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9 Things to Know About the Health Insurance Penalty

Understanding the Shared Responsibility Tax Penalty for Being Uninsured

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Image of Uncle Sam shaking tax penalty dollars out of a man held upside down by Uncle Sam's hand. Image © Eldon Doty/Getty Images

The Affordable Care Act takes a carrot and stick approach to motivating people to buy health insurance. The carrot is an offer of health insurance subsidies to help offset the cost of buying and using health insurance. The stick is the threat of the shared responsibility payment, a tax penalty for not having health insurance coverage.

Here are nine things you should know about this health insurance penalty.

1. The Penalty Amount Is Based on Your Income

The amount of the shared responsibility payment is a percentage of your household income and increases each year. There’s also a minimum penalty for each year, ensuring that even low income folks will feel the pinch of the shared responsibility payment if they don’t have health insurance.

This table shows the amounts of the percentage of income penalty and the minimum penalty:

  2014 2015 2016 After 2016
Percentage of income penalty 1% of income above filing threshold 2% of income above filing threshold 2.5% of income above filing threshold 2.5% of income above filing threshold
Minimum individual penalty $95 $325 $695 $695 + inflation adjustment

 

2. Part of Your Income Is Exempt From the Penalty

You don’t pay the penalty on your entire income, but only on part of it. Before calculating your payment as a percentage of your income, you get to subtract the amount of the filing threshold from your income.

The filing threshold is the amount of income that requires you to file federal income taxes for any given year. If your income is above the filing threshold, you have to file taxes that year. If your income is below the filing threshold, you don’t have to file taxes. The threshold changes each year and can be found in publication 501 at the IRS forms and publications page. The filing threshold for 2012 was $9750 for single filers and $19,500 for married couples filing jointly.

3. The Health Insurance Penalty Is a Monthly Penalty

The health insurance penalty is levied month by month even though it’s only collected yearly. You’re only penalized for the months you don’t have health insurance.

If you have a gap in coverage of less than three consecutive months, you won’t have to pay any penalty. If you’re uninsured for three months or more, your yearly penalty will be prorated so you’re only penalized on the months you were uninsured. For example, if you’re uninsured for seven months, you’ll only pay 7/12 of the yearly penalty. If you have health insurance for even one day in a month, the entire month is counted as though you had health insurance.

Don't let this lull you into thinking you can wait to get health insurance until later in the year, though. Health insurance exchanges only have open enrollment for a brief time each year. If you don't sign up during that time, you may have to wait until the next year. You can read more about this in "Why Not Wait Until I'm Sick to Get Health Insurance?"

4. You Could Be Responsible for Other People's Penalties, Too

You're responsible for paying the penalty for anyone you claim as a dependent on your federal income tax return if those dependents don't have health insurance coverage.

5. Families Have Special Rules

Figuring the health insurance penalty for a family is more complicated than figuring it for an individual, and special rules apply. For example, the minimum penalty for children is only half the amount of the adult minimum penalty. The minimum penalty for families maxes out at three times the individual minimum penalty.

Learn how to figure your family’s health insurance penalty, including examples of the math calculations and partial-year coverage, in “How Much Is the Health Insurance Penalty for Families?

6. Paying the Penalty Will Likely Cost Less Than Buying Health Insurance

The penalty maxes out at the national average cost for bronze-tier health plans sold on health insurance exchanges that year. In states where health insurance rates are higher than average, your maximum penalty will almost certainly be less than the cost of health insurance on your state’s health insurance exchange.

If you’re a high-income person living in a state where health insurance rates are considerably below the national average, there is a small chance that your penalty will be more than the cost of buying a bronze health plan. However, most high-income people living in areas where health insurance is cheaper than the national average won’t face the penalty; they’ll have health insurance.

7. It's Possible to Get an Exemption

The Affordable Care Act exempts many people from the individual mandate to buy health insurance. For example, if your share of the cost for your health insurance premiums is more than eight percent of your income, it's considered unaffordable; you won't have to pay the penalty.

At the end of this article, you'll find links to more information about getting a health insurance exemption.

8. Collecting the Health Insurance Penalty Might Be Hard for the IRS

The shared responsibility payment is paid to the IRS when you file your federal income taxes. However, the IRS has limited tools to collect the penalty money. It’s not allowed to send you to jail or put a lien on your house, the standard techniques it uses for collecting unpaid income taxes. This could mean the health insurance penalty will be hard to enforce.

Although the IRS’s collection tools are limited, it’s not totally impotent to collect from folks who’d rather not pay. For example, it can withhold the payment amount from any tax refund you’re due.

If you owe both taxes and a penalty, it’s not clear how the IRS will credit a tax payment that doesn’t include the penalty payment. For example, let’s say you owe $1000 in taxes as well as a $400 shared responsibility payment. You don’t want to pay the shared responsibility payment, so you write the IRS a check for $1000 for your taxes and you send it in with your return, leaving the $400 health insurance penalty unpaid.

We don’t yet know how the IRS will credit that $1000 check. Will it credit all of the money paid toward taxes owed, leaving the less-enforceable health insurance penalty unpaid? Or, will it credit $400 toward the shared responsibility penalty first, and the remaining $600 toward taxes owed? That would result in you having $400 of unpaid federal income taxes. The IRS could then use its regular collection techniques to collect the remaining $400 of unpaid federal income taxes. Whether the IRS will do this is, as of yet, unknown.

9. Where to Get More Information

Learn how to figure your own health insurance penalty, including examples of how to do the math calculations, in “How Much Is the Health Insurance Penalty for an Individual?

Read for yourself the IRS’s final regulations about the individual shared responsibility payment as published in the Federal Register by the Department of the Treasury on August 30, 2013.

Read the IRS’s FAQs, “Questions and Answers on the Individual Shared Responsibility Provision.”

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