Starting this year, a provision in the Affordable Care Act generally imposes a penalty on individuals who fail to carry so-called minimum essential health insurance coverage. The requirement to carry such coverage is often called the individual mandate, and the penalty is the cost for failure to comply with the mandate. This article explains who owes the penalty, how the penalty is calculated (it's complicated!) and how an individual will be expected to pay it.
Observation: The government's name for the penalty is the shared responsibility penalty.
Non-exempt U.S. citizens and legal residents will owe the penalty if they fail to have minimum essential coverage for themselves and their dependents for any particular month. Minimum essential coverage includes certain government sponsored programs (such as Medicare, Medicaid, and the Children's Health Insurance Program), eligible employer-sponsored plans, plans obtained on the individual market, certain grandfathered group health plans, and certain other coverage specified by HHS in coordination with the IRS.
There are a number of exceptions to the penalty, such as the one for eligible lower-income individuals and the one for some people whose existing health insurance plans were cancelled.
In order to calculate the penalty, if it applies, you need to figure a tentative and a final penalty amount. The tentative penalty calculation involves two prongs.
The tentative penalty amount equals the greater of:
1. The applicable percentage of your household income above the applicable income threshold that requires the filing of a federal income tax return 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 for your household. Bronze coverage is the lowest and least-expensive level of minimum essential coverage. To clarify, if you have a higher-income household, you could owe more than 300% of the applicable dollar amount, but you would never owe more than the cost of bronze coverage.
Percentage of Income Penalty Prong: The applicable percentage of income is 1% for 2014, 2% for 2015, and 2.5% for 2016 and beyond.
Dollar Amount Penalty Prong: The applicable dollar amount for each uninsured household member is $95 for 2014, $325 for 2015, $695 for 2016, and $695 adjusted for inflation for 2017 and beyond. For an under-age-18 household member, the applicable dollar amounts are halved. As stated earlier, this prong of the penalty cannot exceed 300% of the applicable dollar amount.
Key Point: The 300% maximum for this prong is determined without regard to the 50% rule for under-age-18 members of your household.
Final Penalty Amount: As stated earlier, the tentative penalty amount is the greater of the percentage of income prong or the dollar amount prong. However, if the national average cost of bronze coverage for your household is less, the penalty is limited to the cost of bronze coverage. If you have minimum essential coverage in effect for only part of the year, the final penalty amount is calculated on a monthly basis using pro-rated annual figures.
Here Are Some Examples
As you can see, the penalty rules are complicated. The following examples illustrate how to calculate the penalty in simple situations.
Example 1: One-Person Household with No Coverage for the Entire Year. Let's say you're unmarried and live alone. During all of 2014, you have no minimum essential health insurance coverage. Your income for the year is $200,000. Your federal income tax return filing threshold for the year is $10,150. Let's assume that the national average premium for bronze coverage for 2014 is $5,000.
Here's how to calculate the penalty for failure to comply with the individual mandate in 2014.
|The percentage of income penalty prong is $1,899 [($200,000 minus $10,150) times 1%].|
|The dollar amount penalty prong is $95 [lesser of $95 or $285 (300% times $95)].|
|The tentative penalty amount is $1,899 (greater of $1,899 or $95).|
|The final penalty amount is $1,899 (lesser of $1,899 or the $5,000 cost of bronze coverage).|
Key Point: You may have heard that $95 is the maximum 2014 penalty amount for a one-person household. As this example shows, that is simply incorrect.
What does the future hold? Other things being equal, your penalty amount for 2016 could be about $4,700, because the percentage of income penalty prong will be about 250% higher than for 2014.
Example 2: One-Person Household with Partial-Year Coverage. Assume the same facts as in Example 1, except this time let's assume that you have minimum essential coverage for January through June of 2014, but no coverage for the second half of the year. In this situation, you must calculate the penalty month-by-month.
|The dollar amount penalty prong is $48: [(lesser of $95 or $285)/12 equals $8 per month]; $8 times 6 months without coverage equals $48].|
|The tentative penalty amount is $948 (greater of $948 or $48).|
The sum of the monthly national average premium for bronze coverage is $2,500 [($5,000/12) times 6 equals
|Your final penalty amount is $948 (lesser of $948 or $2,500).|
In terms of the future, as long as other things are equal, your penalty amount for 2016 could be about $2,400. That's because the percentage of income penalty prong will be about 250 percent higher than for 2014.
Example 3: Multi-Person Household with No Coverage for Entire Year. In 2014, you and your spouse file jointly. You have three kids (ages 11, 15 and 19) who live with you. For all of 2014, no member of the household has minimum essential coverage. Your 2014 household income is $200,000. Your federal income tax return filing threshold for the year is $20,300. Let's assume that the 2014 national average premium for bronze coverage for a family with two adults and three children is $20,000. Here's how to calculate the penalty for your household's failure to comply with the individual mandate in 2014.
|The percentage of income penalty prong is $1,797 [($200,000 minus $20,300) times 1%].|
|The dollar amount penalty prong is $285, which is the lesser of: (1) [($95 times 3) plus ($95/2 times 2) equals $380] or (2) ($95 times 300% equals $285).|
|The tentative penalty amount is $1,797 (greater of $1,797 or $285).|
|The final penalty amount is $1,797 (lesser of $1,797 or the $20,000 cost of bronze coverage).|
Key Point: Other things being equal, your penalty amount for 2016 could be about $4,500, because the percentage of income penalty prong will be about 250% higher than for 2014.
Penalty Reporting and Enforcement
You are supposed to pay any penalty you owe with your Form 1040 for the year, starting with your 2014 return, which will be filed sometime next year. However, the only enforcement mechanism is that the government can subtract any unpaid penalty from your federal income tax refunds. So if you are not owed a refund for 2014 or beyond, there would be no consequences for not paying the penalty. It may seem strange but it's true!
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