With Obamacare open enrollment drawing to a close next month, uninsured Americans who decide not to select a plan will need to pay a penalty for not complying with the law’s individual mandate.
That penalty has been the subject of much debate and some confusion. At its simplest, the law mandates that individuals who go without insurance in 2014 must pay the government either $95 or 1 percent of their household income, whichever is higher.
The implementation of the law, however, is much more complicated. Here are four things you don’t know about the penalty:
1. The formula is not as simple as it seems. The penalty for not having insurance begins with a flat fee of $95 per person for the year (plus $47.50 per child under 18). The maximum penalty per family is $285.
The other potentially more painful penalty is 1 percent of annual household income, up to a maximum equal to the national average annual premium for a “bronze” health insurance plan. The CBO estimates this to be approximately $5,000 for an individual in 2016 and $12,000 for a family.
The fee increases every year. In 2015 it will be 2 percent of income or a flat-rate penalty of $325 per adult and $162.50 per child. In 2016, it’s 2.5 percent of income or $695 per person and $347.50. After that, the penalty will be adjusted for inflation.
A note on income: The penalty is actually based on 1 percent of your adjusted gross income (AGI) that exceeds your personal exemption and standard deduction. This is often referred to as your “tax return filing threshold.”
The “no insurance” fee is levied on a pro rata basis for every month you don’t have coverage, exceeding a three-month period. In other words, if you don’t have insurance for a portion of the year, 1/12 of the annual penalty applies to each month you’re uninsured. If you lack coverage for less than three consecutive months, you don’t owe a penalty.
2. Relatively few Americans will owe a penalty this year. Six million Americans are expected to buy health insurance under the ACA mandate in 2014. But this is a small percentage of the uninsured population – the Census Bureau estimates that there were approximately 48 million nonelderly Americans without health insurance in 2012.
That doesn’t mean that more than 40 million people will pay the penalty. The actual number has not been estimated for 2014, but it’s likely to be far less. Since the cost of the Obamacare penalty is relatively low this year, more Americans may choose to forego insurance and simply pay the fee.
That said, there are a number of exemptions. Members of federally recognized Indian tribes don’t have to pay, nor do people in jail. Americans who don’t file an income tax return are exempt, as well as individuals and households for which insurance premiums would exceed 8 percent of their annual income. Certain hardship exemptions (such as losing a close family member, for example, or being homeless) will also be granted.
While there are no estimates as to how many people will pay the penalty in 2014 and 2015, the Congressional Budget Office (CBO) and the staff of the Joint Commission on Taxation say that about 30 million nonelderly residents will still be uninsured by 2016. Due to various exemptions, they report, just 5.9 million will pay the penalty—less than 2 percent of the U.S. population.
3. Wealthier families will pay the most. Households with incomes over 400 percent of the federal poverty level (estimated at $98,400 for a family of four in 2016) are estimated to account for nearly one-third of all Americans paying penalties –and two-thirds of the total dollar amount of penalties. The income group projected to shoulder the greatest share of penalty payments will be those households that earn at least five times the federal poverty level—a household income of $123,000 for a family of four.
4. Opting for the penalty will take a chunk out of your tax refund. The actual payment will come due for taxpayers next spring when they file their 2014 taxes. Every taxpayer will have to give the IRS proof of insurance or owe the tax unless they’re exempt.
The IRS can’t impose liens or levies to collect the penalty (although they can do so for people who collected too large a subsidy when buying insurance), but the agency will withhold the fee from any refund that is due, in 2014 or in future years. Since the IRS reports that 75 percent of Americans got a tax refund last year, that’s quite a bit of leverage.
Napala Pratini writes for NerdWallet Health, a website that empowers consumers to find high quality, affordable health care and insurance.
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