Should You File a Protective Refund Claim for ACA-Related Payments?

The U.S. Supreme Court has agreed to hear arguments on whether the Affordable Care Act (ACA) is unconstitutional. It is expected that the Supreme Court will not make a decision until the first half of 2021. This is raising questions regarding if taxpayers should file protective refund claims for ACA taxes paid in 2016, 2017 and 2018 to protect their rights to receive refunds if the ACA is struck down.

Protective claims are filed to preserve the taxpayer’s right to claim a refund when the right to the refund is contingent on future events, and may not be determined until after the statute of limitations expires.

History of the Mandate

Following enactment of the Tax Cuts and Jobs Act (TCJA), the constitutionality of the “individual mandate” under the Affordable Care Act came into question. Under the ACA, the individual mandate created a tax penalty for individuals without health insurance. In 2012, the Supreme Court ruled that the individual mandate was constitutional as the penalty on individuals who did not buy health insurance was a tax. However, the TCJA amended the ACA to provide that the penalty for individuals who did not buy health insurance was zero. In response, a group of states went to federal court claiming that the individual mandate was unconstitutional because the penalty was now zero, and therefore no longer a tax. This has now made its way to the Supreme Court.

The individual mandate applied during the 2016, 2017, and 2018 tax years. The Court will determine whether the ACA is unconstitutional because there is no longer any tax involved.

Tax Implications Under ACA

Under the ACA, taxpayers were subject to the 0.9% Additional Medicare Tax and the 3.8% Net Investment Income Tax. The Additional Medicare Tax affects individuals, and the Net Investment Income Tax affects individuals, estates and trusts. One of the issues the Supreme Court will decide is whether the individual mandate can be severed from the ACA. If the ACA in its entirety is deemed to be unconstitutional, then ACA income taxes are likely to be eliminated.

Statute of Limitations

While it’s not likely that the Court will hold the ACA unconstitutional prior to 2019, the only way to protect your right to receive a refund of ACA taxes is by filing a claim for refund.
A taxpayer may make a claim for refund during the three-year period from the due date of the return or the date the return was filed, whichever is later.

We Can Help
For additional information, or assistance filing a protective claim for refund, please contact RJI CPAs.