Starting when consumers file their 2014 federal income taxes in the spring of 2015, those who could afford to buy health care insurance but opted not to will owe the IRS a penalty. According to an article by USNews.com, “The nonpartisan Congressional Budget Office (CBO) has estimated that roughly four million people will choose to pay a penalty each year instead of purchasing health insurance. This group is expected to be dominated by younger Americans without children who feel they are healthy enough to forego insurance.” Further, the CBO expects these penalties to be low in 2014 and 2015, but will rise to their full, anticipated levels in 2016.
Since the program will be so fresh in these early years, the CBO predicts that a large amount of people will face penalties, compared to once all aspects of the program are familiar and have been continually enforced. It isn’t clear what will happen if people don’t pay their penalties, and the Affordable Care Act forbids the IRS from using aggressive measures to collect these penalties. However, the agency can choose to withhold refunds from those who owe in order to illicit payment.
Insurers will be required to send out notices of health coverage that will become as routine as a taxpayer’s W-2 statement each year. These notices are due to consumers and the IRS by January 30, 2015.
The three major parts of the individual mandate rules are:
1. Understanding the non-financial grounds on which people are excluded from the requirement to get insurance.
The individual mandate applies to people who make enough money to buy private health insurance, and choose not to be covered on their employer’s plan, in the individual market, or through insurance exchanges – it does not apply to those ages 65+ who are covered by Medicare. A few of the people who do not have insurance but won’t face a penalty on non-financial grounds are:
a. Those who are between jobs and without insurance for up to three months
b. Those who have a religious objection to health coverage
c. Undocumented immigrants
d. Individuals who are in jail
e. Indian tribe members
2. The income provisions affecting the need to be insured.
There are financial tests that families and individuals can utilize to see if their income is too low to require filing a federal tax return, in which case they also aren’t required to obtain health insurance. Using the 2010 rules, this limit would be less than $9,350 for individuals, and $18,700 for families. In addition, if the out-of-pocket cost for private health insurance is more than 8% of a higher-earning household’s taxable income, they may also be exempted from penalties. This amount is for any additional cost after subtracting employer healthcare insurance contributions. It is also after reflecting health insurance subsidies that are available as tax credits through state insurance exchanges created by the ACA.
A report from the Congressional Budget Office and the Joint Committee on Taxation staff in March 2011 estimated that consumers who qualify for these subsidies using state exchanges will receive an average benefit of $4,780 in 2014, $5,040 in 2015, and $5,210 in 2016. These credits are linked to the nation’s financial poverty guidelines, which are set by the government each year and adjusted annually based on changes in the CPI. The insurance exchanges will offer subsidies that extend to incomes as high as 4 times the current poverty guidelines. These guidelines for 2012 begin at $11,170 for one person and rise by $3,960 for every additional person in the household. For a family of four, the current guideline is $23,050. “Tax credits for buying health insurance would be available for four-person households with taxable earnings up to 400 percent of that level, or $92,200. (The size of a household is determined by how many people are included on the head of household’s tax return.),” reported USNews.com.
In order to avoid a penalty for not buying insurance, a household should figure out the annual premiums on one of the lowest-quality plans in a state exchange, determine how much of a tax credit their income would provide them, then calculate if the final out-of-pocket expense was more than 8 percent of their household’s modified adjusted gross income. If so, they would not pay a penalty for not buying health insurance. (Check out http://healthreform.kff.org/subsidycalculator.aspx for a simplified calculator for this equation.)
3. The penalties themselves.
Larry Levitt, a senior V.P. at the Kaiser Family Foundation says of these penalties, “Most people think of it as an annual penalty. But it is in fact a monthly thing, and you would pay a penalty for any month that you are uncovered.” The only exception is that you can be without coverage for up to three months without triggering the penalty. Penalty amounts are as follows:
a. In 2014, the annual penalty will be $95 per adult and $47.50 per child, up to a family maximum of $285 or 1 percent of family income, whichever is greater.
b. In 2015, the penalty will be $325 per adult and $162.50 per child, up to a family maximum of $975 or 2 percent of family income, whichever is greater.
c. In 2016, the penalty will be $695 per adult and $347.50 per child, up to a family maximum of $2,085 or 2.5 percent of family income, whichever is greater.