Tax Penalty For Being Uninsured
- Health Insurance Tax Penalty for Lack of Coverage or Under-Coverage
- What Is Modified Adjusted Gross Income (MAGI)?
- Business Penalties
- Who Avoids the Penalty?
Health Insurance Tax Penalty for Lack of Coverage or Under-Coverage
One of the more controversial and debated aspects of the Affordable Care Act (ACA) is the penalty it imposes on individuals who do not choose to enroll in a health insurance plan that meets the minimum essential coverage requirements. Known ashe Individual Shared Responsibility Payment, the penalty applies to the majority of legal residents of the United States starting on January 1, 2014. The tax penalty amount cannot exceed yearly cost of the national average premium for a Bronze plan offered on a health insurance exchange. In other words, the Bronze plan’s average monthly premium times twelve.
The Individual Shared Responsibility Tax is sometimes referred by other names such as the uninsured tax or the Obamacare penalty.
In 2014 uninsured individuals faced 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, people without coverage during the entire year whose income after tax adjustments was $25,000 were required to 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 was $2,448. The maximum penalty for an uninsured family with five or members was$12,240.
The uninsured penalty substantially increased in 2015 and individuals who did not have Minimum Essential Coveragewere faced with 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, 2017 and 2018
Penalties topped out in 2016, when the penalty was the higher of either:
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
The tax penalty was maintained at these rates through 2017 and 2018.
In December of 2017, the Tax Cuts and Jobs Act of 2017 passed. Within the bill, the individual mandate tax penalty was rescinded for 2019. Although the bill passed in late 2017, individuals are required to maintain coverage through 2018 or face the tax penalty.
Starting in 2019, individuals will no longer be required to pay the tax penalty if they remain uninsured or select a non-ACA health insurance such as short-term health insurance.
Will I be responsible for the individual mandate if I am insured for only part of the year?
Until 2019, the Individual Mandate tax penalty is prorated to the number of months without compliant coverage . Coverage gaps that 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) isindexed to inflation, i.e. based on that year’s cost of living.1
Which Health Insurance Plans 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 minimum essential coverage, you should inquire with the insurer. Examples of coverage that do not meet minimum essential coverage requirements include:
- Short-term health insurance
- Accident or disability income insurance
- Stand-alone dental and vision insurance
- Workers’ compensation or other form of liability insurance
- Long-term care insurance
- Critical illness insurance
- Automobile medical payment insurance
- Plans that offer only discounts for medical services
What Is Modified Adjusted Gross Income (MAGI)?
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 as of 2015. For businesses that employ the equivalent of at least 50 full-time employee equivalents, 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: 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).
Since 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 who were not offered coverage and that received a tax credit.2
Who Avoids The Penalty?
Groups that can claim an exemption from the penalty despite a lack of creditable health insurance include3:
- Members of a health care sharing ministry
- People whose income is below the level that requires the filing of an income tax return (these people 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
- Members 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
- Individuals with health insurance coverage gaps totalling less than three months out of the year (they are not required to apply for an exemption but they must report how long they had coverage on their tax returns)
- Americans who live abroad for at least 330 days within a 12-month period
Many exemptions that qualify an individual for an Obamacare special enrollment period also qualify an individual for the uninsured penalty exemption. 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 remain uninsured the entire year, you would still have to pay half of the uninsured penalty. Examples of hardship exemptions include:
- You cannot afford health insurance because the lowest premiums for ACA-compliant coverage represents more than 8% of your gross household income after any subsidies are applied
- 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 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 health care 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)
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.