What Is a Shared Responsibility Payment?

Definition

A shared responsibility payment is a tax penalty created by the Affordable Care Act (and in some cases by state laws). There are two types of shared responsibility payments: the employer shared responsibility payment and the individual shared responsibility payment.

Also Known As: health insurance penalty, health insurance penalty tax, individual mandate penalty, employer mandate penalty, shared responsibility penalty.

This article will explain how the individual and employer shared responsibility payments work, when they're applicable, and what consumers need to know about them.

Employer shared responsibility

The employer shared responsibility payment is a tax penalty imposed on businesses with 50 or more full-time equivalent employees if the businesses don't offer affordable health insurance benefits, or if the benefits offered do not provide minimum value.

If any of the full-time employees get subsidies (tax credits) to help them buy health insurance from a health insurance exchange, their employer is subject to a tax penalty, assessed by the IRS.

Although the individual mandate penalty no longer applies at the federal level, nothing has changed about the employer mandate and its associated penalties. Large employers that don't offer affordable, minimum-value coverage to their employees are still subject to penalties.

Individual shared responsibility

The individual shared responsibility payment, created by the ACA’s individual mandate, was a tax penalty imposed on individual US citizens and legal residents who didn't have health insurance between January 1, 2014 and December 31, 2018.

The payment was assessed by the IRS when people filed their tax returns for tax years 2014 through 2018 (state-based shared responsibility payments are assessed by the state treasury department when residents file their state tax returns).

The ACA's individual shared responsibility penalty was eliminated after the end of 2018, under the terms of the Tax Cuts and Jobs Act that was enacted in late 2017. But people who were uninsured in 2018 still owed the penalty when they filed their tax returns in 2019.

A few states implemented their own individual mandates and associated penalties for 2019 and beyond. But there is no longer a penalty for being uninsured unless you live in New Jersey, Massachusetts, California, Rhode Island, or the District of Columbia.

These states require residents to maintain health coverage, unless they're eligible for an exemption. But they've all taken various steps to make coverage more affordable and/or accessible for various populations, making it easier for people to comply with the insurance requirement:

• The ConnectorCare program in Massachusetts provides additional state-funded subsidies (in addition to the ACA's subsidies) for people with income up to 300% of the poverty level.
• DC provides Medicaid to adults with income up to 215% of the poverty level, which is the highest income threshold in the nation.
• New Jersey and Rhode Island both created reinsurance programs, and New Jersey also created a state-funded premium subsidy.
• California also created new state-funded premium subsidies. But the state-funded subsidy is not necessary between 2021 and 2025, because the American Rescue Plan has boosted federal subsidies above the level that the state-funded subsidies were covering. So for the time being, California is just paying $1/month for each person enrolled in a plan through the Covered California exchange. This ensures that some residents are able to get $0-premium plans, as federal subsidies can be large enough to cover all but $1/month of premiums for some California enrollees.

These states also have fairly low uninsured rates. As of 2019, Massachusetts, DC, and Rhode Island were the three top-rated states in terms of the percentage of their population with health coverage. And although California and New Jersey were more middle-of-the-road, they both had lower uninsured rates than the national average.

Massachusetts has had an individual mandate and penalty since 2006, but deferred the penalty in favor of the federal penalty from 2014 to 2018. New Jersey, DC, Rhode Island, and California implemented individual mandates and penalties due to the elimination of the federal penalty after the end of 2018. Vermont also implemented a mandate in 2020, but has not created a penalty for non-compliance.

Exemptions

There are a variety of exemptions from the individual shared responsibility penalty. The IRS reported in 2017 that for the 2015 tax year, 12.7 million uninsured tax filers had claimed an exemption from the penalty, while 6.5 million had been subject to the penalty.

For the 2015 tax year, the average penalty paid by those 6.5 million filers was $470. But the penalty increased in 2016, and the IRS published preliminary data in 2017 showing an average penalty amount of $667 for people who were uninsured in 2016.

The penalty calculations remained unchanged for 2017 and 2018, although the maximum penalty amounts (which are based on the average cost of a bronze plan) grew each year as health insurance premiums increased.

There is no longer a federal individual mandate penalty for people who are uninsured. But if you're in DC, Massachusetts, New Jersey, Rhode Island, or California, you'll want to familiarize yourself with your state's individual mandate and how to obtain an exemption if you think you might be eligible for one. In general, the state-based individual mandates are using exemption rules that are similar to the ones the federal government used from 2014 to 2018, although there are some local differences.

The general idea is that exemptions are available to people who cannot obtain or cannot afford health coverage, for various reasons. But as noted above, the states that still have individual mandate penalties have taken steps to make coverage more affordable and accessible. And their residents are more likely to have health coverage than residents in much of the rest of the country, thus reducing the need for exemptions.

Background and Legal Challenges

The threat of the shared responsibility payment is meant to motivate employers to offer health insurance to their employees and motivate uninsured individuals to get health insurance.

The constitutionality of the individual mandate was challenged by Obamacare opponents arguing that the government doesn’t have the right to penalize its citizens for not buying something. But the mandate was upheld by the Supreme Court on June 28, 2012. The court found that the shared responsibility payment was actually a type of tax, and determined the individual mandate was constitutional because the government has the right to tax its citizens.

A few years later, in late 2017, the Tax Cuts and Jobs Act was enacted, calling for the eventual elimination of the individual mandate penalty. That triggered another lawsuit—Texas v. Azar/U.S., which was subsequently called California v. Texas—in which 20 states argued that without the individual mandate penalty, the entire ACA ought to be overturned (Maine and Wisconsin pulled out of the lawsuit after Democratic governors took office in early 2019, leaving 18 states that were challenging the ACA).

In December 2018, a federal judge in Texas sided with the plaintiff states and ruled that the entire ACA was unconstitutional. In December 2019, an appeals court panel agreed with the lower court that the individual mandate is unconstitutional, but sent the case back to the lower court to determine exactly what portions of the ACA should be overturned as a result.

The Supreme Court stepped in and agreed to hear the case. Oral arguments took place in November 2020, and the Court issued its ruling—once again upholding the ACA—in June 2021.

(That was the third time the ACA had been upheld by the Supreme Court, after the previous ruling about the individual mandate in 2012, and another ruling in 2015 over the legality of premium subsidies in states that use the federally-run health insurance exchange.)

So although the federal individual mandate penalty no longer applies, the rest of the ACA remains intact, including the shared responsibility provision that goes along with the employer mandate.

And of course, state-based individual mandate laws—and state-based employer mandate laws, such as Hawaii's—also remain in force.

Small Employers

Although there is no employer mandate for small businesses, offering health benefits is a good way for small employers to attract and retain a talented workforce.

If a small employer wishes to offer coverage, they can purchase group health insurance, create a self-insured plan (less common among small businesses, but possible), or they can opt to use a health reimbursement arrangement in which they reimburse workers for the cost of self-purchased health insurance.

Summary

A shared responsibility payment is a penalty assessed on individuals who don't have health insurance, or large employers who don't offer affordabled, comprehensive coverage to their full-time employees.

The Affordable Care Act created both of these penalities, but the penalty for individuals was reset to $0 as of 2019. Some states do still have assess a shared responsibility penalty on residents who don't have health coverage, but most do not.

The employer shared responsibility provision is still in place, however, which means the IRS does assess penalties on large employers that don't offer adequate health coverage, if any of their full-time employees obtain subsidized health coverage through the exchange/marketplace.

A Word From Verywell

In most of the U.S., people are no longer subject to a shared responsibility payment/penalty if they don't have health insurance. But going without health coverage isn't a great idea, even if you're not directly penalized for it. You can only enroll in health coverage during open enrollment or a special enrollment period linked to a qualifying life event. So if you go without coverage and then find yourself in need of medical care, you might have to wait several months (up to a year) before you can enroll in a health plan and have the coverage you need. This is why it's better to just maintain coverage continuously, so that it's there if and when you need it.