One percent of your income may not sound like a lot, especially if it’s only a potential fee you might have to pay at some vague point in the future.
When that time arrives, however, 1% of your income might suddenly feel like a huge bite out of your wallet. And that time will soon be here for people who neglect to get insurance coverage as required under the Affordable Care Act.
March 31 is the deadline for people to enroll in a health insurance plan for 2014 or pay a penalty fee. There are so many complex details in the ACA that it’s easy to lose track of what ordinary people are supposed to do. Plus, nobody knocks on your door or gives you a call to remind you of your civic duty. So it may come as an unhappy surprise to certain Americans that the penalty for foregoing health insurance in 2014 could be as high as $3,600 per person — and more for a family.
Health experts expect a surge of enrollment in Obamacare, as the ACA is known, as the March 31 deadline approaches. But with more than 40 million Americans lacking healthcare coverage, there are bound to be millions who will still end up without insurance, in violation of the ACA. Since the health-reform law is already unpopular, the way the government handles those violators is a delicate matter.
Read the fine print
If you’re somewhat familiar with the ACA, you might recall that penalties for 2014 start at a modest $95 per person. But there’s a lot of fine print that hasn’t gotten much attention. The $95 penalty is for single people with no kids who earn less than $19,500 per year. Above that, the penalty is 1% of your gross income minus the personal exemption and standard deduction you’d be able to claim on your federal income-tax filing. Overall, it can add up to a lot more than $95.
The nonprofit Tax Policy Center has developed an online calculator that tells you the penalty you’re likely to owe once you input your income and a few other basic details (no personal info required). A single person earning $50,000 this year will have to pay a $399 penalty for not having insurance. Since the penalties are meant to increase over time, the fee would jump to $794 in 2015 and $986 in 2016.
A single person earning $100,000 would have to pay an $899 fee this year, rising to $1,794 and $2,236 during the next two years. The maximum fee anybody can pay for 2014 is $3,600, which for a single person would kick in around an income level of $380,000. (It should be said, it's quite unlikely anyone at this income level would be without health insurance.) But families can pay more, with the penalty for uninsured kids topping out at half the adult rate.
The point of such penalties isn’t to punish people or raise revenue for the government but to provide an increasingly strong incentive to sign up for insurance, from any source. ACA enrollees can qualify for federal subsidies that will reduce the cost of coverage up to income levels of about $47,000 for an individual and $95,000 for a family of four. At some point, the cost of coverage could be cheaper than the penalty for some people, which in theory ought to make enrolling a no-brainer.
There’s one wild card, though: It’s still not clear how the government will collect penalty fees, or how aggressively it will enforce them. About 80% of people who file a tax return get a refund, and the Internal Revenue Service will be allowed to deduct the amount of penalties owed from those refunds. But that could create an undesirable cat-and-mouse game in which taxpayers deliberately underpay each year, making it harder for the government to collect not just ACA penalty fees but basic taxes. So the IRS may be reluctant to hack into refunds. And there’s no other clear-cut way for the government to garnish wages or take other aggressive steps to collect fees.
There are also a variety of exemptions from the coverage requirement due to cultural or religious objections, financial hardship and several other factors. But given the law's already shaky standing, the government may be unwilling to come down hard on conscientious health insurance objectors ether. It’s prudent to have health insurance, but there may only be limited repercussions if you don’t.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.