Now that the Supreme court has upheld key provisions of President Obama’s health care reform plan, also known as ObamaCare or the Affordable Care Act, all Americans with an income above a certain threshold will have to purchase health insurance. The provision referred to as the individual mandate is what will legally require most US citizens and legal residents to obtain private, employer sponsored or public health insurance (through state run exchanges) starting in 2014. Based on the most recent data available it is estimated that more than half of the US population gets health insurance directly through their employers, while 50 million people are uninsured. The remaining consumers either buy their own private insurance or are covered by federal/state government programs, such as Medicaid and Medicare.
[Update March 31st 2014] Extension to purchase health coverage may now be in the works. The original deadline to purchase coverage, before incurring the penalties discussed below was March 31st, 2014. But a number of state exchanges, like Covered California said that, “Individuals who start an online application by 11:59 p.m. on March 31, 2014, will have until 11:59 p.m. on April 15, 2014, to complete their application and select a plan“. The official site, healthcare.gov, is not clear on the extension but odds are that if the state exchanges are providing extensions, the federal site will follow soon. I will post updates when available (you can get these by connecting via Email, Facebook, Twitter or RSS).
Here is a brief summary of the standard penalties for not having health insurance who do not meet the exemptions outline above:
Individuals: From 2014 (reported in 2015), individuals who did not have insurance would owe $95, or 1 percent of income, whichever is greater. In 2015 it rises to the greater of $325 or 2 percent of income. But the penalty would subsequently rise in 2016, reaching $695, or 2.5 percent of income, whichever is greater. From 2017, the minimum tax penalty per person will rise each year with inflation. And for children 18 and under, the minimum per-person tax is half of that for adults ($47.50). The tax penalty is pro-rated, so that a person who is not covered for only a single month would pay 1/12th of the tax that would be due for the full year.
While the focus is on the $95 (single adult) penalty, the actual penalty may be much more for higher income people because the percentage component of the penalty comes into play. For example, a single person whose MAGI is $35,000 and elects not to have health insurance, may be liable for a penalty of $249 ($35,000 – $10,150 = $24,850 x 1% = $249). The maximum 2014 penalty is capped at the national average price for a bronze plan, or about $9,800.
Families: For families the 2014 health insurance non-compliance penalty is capped at $285 per family, or 1% of income, whichever is greater. In 2015 it rises to the greater of $975 or 2 percent of income. And by 2016, it will jump sharply to $2,085 per family, or 2.5% of income, whichever is greater. From 2017, the penalty/tax will rise in line with inflation. The minimum amount per family is capped at triple the per-person tax, no matter how many individuals are in the taxpayer’s household. So, for example, a couple with one child over 18 (or two children age 18 or under), and no coverage, would pay a minimum of $285 in 2014, $975 in 2015 and $2,085 in 2016. And that would be the minimum no matter how many uninsured dependents a taxpayer has.
Individuals or families who fall below income-tax filing thresholds would not owe anything or get subsides to offset health insurance costs. People who are unemployed or cannot find a policy that costs less than 8% of their modified adjusted gross income would also be exempt from penalties under the individual mandate. On the other hand, to offset the cost of providing insurance to low income households, individuals making more than $200,000 a year and couples earning above $250,000 will get additional health care taxes deducted as payroll taxes. These people are also hit with a 3.8 percent tax on investment income.
Employers: Also from 2015 (originally 2014, but was delayed by the administration), employers with 50 or more workers could face federal fines for not providing insurance coverage. Several of the other changes would take effect much sooner. For the current and future impacts of health insurance on employers see this article.
How Individual Health Care Coverage Will be Monitored
Since 2011, employers have had to state the value of the health care benefits provided to each employee on their W-2 at the end of each year. Insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year will also have to report certain health insurance coverage information to both the covered individual and the IRS. Thus, the IRS will ultimately be responsible for reporting an individuals and business’ non-compliance with purchasing health insurance.
Due to the website issues with healthcare.gov the Obama administration has announced that it will give Americans who buy health insurance through the new online marketplaces an extra six weeks – till the end of Open enrollment on March 31st, 2014, to purchase coverage before they incur the penalties discussed above. And given all the issues still plaguing the federal health care exchange website (healthcare.gov) the requirement for everyone to have health insurance under the individual mandate may be delayed even further.
In a further extension announced just before Christmas, the administration has announced Americans who had their health plans cancelled by insurance companies will be exempt (known as the “hardship exemption”) from the individual mandate and associated penalties that go into effect on January 1st. The insurance plans were cancelled because they did not meet the minimum plan requirements defined under the affordable care act and the available plans are too expensive. To claim the exemption you would have to provide proof of a canceled policy.
The administration is still working to resolve the various issues the the affordable care rollout and if there are further extensions or deferment of penalties I will post updates (you can get these by connecting via Email, Facebook, Twitter or RSS).