President Obama’s health care reform plan, also known as ObamaCare or the Affordable Care Act, is the law of the land now which means that all Americans with an income above a certain threshold have to purchase or have health insurance. The provision referred to as the individual mandate is what legally required most US citizens and legal residents to obtain private, employer sponsored or public health insurance (through state run exchanges). Based on the most recent data available it is estimated that the majority of the US population gets health insurance 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.
Here is a summary table of the standard penalties for not having health insurance. Details on how the penalty is applied and individual exemption mandates are provided in subsequent sections.
|Year||Penalty (Single)||Penalty (Family)||Maximum Penalty|
|2017||$695 or 2.5% of income||$2,085 or 2.5% of income||$13,100|
|2016||$695 or 2.5% of income||$2,085 or 2.5% of income||$13,000|
|2015||$325 or 2% of income||$975 or 2% of income||$12,500|
|2014||$95 or 1% of income||$285 or 1% of income||$9,800|
[ObamaCare (ACA) Repeal Update] – With Donald Trump now the 45th President, he along with Congressional Republicans have started the process to repeal Obamacare in 2017. The challenge they are current facing is that no replacement plan for Obamacare has been broadly agreed to and implementing a full replacement will take months, if not years. Without an effective replacement plan an ACA repeal could leave millions without access to health insurance and create significant financial turmoil within the American healthcare system. From a health care penalty perspective, there is the strong expectation that the individual mandate will be removed under any replacement plan. This means that those without health insurance in 2017 may only be subject to a partial or no penalty when filing taxes in 2018. Note however that for 2016 taxes currently being filed in 2017, all penalties will apply as shown in the above table. I’ll continue to post updates on this topic and encourage you to follow or share this site via Facebook or Twitter.
Individuals: For the 2014 tax year (reported/filed in 2015), individuals who did not have insurance would owed $95, or 1 percent of income, whichever is greater. For the 2015 tax year it rose to the greater of $325 or 2 percent of income. But the penalty for 2016 rose yet again, 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. Estimates are provided on the table above and it is likely 2017 penalties and maximums will remain the same as 2016 given the low inflation environment. 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).
Families: For families the 2014 health insurance non-compliance penalty was capped at $285 per family, or 1% of income, whichever is greater. In 2015 it rose to the greater of $975 or 2 percent of income. For 2016, the penalty jumped 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.
The maximum penalty (under the percentage of income criteria) is capped at the national average price of a bronze plan sold through the health insurance marketplace. For 2014 the maximum was $9,800, $12,500 in 2015 and then $13,000 in 2016. The 2017 maximum penalty is expected to stay the same as 2016 or rise marginally in line with inflation.
Individuals or families who fall below income-tax filing thresholds would not owe anything or get subsides or credits to offset health insurance costs (see section below on Health care premium tax credit). 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: For 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
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.
Obamacare/Affordable Care Act Tax Forms
A number of tax payers will have more complicated tax returns this year with the need to account for health insurance coverage as part of the individual mandate of the new Affordable health care laws.
Taxpayers who get their health insurance through their employer or government sponsored programs like Medicare or Medicaid, which will be the majority, will be able to prove their compliance via their tax filing by check a box on their normal tax (1040 series) return validating they had insurance. But those who bought insurance on the health insurance exchanges with the help of federal subsidies (see below for income qualification levels) will receive a form 1095-A detailed their coverage and have to reconcile their payments with their income level. HealthCare.gov, the federal exchange that serves 37 states, started to mail out 1095-A forms to customers said all forms should be mailed out by the end of January. This end of month deadline is also the same for state-run exchanges
Those who failed to report raises or bonuses to their respective health exchanges may have to pay back some amount of subsidy for purchasing health insurance via these exchanges. This may require them to complete additional forms (Form 8965 or 8962) to claim exemptions and determine the allowed premium tax credit.
Checking if you have the minimum essential coverage to meet the individual mandate
The IRS has provided details on what constitutes coverage under the new health care laws. If you meet this coverage you won’t face penalties.
There are also certain allowed exemptions from the individual mandate that include items like
- Being uninsured for less than 3 months of the year
- The lowest-priced coverage available to you would cost more than 8% of your household income
- You don’t have to file a tax return because your income is too low
- You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare
- You’re incarcerated (either detained or jailed), and not being held pending disposition of charges
- You’re not lawfully present in the U.S. (illegal immigrants)
- You qualify for a hardship exemption (homeless, evicted in the past 6 months, received a shut-off notice from a utility company etc)
But you will need to show evidence for these in your tax return (Form 8965) with your tax return. when claiming the exemption and the IRS will be checking these quite thoroughly.
US citizens or residents who reside overseas and meet the IRS foreign residency criteria (generally 330 full days outside of the U.S. during a 12-month period) can also claim exemption from the individual mandate penalty via Form 8965. If living overseas for a partial period of time that does not qualify you as a foreign resident for tax purposes coverage provided by your local employer (under an expatriate health plan) can count as qualified health coverage that precludes them from the penalty. One exemption that may be particularly relevant to U.S. citizens living abroad for a small part of a year is the exemption for a short coverage gap. This exemption provides that no shared responsibility payment will be due for a once-per-year gap in coverage that lasts less than three months.
ObamaCare Premium Tax Credit Subsidy and Federal Poverty Levels (FPL)
Lower income Americans that purchase health insurance under the Affordable Care Act may also be eligible for a premium tax credit or subsidy. This is paid in the form of a tax credit (in advance or when filing your tax return) and is based on household size and income relative to the federal poverty levels (FPL). To qualify for the premium tax credit the household modified adjusted gross income (MAGI) has to be between 100% and 400% of the FPL. This is shown in the table below for different household sizes. The actual amount of the tax credit will vary based income and household size, but can only be claimed if you purchase health insurance through a healthcare marketplace or exchange.
|# Persons in Household||2015 - 100% FPL income threshold||2015 - 400% FPL income threshold||2016 - 100% FPL income threshold||2016 - 400% FPL income threshold|
|9+||add $4,160 for each additional person.||add $16,640 for each additional person.||add $4,160 for each additional person||add $16,640 for each additional person|
Note: FPLs are higher in Alaska and Hawaii than in the mainland 48 states. The above limits increase with inflation every year. Eligibility for the subsidy/tax credit is based on income limits for the prior year (e.g your 2017 subsidy is based on your 2016 income levels).