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What is the Penalty for Not Having Health Insurance?

The Affordable Care Act, the law more commonly known as Obamacare, was created to help provide everyone with access to health insurance. Obamacare offers a carrot and stick policy of rewards and penalties to encourage consumers to sign up for coverage.

The carrots Obamacare uses to attract enrollees include better coverage under reformed health insurance plans, access to preventive care with no out-of-pocket costs, subsidies to make insurance more affordable for those who qualify, and a guarantee that no one can be turned down based on their medical history or pre-existing medical conditions.

The stick employed by Obamacare to encourage you to get coverage is the Obamacare tax penalty.

You might have heard about the Obamacare tax penalty or even had to wrestle with it when doing your taxes.  But do you really know what it is and how it’s calculated? This article will help you understand the tax penalty better.

What is the Obamacare tax penalty?

Briefly, the Obamacare law requires most Americans to have health insurance that meets specific coverage criteria. If you have a gap of more than two consecutive months in a single year with no qualifying health insurance coverage, you may be subject to the Obamacare tax penalty.

The dollar value of your tax penalty for not having health insurance may vary depending on your personal circumstances. The Obamacare tax penalty is calculated either as a percentage of your taxable household income, or as a set dollar amount per person. If you’re subject to the tax penalty (referred to as a “shared responsibility payment” on your federal tax forms), you will be required to pay the larger of the two amounts.

Examples of the Obamacare tax penalty

The rules governing the Obamacare tax penalty for 2016 are as follows. If you’re subject to the penalty, you will be required to pay either:

  • 5% of your taxable household income (up to a maximum equivalent to an annual premium for the national average price of a bronze-level Obamacare plan)
  • Or $675 per adult and $347.50 per child under 18 (maximum $2,085)

So, for example, a 30-year-old individual who reports a taxable household income of $25,000 may be required to pay the greater of the following:

  • 5% of household income = $625
  • Or $675 for 1 adult

Since it’s higher, this person’s penalty would be the second one.

Another example: a family of 3 (with one child under 18) who reports a taxable household income of $85,000 may be required to pay the greater of the following:

  • 5% of taxable household income = $2,125
  • Or $1697.50 for 2 adults and 1 child

In this example, the family of three would have to pay the first, since it’s higher.

Now, to keep things simple, we’ve used the term “taxable income” in the examples above, but technically these calculations are based on the figure referred to as your “modified adjusted gross income” on your federal tax return. To better understand how these rules may apply to you, speak with a tax professional.

What triggers the Obamacare tax penalty and how can I avoid it?

You may be subject to the Obamacare tax penalty if you go without what the law calls “minimum essential coverage” for more than two consecutive months in a single calendar year. “Minimum essential coverage” means a health insurance plan that meets the requirements of the Obamacare law.

The following types of health insurance will typically allow you to avoid the Obamacare tax penalty (assuming there are no gaps in your coverage):

  • Any health plan offered for sale through a government-run health insurance marketplace
  • Any health plan that meet Obamacare requirements that is sold through a private marketplace or insurance company or licensed agent or broker, outside of the government-run Obamacare marketplace
  • Any health insurance plan that you have had since before the law was signed on March 23, 2010
  • Any major medical health insurance plan provided by your employer, which includes retiree plans and COBRA plans
  • Medicare coverage
  • Medicaid coverage
  • Government-sponsored CHIP coverage
  • Other forms of state or federal government-sponsored coverage, such as the health insurance coverage provided to members of the American military

You may also be exempt from the Obamacare tax penalty if any of the following are true in your case (though you may need to apply for an exemption in some cases):

  • You did not earn enough to be required to file a federal tax return
  • There are serious financial hardships that prevent you from affording an Obamacare health plan (such as filing for bankruptcy, outstanding medical expenses that resulted in substantial debt, or experiencing natural or human-caused disaster that created substantial damage to your property)
  • You have been incarcerated, homeless, evicted, or facing eviction
  • You have received a shut-off notice form a utility company
  • You experienced domestic violence that prevented you from purchasing an Obamacare health insurance plan
  • You experienced the death of a close family member that prevented you from purchasing an Obamacare health insurance plan
  • You have a religious objection to purchasing a plan
  • You are an American Indian and/or Alaska Native

It’s important to know that there are some forms of insurance coverage that do not meet the requirements of the Obamacare law and which may leave you open to the tax penalty. These include short-term health insurance plans, dental plans, vision plans, life insurance plans, accident insurance plans, worker’s compensation, critical illness plans (coverage for a specific disease or condition), and more.

Why is there a penalty for not having health insurance?

The Affordable Care Act wants everyone to have quality health insurance coverage, and the penalty encourages you to purchase a plan that meets the requirements of the law and offers you and your family robust coverage.

Since Obamacare allowed people with pre-existing medical conditions to sign up for health insurance, the insurance companies need to have a mix of healthy and unhealthy people, and younger and older people, in order to keep the cost of coverage in check for everyone.

If people only signed up for health insurance when they got sick, the cost of health insurance premiums would skyrocket. By creating a penalty and urging people to purchase an Obamacare plan, the costs of health insurance can be better balanced. Enrollees who are healthy are effectively subsidizing those who are sick. And when today’s healthy people are sick in the future, the healthy people at that time will help pick up the tab for their health insurance coverage.

How is the Obamacare tax penalty collected?

The tax penalty is collected when you complete your federal tax return each year. The tax penalty is referred to as an Affordable Care Act “shared responsibility payment” on your federal tax forms. If you don’t earn enough money to be required to file a federal tax return, you are not required to pay a tax penalty for going without Obamacare-compliant coverage.

If you were enrolled in an Obamacare plan you should receive a 1095 form early on in the tax filing season. When you receive this 1095 form, be sure to keep it with your tax records, but the form should not be filed with your tax return.

If you did earn enough to be required to file a federal tax return but want to claim an exemption from the requirement to have coverage under Obamacare, you may need to file a copy of IRS Form 8965 (Health Coverage Exemptions) with your federal tax return. You will still need minimum essential coverage for the months that you are not exempt, or you will have to make the shared responsibility payment.

A couple more things to know about Obamacare tax penalty:

If you are subject to the tax penalty but were insured with an Obamacare health insurance plan for a part of the year, your Obamacare tax penalty can be prorated based on how much of the year you were without coverage. For example, if you only had Obamacare health insurance from January through June (50% of the time), then you would only pay 50% of the Obamacare tax penalty.

While no one likes paying a penalty, some people decide to pay the Obamacare penalty and sign up for short-term or accident and critical illness coverage rather than purchase Obamacare-compliant coverage. In some cases, taking the penalty and signing up for a short-term plan could be less costly, but purchasing a plan that is not approved by the Affordable Care Act may not provide you with the coverage you really need if you become ill or need to be hospitalized.