the Tax Cuts and Jobs Act, which reduced the tax under Section 5000Ato zero beginning in 2019.Under SB 78California has created its own individual mandate.See Title 24 of the California Government Code, Section 100700 et seq. Newly enacted Section 100705(a) of the Government Code¹ requires California residents to maintain minimum essential coverage (“MEC”) unless an exemption applies. MEC is defined in Health and Safety Code Section 1345.5 using substantially the same definition of MEC that applies for purposes of the Federal individual mandate under IRC Section 5000A(f) and includes: most employer-sponsored group health coverage; individual coverage purchased through the Exchange² or directly from an insurance company; and coverage under a government-sponsored program, for example,Medicare, full scope Medi-Cal, CHIP and TRICARE.
The exemptions from the California individual mandate are very similar to the Federal exemptions except that unlike the Federal rule,bona fide residents of states other than California are exempt. In addition to residents of other states, those exempt from California’s mandate include: individuals for whom a certificate of exemption for hardship or religious conscience has been issued;³ individuals who are members of a health care sharing ministry; incarcerated individuals; members of an Indian tribe; individuals who are not citizens or nationals of the United States or not lawfully present in the United States; bona fide residents of United States possessions; and individuals enrolled in limited or restricted scope coverage under Medi-Cal or a similar program.
The legislation authorizes the California Exchange (also known as Covered California) and the Franchise Tax Board to promulgate rules and regulations to implement the mandate. The legislature has stated its intention that the Federal regulations under IRC Section 5000A (as in effect as of December 15, 2017) shall apply in construing the mandate to the extent that they do not conflict with state regulations established by the Exchange and the Franchise Tax Board.
The California Individual Shared Responsibility Penalty
SB 78 amends the California Revenue and Taxation Code(“R&T Code”)to impose a new tax or penalty for failure to enroll in and maintain MECas required by the Government Code. See Part 32 of Division 2 of the R&T Code commencing with Section 61000. The tax is imposed on a responsible individual for failure of that individual and his or her spouse and dependents to maintain the required coverage.The amount of the penalty is calculated in same way as under IRC Section 5000A(c) with some exceptions. The penalty is generally determined by multiplying the applicable dollar amount ($695 for adults and half that amount for individuals under age 18) by the number of individuals without MEC, with a cap of 300 percent of the applicable dollar amount.The penalty is applied on a monthly basis(1/12 of the applicable dollar amount)and is triggered only when MEC is not maintained for a calendar month. The applicable dollar amount will be adjusted for the cost of living. In no event will the penalty amount exceed 2.5 percent of the responsible individual’s applicable household income for the taxable year over the amount of gross income that would trigger the requirement to file a state income tax return.
Similar to the Federal tax, no penalty is imposed:for a coverage gap of less than three consecutive months during the year;for those with incomes below the minimum threshold for filing a California tax return;and where the cost of coverage is unaffordable. Coverage is unaffordable if the cost of coverage exceeds 8.3percentof the individual’s applicable household income.
In order to administer the tax, SB 78 amends the R&T Code to add a reporting requirement that is imposed on applicable entities. See R&T Code Section 61005. An “applicable entity” is defined to include those entities that provide MEC, for example, health insurance carriers, employers that provide employment-based health coverage, the Exchange (for individual coverage provided through the Exchange),and the State Department of Health Care Services and county welfare departments (for coverage under a state program). A return will satisfy the new state reporting requirement if it is in the form of and includes the information contained in the Federal information returns required by IRC Section 6055 (IRS Forms 1095-A, 1095-B and 1095-C)as in effect on December 15, 2017. The legislation imposes a penalty of $50 per individual covered by an insurance carrier or employer that provides employer-based coverage who fails to make the return.
Individual Market Assistance
SB 78 also requires the Exchange to establish and administer a program of financial assistance to help California residents with household incomes at or below 600 percent of the Federal poverty level to access affordable health coverage through the Exchange. See Title 25 of the Government Code commencing with Section 100800. The Exchange is responsible for adopting an annual program design for each coverage year, provided that no financial assistance is provided after the 2022 coverage year. The program design adopted by the Exchange must be based on funds appropriated by the legislature for the coverage year.
The financial assistance provided through the program is through premium assistance subsidies, which are advanced to program participants and remitted by the Exchange to a qualified health plan issuer that offers Exchange-based coverage. Subsidies offered will be based on a program participant’s projected household income, family size, and other factors to be determined by the Exchange. Only those California residents who are eligible for a Federal premium tax credit under IRC Section 36B (without taking into account the income requirements) will be eligible for the California subsidies. In the same way as the Federal premium tax credit, state premium assistance subsidies that have been advanced must be reconciled against those that are allowed under the program. If the amount allowed exceeds the amount advanced, then the program participant will receive a refund. If the amount advanced exceed the amount allowed, then the participant will be liable for the excess, up to a limit specified in the program design.
¹ All references are to the California Codes unless otherwise indicated.
² All references herein to the “Exchange” are to the California Exchange.
³ Under Government Code Section 100715(c), the California Exchange is required to establish a system for the issuance of certificates of exemption in these situations.
If you are interested in knowing more about SB 78, contact a Boutwell Fay attorney.
© Boutwell Fay LLP 2019, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of July 31, 2019.