Latest News on the Constitutional Validity of the Patient Protection and Affordable Care Act (ACA)

By Scott Lewis, CPA, MSA

To our clients and friends:

The Supreme Court recently agreed to hear a case this fall that could determine the constitutional validity of the Patient Protection and Affordable Care Act (ACA). The court likely will not issue its ruling until spring or summer of 2021, at the earliest. The Court will be deciding whether the individual mandate is unconstitutional, and if so, whether it is severable from the rest of the ACA. The individual mandate is the ACA requirement on individuals to have health coverage or pay a penalty on their Form 1040, per section 5000A. In 2012, the Court ruled in a 5-4 decision that the individual mandate was constitutional because the penalty was a tax, which the Constitution allows Congress to impose.

The question in 2020 is… 

Whether the individual mandate is unconstitutional since the Tax Cuts and Jobs Act of 2017 (TCJA) reduced the penalty amount to zero starting in 2019. Individuals are still required to have health coverage, but there is no longer a penalty for failure to do so. If the Court determines that the individual mandate is unconstitutional and cannot be severed from the rest of the ACA, then the whole ACA could be declared unconstitutional.

Even if the Court determines that the individual mandate 1) is unconstitutional, and 2) cannot be severed from the rest of the ACA, our view is that the likelihood of any changes affecting tax years before 2019 are unlikely because the key issue in the case is the reduction of the individual mandate penalty to zero by the TCJA in 2017, which was not effective until 2019.

How Does This Affect You?

The ACA imposes various taxes on individuals and other entities including the following:

  • Individuals filing Form 1040 may pay the 3.8% net investment income tax (NIIT), on interest, dividends, and other investment income, and the 0.9% additional Medicare tax on wages or self-employment income over a certain level.
  • The individual mandate penalty for failure to have health insurance.
  • Estates and trusts filing Form 1041 may pay the 3.8% NIIT.

If the ACA is held to be unconstitutional, these taxes may be invalidated on a prospective or retroactive basis. If retroactive, then the additional questions are 1) which years could be affected, 2) whether refunds for taxes previously paid could be requested, and 3) how the statute of limitations applies for filing an amended return or other refund request.

The consensus is that the chances are very remote that the court will render a decision that would result in refund opportunities for taxes paid for years before 2019.  However, as a precaution, if you had paid ACA taxes in 2016 or 2017, you may want to file a protective claim for refund.

A protective claim for refund informs the IRS to keep the tax year open (generally for refund purposes only) until the court case is decided. The IRS simply holds the claim and does not act on it unless an amended return is filed. If the case does result in these taxes being invalid retroactively, you would then need to file an amended return to claim your refund. If the case ends up not affecting any prior years, you simply do nothing.

Being as the statute of limitations period for 2016 and quite possibly some 2017 tax returns will end before the Court’s decision is entered, a protective claim for tax refund could be filed to extend the federal statute of limitations until after the case is decided. For 2016 returns filed on or before July 15, 2017, the protective claim must be filed by July 15, 2020. For 2016 returns filed after July 15, 2017, the protective claim due date is three years from the date the 2016 return was filed.

Should You File a Claim?

You should consider whether filing a claim, in light of the very remote possibility that the ACA taxes are deemed unconstitutional for 2016 or 2017, is appropriate for your individual tax situation; it likely that this does not make economic sense unless you paid a large amount of these taxes. 

The amount of ACA taxes that you paid for these years is reported on Form 1040 on these lines:  Form 8960, Line 17; Form 8959, Line 18; and Form 1040, Line 61, if applicable. For trusts and estates that filed Form 1041 for the tax year 2016 or 2017, see Form 8960, Line 21.

After considering the costs and the uncertain benefits, if you wish to proceed, we can assist you in filing a protective claim for refund for the 2016 tax year (and later years, if needed). Our fees for filing the protective claim for 2016 would be $500, and if an amended return is necessary after the Court’s decision, then additional fees would be incurred to file these amended returns. Although the statute of limitations for the 2017 tax year does not expire until, at the earliest, April 15, 2021, we can file a protective claim for 2017 for the same fee now.

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