Executive Order Does Not Relieve Taxpayers of Shared Responsibility Penalties for 2016

On January 20, 2017, newly inaugurated President Donald Trump signed Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal, directing agencies to exercise the authority and discretion permitted to them by law to reduce burdens imposed by the Affordable Care Act.  As well, shortly thereafter the IRS announced that it would accept tax returns where taxpayers did not indicate whether they had qualifying health insurance. 

Many clients took this to mean that the penalties for failure to maintain health insurance that provided minimum essential coverage by individuals and the shared responsibility payments that are imposed on applicable large employers (ALEs) who fail to provide affordable minimum essential coverage to their employees would not apply for 2016.  However, in information letters INFO 2017-10, INFO 2017-0013, and INFO 2017-0017 the IRS noted that the order did not actually change the law, and that the penalties will still apply to those taxpayers unless they meet another exception.

With regard to the penalty imposed on ALEs under IRC §4980H, the IRS notes in INFO 2017-10 that “[t]here is no provision in the statute that provides for the waiver of an ESRP.” (Employer Shared Responsibility Payment under §4980H)  In the case of that letter, the organization in question was an ALE not for profit organization not providing the coverage for both financial and religious reasons.  While there is no provision granting relief to not for profits that have financial issues with providing the option for coverage, the letter did note that eligible nonprofit religious organizations that objects to providing contraceptive coverage on religious grounds does have the ability to seek to exclude that coverage.

For individuals, §5000A generally imposes a separate shared responsibility payment on individuals who do not maintain qualifying insurance.  There are some options for relief, as INFO 2017-17 notes:

Certain individuals are exempt from the requirement to have minimum essential coverage. One exemption is for individuals whose coverage options are considered unaffordable because the minimum amount they must pay for minimum essential coverage is more than a certain percentage of their household income. That percentage is 8.16 for 2017. Your 2017 household income is the modified adjusted gross income of you, your spouse (if filing jointly), and any dependents who are required to file a tax return. Modified adjusted gross income is the adjusted gross income from the tax return plus any excludible foreign earned income and tax-exempt interest received during the taxable year. For more information on health coverage exemptions, you may want to visit our website, www.irs.gov, and review Form 8965, Health Coverage Exemptions.

As the executive order suggests in its title, this order was meant to be a short-term stop-gap measure until Congress repealed these requirements.  However, as the repeal of ACA proved more difficult to bring to fruition than many expected, taxpayers who decided not to report or pay the penalties on their 2017 return may be in for an unhappy surprise. 

Similarly, advisers seem to be in a similarly “tight spot” with regard to these rules.  Preparers are still bound not to sign a return that has a position that lacks substantial authority unless there is disclosure.  And, even with disclosure, the preparer can only sign the return if there is a reasonable basis for the position.  While, arguably, the ambiguity with regard to the rules might have created such authority at the beginning of the 2017 filing reason, now it appears any such “authority” is tenuous at this point.

It is possible, if Congress does find a way to enact a bill that removes these penalties, that the issue may retroactively go away. But until then advisers need to be aware that the IRS does not view the Executive Order, which limits its application to discretion allowed to agencies under the law, as allowing or requiring the agency to ignore the penalties imposed by the law.