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 brief summary of the standard penalties for not having health insurance or not meeting the allowed exemptions (see table at the end of this article):
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 rises 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. 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, 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.
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 and is expected to rise to $12,500 in 2015 and then $13,000 in 2016.
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: 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 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.
- 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.