Obamacare Health Insurance Penalty Explained

The individual mandate is the most disputed provision of Obamacare. This part of the Affordable Care Act or ACA as Obamacare is more formally known requires most American citizens to carry healthcare coverage, and if not, they are required to pay a penalty. It was this mandate that caused the ACA to be argued in the Supreme Court in 2012. However, in a 5-4 decision, the ACA was upheld.

Then again, even though the provision requires most Americans to get insurance, there are some exceptions. For instance, those who are incarcerated can’t get coverage and some citizens can file for exemption based on religious conscience.

The individual came into effect in 2014.

What Is the Individual Mandate?

Under the ACA, American citizens should purchase health insurance. This mandate was put into place to encourage those who are not likely to get coverage to sign up. Why should that be the case? For one, them signing up means that premiums can be kept at a low rate – which is essentially one of the main goals of Obamacare: to provide affordable healthcare coverage.

However, even though the individual mandate is required of American citizens, there are some exemptions. Apart from those listed above, here are some common reasons for exemptions:

  • Your coverage during open enrollment was inside or outside a marketplace.
  • You went without coverage for less than three months.
  • You are not required to file taxes because the income you make is deemed below the tax filing threshold.
  • You getting healthcare coverage would mean more than 8% of household income per person.
  • You were denied Medicaid or Children’s Health Insurance Program (CHIP) because you live in a state that didn’t expand Medicaid and you earn 138% FPL or less.

Basically, if you don’t fall into any of the exemptions list, you are required to carry health insurance as of January 1, 2014. Otherwise, you are liable for a tax penalty. You don’t even have to buy a policy on your own (you can always do that too) but you can also be covered through your job or through public programs like Medicaid.

How Much Is the Penalty for Not Having Health Insurance?

The fee for not carrying health insurance differs every year. The Individual Shared Responsibility fee for the 2014 tax season was $95 per adult and $47.50 per child. Or, your penalty can also be 1% of your income. Whichever value is greater, that will be your penalty fee.

For the 2015 tax season, the Individual Shared Responsibility Fee for not being covered is $325 for adults and $162.50 for each child. Or, you can also get a 2% of your taxable income as your penalty fee. Again, whichever value is greater will be your actual penalty fee.

The penalty fee will keep increasing per year until such a time it reaches the cost of getting the cheapest health plan in the market.

How Does the Individual Shared Responsibility Work?

As mentioned earlier, the fee you pay for not getting coverage increases each year. However, the value you pay is capped at the lowest priced plan in the market – that is the Bronze plan. So the value will keep rising until it reaches the cost of a Bronze plan.

When paying a penalty, you have to make a payment for each member of your household that you have claimed as a dependent.

Also mentioned earlier, you can either pay a flat amount or a percentage of your income, whichever is greater. If what you owe is the flat amount, then you won’t have to pay more than the maximum for a family. In case you owe the percentage, you have to make one payment for the entire family and not for each member.

Lastly, your penalty cannot exceed the maximum average premium for a Bronze plan.

Other Important Notes About the Tax Penalty

In 2016, the flat amount will be $695 per person and $347.50 per child. Or, you can pay 2.5% of your household income.

By 2017, the flat amount will be determined by the rate of inflation. And this will be true for flat amounts going forward. Percentage-wise, you will have to pay 2.5% of your household income.

Will Someone Be Jailed for Not Paying the Penalty?

The short answer is no.

That said, you can qualify for an exemption if you don’t want to pay a fine. However, if you don’t qualify and you haven’t got any insurance, then you will have to make a payment for every month that you were not covered in your income tax return.

Sure, the prospect of facing jail time for something that is required by the law can be scary, but you won’t be jailed for not paying the fee. Instead, the IRS can withhold the money from your tax returns.

How to File Taxes for the Fee?

Your insurer will send you a 1095-A, 1095-B or 1095-C form. This is what you will use to file your taxes. If you had an exemption for a certain number of months, make sure you have the ECN number given by the health insurance marketplace.

Does Paying the Penalty Mean Being Covered by Insurance?

The answer again is no. Basically, what’s happening is that you don’t have insurance and you pay a penalty for not getting one. However, this doesn’t mean you can’t go see a doctor. But if this is the case – you without insurance and going to a doctor – then you have to shoulder the bills yourself.

You need to obtain minimum essential coverage and maintain it throughout the year. An important point to remember is to get you and your dependents covered during the open enrollment period. Why is that the case? The reason is that plans sold outside of the coverage period normally don’t count as minimum essential coverage, which is basically the requirement for avoiding a penalty.

To get around this, you have to qualify for a special enrollment or get another kind of insurance like Medicaid.

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