The Obamacare Penalty: Yes, It Can Be Avoided

The Obama administration this week said it is delaying the enforcement of the Affordable Care Act’s mandate, extending until March 31 how long Americans can go without insurance before facing a penalty.

But how strict is the Affordable Care Act’s individual mandate to begin with? It’s a question that’s floated around since the mandate was first mentioned: Can the government – and more specifically, the IRS – really enforce the mandate penalty? The answer is yes, but only up to a point. Whichever political side of the ACA you are on, it is a technical question that’s piqued the curiosity of consumers and pundits alike.

Consumers don’t have to report on whether they have coverage or are exempt from the mandate until they file their 2014 income tax return, which are due April 15, 2015. (Insurers will be required to provide everyone they cover with information that will help them demonstrate they had coverage.)

As it stands now, the individuals who don’t obtain health coverage in a given year (and are not exempt from the mandate) are subject to a fine of $95 for an individual or 1% of family income, whichever is greater. In 2015, the penalty increases to $325 per adult, or 2% of family income, whichever is greater.

How exactly will the penalty be assessed? If you don’t have sufficient health coverage by the deadline, the “IRS will hold back the amount of the fee from any future tax refunds,” according to HealthCare.gov, the government’s marketplace website.

But what if you don’t get a tax refund? Conservative radio talk show host Rush Limbaugh picked up on this subject on his show this week, telling listeners: “The only way that they can collect the penalty or the fine is by taking money from your refund. If you are not owed a refund, they cannot get money from you.”

We asked Mark Luscombe, principal analyst at CCH Tax & Accounting North America, about that. Turns out Limbaugh is essentially right. If you don't get a refund next year, the “IRS could carry over the sum due and apply it against any refunds in future years. On a joint return, the penalty of one joint filer could be applied against the refund due to the other joint filer,” Luscombe says.

“If you don’t pay it, all they can do is wait until they owe you some money and take that. Or probably just send you a letter every now and then reminding you that you owe money to the IRS,” says Timothy Jost, a professor at the Washington and Lee University School of Law and coauthor of the casebook “Health Law.”

And by the way, once the IRS assesses the penalty, they’ve got 10 years to collect, says Bryan Camp, law professor at Texas Tech University.

The law also prohibits the IRS from using liens or levies to collect any “payment you owe related to the law, if you, your spouse or a dependent included on your tax return does not have minimum essential coverage,” according to the IRS. That means the IRS cannot go into someone’s “checking accounts anyway and just take the money,” as one of Limbaugh’s callers suggested the Obama administration might just do.

One other possible way for the government to recover the penalty owed is by suing you, says Camp. “It’s a difficult process because it’s the Department of Justice that has to file the suit, and they’ll only do that if the IRS asks and begs them to do it… The IRS can’t sue anyone for failure to pay taxes,” says Camp. If the government sues you for other tax debts, they can add this penalty to the amount. But “if it’s such a small amount, it’s unlikely the government would sue for the same very practical reasons you wouldn’t sue someone for $25,” he says.

Perhaps most important, there are no criminal penalties for not paying up. “You can’t go to jail – that’s not an option,” Jost says.

As Limbaugh explained on his show, “If you structure your taxes so that you do not get a refund, you do not have to buy insurance and you do not have to pay a fine 'cause they can't collect it from you if you don't have a refund due.  And that is just another nail in the coffin of Obamacare imploding on itself.” (That might be tough, however – most Americans get tax refunds. The IRS said about 75% of taxpayers got a refund last year.)
 
As Jost says, unless the law boosts the IRS’s power to collect these fines, it is, indeed, possible for one to go on without obtaining health coverage and never be financially penalized.