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Affordable Care Act Penalty Tax: Yes, No, Maybe?

If an individual or family decides to forego health insurance, is there a penalty tax? What is the exact figure? It seems that computing this tax may be a bit more complicated than has been portrayed in many publications. Who precisely is subject to this tax and when is it assessed?

The Obamacare individual mandate requires that most Americans obtain health insurance by 2014 or pay a penalty. The individual mandate was effective January 1, 2014. The penalty tax will be applied to year end modified adjusted gross income for each month that an individual had no health insurance nor an exemption to it. To avoid the penalty, individuals will have to enroll in a marketplace plan no later than March 31, 2014. Missing the deadline will trigger a fee and open enrollment won’t begin again until November 15, 2014.

What constitutes an “exemption”? Good question. Can anyone get one? First, and most important, most individuals are offered health insurance through their employers. For an exemption to apply to anyone whose employer offers coverage, the individual would have to pay more than 8% of income for that health insurance coverage after taking into account any employer contributions OR tax credits that may be available through an exchange purchased plan. Also, individuals are allowed a short coverage gap of three consecutive months and will be exempt from the tax for these months. In 2014, a second exemption covers those who buy marketplace insurance for an additional month. An exemption is also granted for anyone who is part of a religious group opposed to acceptance of benefits from a health insurance policy. There is no penalty for undocumented immigrants and members of Indian tribes who don’t enroll in exchange plans.

These are broad categories; there are other conditions that would permit an individual to apply for an exemption. These include, but are not limited to, homeless individuals, homeowners who are in a home foreclosure situation,  a death in a family and anybody who believes they have had a hardship in obtaining health insurance. Documentation is optional. And, of course, there are the policy holders whose coverage was canceled; that group has just been given another two year extension. It would seem that almost anyone could fall into one of these categories!

Now….the penalty tax. In 2014, the tax is $95 per adult and $47.50 per child under age 18 (up to $285 per family) or 1% of income, whichever is greater. For 2015, the penalty is increased to $325 per adult and $162.50 per child under age 18 (up to $975 per family) or 2% of family income, whichever is greater. And, in 2016, the penalty is $695 per adult and $347.50 per child under age 18 (up to $2,085 per family) or 2.5% of family income, whichever is greater. The penalty cannot exceed the national average premium for a bronze plan coverage in an exchange. After 2016, these penalties can be increased annually by a cost of living adjustment.

The ACA imposed this penalty tax to help defray the cost of maintaining the exchanges. How much will be collected remains to be seen. Between the sheer number of possible exemptions and the confusing manner by which these taxes will be assessed, it seems as if accurately determining tax revenue is unlikely. It remains to be seen.

For additional information, contact EAB HealthWorks.