Penalty For Being Uninsured
- Health Insurance Penalty for Lack of Coverage or Under-Coverage
- What Is Modified Adjusted Gross Income (MAGI)?
- Business Penalties
- Who Avoids the Penalty?
Health Insurance Penalty for Lack of Coverage or Under-Coverage
One of the more controversial and debated aspects of the Affordable Care Act is the penalty it imposes on individuals who do not enroll in a health insurance plan that meets minimum essential coverage requirements by January 1, 2014. The penalty applies to the majority of legal residents of the United States and cannot exceed the national average premium for a Bronze plan offered on a health insurance exchange.
In 2014 uninsured individuals will face a penalty equal to the greater of:
1) $95 per adult, $47.50 per child, with a maximum of $285 for a family
2) 1% of modified adjusted gross household income
For example, a person without coverage during the entire 2014 year whose income after tax adjustments is $25,000 would pay a penalty of $250 since 1% of their income is $250 and $250 is greater than the flat fee penalty of $95.
In July 2014 the IRS announced that the maximum penalty an uninsured individual must pay in 2014 is $2,448. The maximum penalty for an uninsured family with five or members is $12,240.
The uninsured penalty will substantially increase in 2015 and individuals without creditable health insurance coverage will face a penalty equal to the greater of:
1) $325 per adult, $162.50 per child, with a maximum of $975 for a family
2) 2% of modified adjusted gross household income
2016 & beyond
Penalties will increase through 2016 when the penalty will be the greater of:
1) $695 per adult, $347.50 per child, with a maximum of $2,085 for families
2) 2.5% of modified adjusted gross household income
Keep in mind penalties will be pro-rated to the number of months without coverage (e.g. 6 months without coverage = 50% of penalty). Coverage gaps which total less than three months in a calendar year will not trigger a penalty. After 2016, the flat dollar amount (see option #1 in each scenario above) shall be indexed to inflation, i.e. based on that year’s cost of living.1
Those households whose annual income is below 100% of the Federal Poverty Level will not be subject to the penalty but would be eligible for Medicaid under most conditions.
In December 2013, the Department of Health & Human Services announced that the penalty for lacking creditable insurance would be waived for those people who had their health insurance cancelled and have difficulty paying for a metal plan. These individuals are also eligible but not required to enroll in Catastrophic health plans. Normally Catastrophic health plans are limited to people under the age of 30. Refer to our Who Avoids the Penalty? section for additional information.
Which health insurance plans qualify as creditable health insurance coverage that meet minimum essential coverage standards of the Affordable Care Act?
The following types of coverage qualify as meeting minimum essential coverage requirements4:
Individual health coverage:
Coverage through programs sponsored by the government:
If you are unsure whether a plan qualifies as creditable coverage, you should inquire with the insurer. Examples of coverage that do not meet minimum essential coverage requirements include:
- Short-term insurance
- Accident or disability income insurance
- Standalone dental and vision insurance
- Workers’ compensation or other form of liability insurance
- Long-term care insurance
- Critical illness insurance
- Automobile medical payment insurance
- Plans which offer only discounts for medical services
What Is Modified Adjusted Gross Income (MAGI)?
As mentioned earlier in the article, penalties for lacking health insurance are calculated using your “modified adjusted gross income,” otherwise known as MAGI. MAGI is not your annual salary. Rather, it can include additional sources of income such as tax-exempt interest. Furthermore, MAGI includes a variety of tax deductions (but not all of the deductions used to calculate “adjusted gross income” on line 38 of a 1040 tax form). For more information, see the IRS’ calculation of modified adjusted gross income.
Health insurance penalties also apply to businesses but not until 2015. Employers have received a penalty waiver for 2014. For businesses that employ the equivalent of at least 50 full-time employees, they must offer full-time employees at least one affordable group health insurance option that meets or exceeds the actuarial value of a Bronze Plan. “Affordable” in this context means that the single coverage premium paid by the employee does not surpass 9.5% of his or her wages from the company. If a company fails to meet these criteria and employees receive subsidized coverage through an exchange, it faces a penalty. The penalty, determined on a monthly basis, depends on the nature of the employer’s non-compliance.
1. Monthly penalty for employers that fail to provide health coverage: The number of full-time employees (minus 30) multiplied by 1/12th of $2,000.
2. Monthly penalty for employers that provide coverage failing to meet minimum standards for value and affordability: The number of full-time employees receiving subsidized Exchange coverage multiplied by 1/12th of $3,000 (this penalty cannot exceed the penalty for providing no coverage).
The employer mandate and the individual mandate for consumers were both scheduled to go into effect in January 2014, but the employer mandate portion of the ACA was delayed one year for employers with at least 100 full-time equivalent employees (FTEs) and two years for employers with 50-99 FTEs. The number of FTEs for a month is calculated by adding (1) the number of full-time employees and (2) the number of part time employee work hours divided by 120.
Employers with at least one hundred FTEs are not required to provide health plans until 2015, when those employers only must cover at least 70% of full-time employees. In 2016 all employers with at least 50 FTEs must cover at least 95% of full-time employees. Even if an employer covers 95% of their employees, they could still have to pay a yearly penalty of $3,000 times the number of full-time employees that were not offered coverage and that received a tax credit.2
Who Avoids The Penalty?
The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) released an updated estimate of penalty payments in June 2014. The report projects 23 million out of approximately 30 million nonelderly uninsured will qualify for one or more exemptions from the ACA individual mandate in 2016. Overall CBO and JCT estimate that only 4 million individuals will pay the uninsured penalty in 2016, 2 million less than a previous projections from 2012. An estimated $4 billion will be collected in 2016 and an estimated $5 billion will be collected annually from 2017 to 2024.6
Groups which can claim an exemption from the penalty despite a lack of creditable health insurance include3:
- People whose income is below the level that requires the filing of an income tax return (you are not required to apply for an exemption)
- People for whom health insurance would cost more than 8% of their income even after employer contributions and government subsidies are applied to the cost
- Members of a religious sect (e.g. Old Order Amish) who do not accept the benefits of a health insurance plan
- embers of a Federally recognized Native American tribe
- Noncitizens of the United States (neither a U.S. national, citizen, or alien)
- Americans incarcerated in prison, jail, or similar penal institution or correctional facility
- Members of a health care sharing ministry
- Individuals with health insurance coverage gaps totalling less than three months out of the year (you are not required to apply for an exemption, you will report how long you had coverage on your tax return)
- Americans who live abroad for at least 330 days within a 12-month period
Many exemptions which would qualify an individual for an Obamacare special enrollment period also allow an individual to be exempt from the uninsured penalty. Hardship exemptions typically cover the month before the hardship, the months of the hardship, and the month after the hardship. If your hardship only lasted for half of the year and you remained uninsured the entire year, you would still have to pay half of the uninsured penalty. Examples of hardship exemptions include5:
- Aforementioned instances where coverage is considered unaffordable for an individual or family.
- You are not eligible for Medicaid because the state in which you reside elected to not expand Medicaid eligibility standards under the Affordable Care Act (this exemption is granted for the entire year)
- You have become homeless or you have been evicted in the past 6 months or you are currently facing foreclosure or eviction
- You recently experienced domestic violence
- You recently experienced the death of close family member
- You recently experienced a natural or human-caused disaster such as a fire, flood, or earthquake which resulted in substantial damage to your property
- You have unreimbursed medical expenses in the past two years which led to substantial debt
- You received a shut-off-notice from a utility company
- You are taking care of an ill, disabled, or elderly family member and have incurred unexpected increases in essential expenses
You can claim certain exemptions on your 2014 federal tax return. Some exemptions you may claim by filling out various forms provided by healthcare.gov and mailing them to the Health Insurance Marketplace Exemption Processing Center. You may submit additional documentation to prove your hardship such as copies of medical bills or a copy of your eviction notice. Instructions are provided in the following form links, but if you need additional assistance, refer to these general instructions:
- Exemption form if you live in a state using the Federal health insurance exchange and you are applying based on coverage being unaffordable
- Exemption form if you live in a state using its own health insurance exchange and you are applying based on coverage being unaffordable
- Exemption form if you are applying based on your membership in a healthcare sharing ministry
- Exemption form if you are eligible for services from a Native American health care provider because you are a member of a Federally recognized Native American tribe
- Exemption form if you are incarcerated
- Exemption form if you are applying based on your membership in a recognized religious sect who consciously object to health insurance
- Exemption form if you are applying based on a hardship (14 categories to choose from)