You have probably noticed the effects of the Tax Cuts and Jobs Act which was effective January 2018. Most notable for Californians was the $10,000 limitation on the deduction of State and Local Taxes (SALT limitation). Also included in that bill was the repeal of the “individual mandate” which requires everyone to purchase health insurance if they aren’t otherwise covered (such as employer paid insurance). In a typical twist of regulatory muddling, effective January 1, 2020, the mandate was not repealed but the penalty was. Technically, you are still required to purchase health insurance but there is no penalty if you do not—thus removing the “teeth” from this requirement. So, you’re clear to go without individual health insurance, right?
Not so fast! The State of California did not like that, so the legislature passed a law imposing penalties if its residents don’t comply (starting at $695 per adult and half that for children). For higher-income families, it can be as much as 2.5% of household income. A household with $500,000 of household income faces a penalty of nearly $10,000. (The math is not as simple as 2.5% of household income; the government opposes simple calculations.) The penalty is paid on your tax California tax return, so noncompliant persons would pay the penalty when they file their 2020 tax return in April (or October, if on extension) 2021.
There are exceptions to the mandate, such as income below the filing threshold, short-term gaps (3 months or less) in coverage, religious conscience and a host of others. Most exemptions must be applied for and granted by Covered California.
The Republicans scored a victory in the repeal of the mandate for the country, as a whole but Governor Newsom and his colleagues flexed their muscle and reinstated it for 12% of the US population, namely California taxpayers.
We have no position on the “individual mandate,” but for our clients, medical insurance is always a key component of Risk Management. Some prefer nearly complete coverage with low deductibles, while others are willing to partially self-insure and prefer very high deductible plans that significantly reduce the cost of insurance. Neither is right or wrong but thought should be put into the selection process. Are you a high or low medical user? What pre-existing conditions do you or family members have? What is the cost savings by using a high-deductible plan, and will you use those cost savings to fund a Health Savings Account (“HSA”)? Do you want to save and invest your HSA to cover future medical costs, such as during your retirement years?
Whether or not you like the government mandating that you purchase medical insurance, it is a foundational, critical component of protecting the assets you have spent a life accumulating and we would never want to jeopardize your financial independence.
If you have questions about how this applies to you or evaluating your health insurance risk exposure, give us a call. We’re happy to help!
“I’m a problem solver and pride myself on my ability to recognize tax nuances, evaluate complicated estate and tax planning issues and provide sensible easy-to-understand solutions that fit each unique client situation. 95% of financial planning has tax implications, and most wealth management firms do not have the estate and tax horsepower that we have at Inspired Financial.”
