The Obamacare law imposes a penalty on individuals who fail to have so-called minimum essential health insurance coverage for any month. This requirement is commonly called the individual mandate, and the penalty is the cost of noncompliance with the mandate. The bad news is the penalty can be considerably more expensive in 2015. If you are like me and had your health insurance cancelled (again), you must obtain coverage quickly to avoid getting socked with the penalty in 2015. Here’s what you need to know.
Penalty basics
Unless you are exempt, you will owe the penalty if you do not have minimum essential coverage for yourself and your dependents. Minimum essential coverage includes certain government-sponsored programs (such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and TRICARE), eligible employer-sponsored plans, plans obtained in the individual market, certain grandfathered group plans, and certain other coverage specified by the federal government. However, if you fit into one of the following categories next year, you will be exempt from the penalty in 2015.
- * Your 2015 household income is below the federal income tax return filing threshold (generally $10,300 for singles, $20,600 for married joint-filing couples, and $13,250 for heads of households).
- You are considered to lack access to affordable minimum essential coverage. For example, coverage under an employer-sponsored plan is considered unaffordable if your required monthly contribution exceeds 8% of household income.
- You suffered a hardship in obtaining coverage. To qualify for this exception, you should obtain a hardship exception certificate issued by an Insurance Exchange.
- You have only a short coverage gap.
- You qualify for an exception on religious grounds or have coverage through a health-care sharing ministry.
- You are not a U.S. citizen or national or you are in the U.S. illegally.
- You are incarcerated.
- You are a member of an Indian tribe.
For more details on available exemptions, see IRS Publication 5172 (Facts about Health Coverage Exemptions) at www.irs.gov.
Penalty specifics
If you owe the penalty, the tentative amount equals the greater of the following two prongs:
1. The applicable percentage of your household income above the federal income tax return filing threshold or
2. The applicable dollar amount times the number of uninsured individuals in your household, limited to 300% of the applicable dollar amount.
The final penalty amount cannot exceed the national average cost of “bronze coverage” (a new term of art) for your household. For 2014, the national average cost for bronze coverage was $204 per person per month or $1,020 per month for a family of five or more. The 2015 national average for bronze coverage won’t be revealed until late next year.
Meanwhile, the important thing to know is that a higher income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage. Confusing? You bet. But please hang in there, because things will soon become clearer.
Percentage of income prong: The applicable percentage of income is 2% for 2015 (it was only 1% for 2014). In 2016 and beyond, it will increase to 2.5%.
Dollar amount prong: The applicable dollar amount for each uninsured household member is $325 for 2015. For 2016, it will rise to $695. For 2017 and beyond, it will be $695 adjusted for inflation. (For 2014, the applicable dollar amount was only $95.) For an under-age-18 household member, the applicable dollar amounts are cut by 50%. As stated earlier, this prong of the penalty cannot exceed 300% of the applicable dollar amount (determined without regard to the 50% cutback for under-age-18 individuals) for the year in question.
Final penalty amount: As stated earlier, the tentative penalty amount is the greater of the percentage of income prong or the dollar amount prong. But the final penalty amount is limited to the national average cost of bronze coverage. If you have minimum essential coverage for only part of the year, the penalty is calculated on a monthly basis using pro-rated annual figures.
Here are some examples
As you can see, the penalty rules are pretty complicated. The following examples illustrate how to calculate the penalty for 2015 in the two simplest situations.
Example 1: One-person household with no coverage for entire year
Say you are unmarried and live alone. During all of 2015, you have no minimum essential coverage. Your income for the year is $100,000. Your tax return filing threshold for the year is $10,300. Assume the monthly national average premium for bronze coverage for one person is $250 for 2015, which amounts to $3,000 for the entire year (12 x $250).
In your case, the percentage of income prong is $1,794 for 2015 [($100,000-$10,300) x 2%].
The dollar amount prong is $325.
The tentative penalty amount is $1,794 (greater of $1,794 or $325).
As stated, the annual national average cost of bronze coverage is assumed to be $3,000 for one person who is uncovered for all of 2015.
Therefore, your final penalty amount for failing to comply with the individual mandate is $1,794 (lesser of $1,794 or $3,000).
If your circumstances are the same in 2016, the final penalty amount for that year will probably be about $2,200. Ouch!
Example 2: Family of five with no coverage for entire year
Say you are a married joint filer with three kids younger than 19. During all of 2015, no member of your family has minimum essential coverage. Your household income for the year is $100,000. Your tax return filing threshold for the year is $20,600. Assume the 2015 national average premium for bronze coverage for a family of five is $1,100 per month, or $13,200 if you have no coverage for the entire year.
In your case, the percentage of income penalty prong is $1,588 [($100,000-$20,600) x 2%].
The dollar amount penalty prong is $975, which is the lesser of: (1) [($325 x 2 for the adults) + ($325/2 x 3 for the kids) = $1,137.50] or (2) ($325 x 300% = $975).
The tentative penalty amount is $1,588 (greater of $1,588 or $975).
The final penalty amount is $1,588 (lesser of $1,588 or the $13,200 cost of bronze coverage).
If your circumstances are the same in 2016, the penalty amount for that year will probably be about $2,000.
Penalty enforcement is lacking
You are supposed to pay any penalty you owe with your Form 1040 for the year. So the penalty for 2015 would be reported on your 2015 return which you will file sometime in 2016. However, the only enforcement mechanism is that the government can subtract any unpaid penalty from your federal income tax refunds. So if you’re not owed a refund for 2015 or a later year, there will never be any consequences for not paying the penalty. (You are not subject to criminal prosecution, and the IRS cannot put a lien or levy on your income or assets.)
The last word
After all the well-publicized problems in the Obamacare rollout, some observers (including me) speculated that the individual mandate penalty might be postponed for at least 2014 and maybe for 2015 as well. That has not happened yet, and it now appears unlikely to happen at all. However, stay tuned for further developments. I will keep you posted. LINK
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