What You Need To Know About Tax Penalties For Uninsured Californians

Posted: November 30, 2021

You’re protected against high medical bills and unexpected health care costs when you have health insurance. Since the Affordable Care Act (ACA) came into law in 2010, qualified health insurance plans need to provide a certain amount of coverage.

Preventative care needs to be covered without you paying out-of-pocket. Plans also need to have an out-of-pocket maximum to keep healthcare costs under control.

The ACA also introduced the concept of a tax penalty if a person doesn’t purchase an insurance plan. Since the rules about health insurance tax penalties have changed since the law went into effect, it’s essential to understand what you might have to pay if you decide health insurance isn’t for you.

What Are Health Insurance Tax Penalties?

Under the ACA, people who didn’t purchase health insurance or otherwise have insurance coverage were responsible for paying the individual Shared Responsibility Payment. Eligible individuals paid the fee when they filed their federal tax returns.

How much a person paid was based on several factors. The fee could be based on income or the number of people in a household.

The tax penalty was 2.5% of household income above the tax filing threshold using the income method. Under the per-person method, the penalty was $695 per adult and $347.50 per child. You only had to pay a fee for household members who didn’t have insurance. For example, if you filed taxes with your spouse but they had insurance through their job and you had no coverage, you’d pay $695.

Whether you paid a per-person penalty or an income-based penalty depended on which amount was higher. You’d pay the higher of the two, up to the average national annual cost of a Bronze health insurance plan.

The tax penalty was affected by how long you went uncovered. If you went just a month or two without a health insurance policy, you didn’t have to pay the penalty. If you went for more than two months but less than the entire year without health coverage, you’d pay 1/12 of the annual penalty for each month you didn’t have a policy.

There were some hardship exemptions available to people who didn’t have health coverage and wouldn’t be able to afford the tax penalty. However, no exemptions apply at the federal level anymore, as the individual mandate was removed from the ACA starting in 2019.

As of that year, people weren’t required to purchase health insurance and couldn’t be charged a tax penalty at the federal level.

Some states, including California, introduced their own tax penalties for the uninsured.

What Are the Tax Penalties for California?

While the federal tax penalty for not having health insurance no longer applies, California introduced a tax penalty in 2020. Under California’s law, the Minimum Essential Coverage Individual Mandate, you need to have a qualified insurance plan for yourself and any dependents as of January 1, 2020, unless you qualify for an exemption.

When introducing the individual mandate, the state’s goal was to reduce the number of uninsured people in California.

California’s health insurance tax penalty is based on income and age. The penalty size is calculated by month.

Like the individual mandate under the ACA, California’s tax penalty can be based on the number of people in a household or income. If you’re eligible for the per-person calculation, you will pay $850 per uninsured adult and $425 per uninsured child.

Under the income calculation, you’d owe 2.5% of your household income above the income tax threshold. You pay whichever is higher.

For example, if you have two uninsured adults and two uninsured children at home, the per-person method’s penalty is $2,400. If your gross household income is $150,000, you’d first subtract the state income tax threshold, $49,763. You’d then multiply the difference by 2.5% (or .025) to determine the penalty. In this example, the penalty is $2,506. Since it’s more than $2,400, you’d pay based on your income, not household size.

If you’re a single person who earns less than $49,763 annually, you will pay the per-person penalty of $850.

Are There Tax Penalty Exemptions?

Depending on your situation, you might qualify for an exemption to California’s individual mandate. If you’re eligible for an exemption, you won’t have to pay the penalty if you don’t have health insurance.

You might have to fill out an application to qualify for the exemption, or you might prove your eligibility for it when you complete your tax return. Some of the factors that can exempt you from the tax penalty include:

• A short coverage gap: How long you go without health insurance affects whether you pay the penalty or not. If you’re uninsured for less than three months out of the year, you’re exempt from the penalty.
• Income below the threshold: If your income is less than the amount required to file a tax return in California, you don’t have to pay the tax penalty. The income threshold varies based on your filing status and whether you’re under or over age 65.
• The cost of health insurance is unaffordable based on your income: You qualify for an exemption if the cost of the lowest-priced health insurance plan, a Bronze plan, is more than 8.27% of your income for the 2021 tax year. You could also have an offer of health insurance through an employer or other source that’s over that percentage. When you apply for an exemption, you’ll need to show evidence of your income and proof of the health insurance on offer and its cost.
• Your location: If you currently live abroad or outside of California, you don’t have to pay the state’s tax penalty. People who are currently incarcerated are also exempt from the penalty.
• Your citizenship status: If you aren’t a U.S. citizen and don’t have the legal right to be in the U.S., you are exempt from the tax penalty.
• Your connection to a federally recognized tribe: People who are members of a federally recognized tribe or are eligible for health services from the Indian Health Service are exempt from the individual mandate.

The above reasons allow you to claim an exemption when you file your state tax return if you have to file a return. Other exemption situations require you to apply through Covered California.

1. Hardship Exemption

You might qualify for a hardship exemption. Experiencing homelessness, filing for bankruptcy and having a substantial amount of medical debt are a few situations that could help you qualify for a hardship exemption. To apply for the exemption, you need to provide proof, your Social Security number and birthdate.

2. Religious Exemption

The other exemption you can apply for is a religious conscious exemption. You’re eligible for this exemption if you belong to a sect or religion that opposes the acceptance of public or private benefits or to a religion that relies on a particular method of healing. The religion must be approved, and you need to sign a statement saying you haven’t received medical services within the past year. You also need to submit IRS Form 4029 with your application.

Once you submit your exemption application, it can take up to 30 days to receive a decision. Based on the materials you submit, your application can be approved, denied or you might need to provide more details. If your request is approved, you’ll receive an exemption certificate number that you need to include with your state tax return.

If your application is denied, you have 90 days to file an appeal.

How to Avoid a Tax Penalty

The best way to avoid paying the Shared Responsibility fee when you file your taxes is to get health insurance coverage for as much of the year as possible.

Not all insurance plans are created equally. It’s important to understand your health care needs when choosing a plan. If you don’t have any conditions that require ongoing treatment or medication, you can choose a plan with a low monthly premium to help save money.

If you have a condition that requires treatment or medication, you might want to sign up for an insurance plan with a higher monthly premium but lower out-of-pocket costs.

Types of Health Insurance

The ACA created the “metal” categories of health insurance, divided based on how the insured and the insurer share costs. Knowing the options helps you choose the plan that best fits your needs:

• Bronze plans: A bronze plan typically covers 60% of your medical bills. You’re responsible for the remaining 40%. You can expect to pay a lower monthly premium with a bronze plan than any other metal plan. The trade-off is a higher deductible, or the amount you need to pay before insurance coverage kicks in. Because of the ACA, preventative care treatments, such as annual physicals and vaccines, are covered with no additional charge.
• Silver plans: A silver plan is a middle-of-the-road plan. The insurer will likely pay 70% of your healthcare costs. You’ll pay 30%. Silver plans have a higher premium than bronze plans and might have a slightly lower deductible. If you expect to see a doctor for routine care regularly, a silver plan might suit you best.
• Gold plans: With a gold plan, you pay more toward the premium each month but less out of pocket when you need care. The insurer typically pays 80% of your healthcare costs, and you pay 20%. If the plan has a deductible, it’s usually much lower than bronze or silver plans.
• Platinum plans: A platinum plan typically has the highest monthly premium of the four metal categories but the lowest out-of-pocket expenses. If you know you’ll be seeing doctors frequently, need ongoing medical treatment or take a lot of prescription medications, a platinum plan might work best for you. Under the plan, the insurer pays 90% of your healthcare costs, and you pay the remaining 10%.

Some individuals might qualify for a different insurance policy outside of the four metal categories. If you’re under age 30 or meet specific income requirements, you can apply for a minimum coverage or catastrophic plan.

A minimum coverage plan typically has a high deductible but a low monthly premium. You can also see a primary care doctor for free, up to three times a year, with a minimum coverage plan.

Insurance plans also differ based on the number of people they cover. Depending on the size of your household and your insurance needs, you can purchase a plan that covers:

• Just you
• Yourself, your spouse and your dependents
• Just your children

Get Help Paying for Health Insurance

If the cost of health insurance seems out of reach, you have options. You can qualify for a subsidy if you earn up to 400% of the federal poverty level based on your household size. For a single person, that means you can earn up to $51,520 and qualify for financial assistance. If you have a family of four, your household income can be up to $106,000 annually to be eligible for assistance.

The lower your income, the more aid you’re eligible to receive. If your household income is less than 138% of the federal poverty level, you qualify for Medi-Cal, California’s version of Medicaid.

To qualify for a subsidy, you need to provide proof of income, such as a tax return, pay stub or Form W-2. You can elect to receive the subsidy each month, paying less for your premium. You can also take the subsidy as a tax credit, reducing the amount you owe on your tax return or increasing your tax refund.

Other Reasons to Get Healthcare Coverage

California’s tax penalty is designed to incentivize getting health insurance. Without a policy, you can end up paying thousands of dollars in additional taxes. Beyond avoiding the extra fee, there are many reasons to purchase a health insurance policy:

• It protects you financially: Health care in the U.S. is expensive. For example, it can cost more than $7,000 to treat a broken leg. Depending on the insurance plan you have, your insurer will pay anywhere from 60 to 90% of the cost of the medical treatment you need.
• It helps you maintain your health: Under the ACA, preventative care treatments are fully covered by qualified insurance plans. That means your annual flu shot, wellness visit and health screenings are free to you. You don’t have to pay a penny out of pocket. Getting preventative care helps you detect any health issues early or helps you avoid falling ill in the first place.
• It helps you if you get sick: Should you develop an illness or become injured, you can rest assured that your health insurance policy will cover some of the costs of your care. You can also feel confident going to the hospital or physician for treatment. Having health insurance gives you peace of mind that the care you need will be accessible when you need it.

The ACA made it so insurers can’t deny people coverage or charge more if they have pre-existing conditions. That means you’re eligible for health insurance no matter how many medical conditions you have. When you sign up for a plan, the policy can’t exclude treatment for any conditions you’ve been diagnosed with already, such as diabetes or heart disease.

When Can You Sign up for Health Insurance?

You can sign up for health insurance each year during open enrollment. During open enrollment, you can keep a plan or choose a different one if your needs have changed. You can also sign up for health insurance for the first time or enroll in Medi-Cal.

Open enrollment typically occurs in the fall and extends through the early winter. When you sign up for a plan determines when your coverage begins.

When Does Open Enrollment End in California?

Open enrollment starts on November 1 and ends on January 31. For coverage in 2022, the open enrollment period started on November 1, 2021, and lasted through January 31, 2022. California’s open enrollment period is a little longer than the national open enrollment period, which ends on January 15 each year.

To qualify for a plan that begins on the first day of the following year, you need to sign up for coverage by December 15. If you enroll in coverage by January 31, it will begin in February. After enrolling, you need to pay your first premium before the coverage start date.

What Is a Special Enrollment Period?

If you need health insurance and open enrollment is over, you may have options. A special enrollment period is available following certain life events. You can enroll in a new health insurance plan if any of the following apply to you:

• You’ve recently moved to California: If you move to California outside of open enrollment, you can sign up for a health insurance policy during a special enrollment period.
• You left your job: If you are laid off or otherwise lose health insurance from an employer, you qualify for a special enrollment period. You might be eligible for Medi-Cal after a job change, depending on your circumstances.
• Your marital status has changed: You may need to purchase health insurance if you get married or divorce your spouse during the year. You’re also eligible for a special enrollment period if your spouse dies outside of open enrollment.
• You had a baby: You can sign up for a new health insurance plan or purchase a policy for your new arrival if you give birth to a baby or adopt a child during the year.
• You turned 26: Many people are covered by their parents’ plans until they turn 26. If you’re approaching your 26th birthday and it’s not open enrollment, you qualify for a special enrollment period and can purchase a plan or apply for Medi-Cal.
• Your citizenship status changed: You can be eligible for a special enrollment period if you become a U.S. citizen or have another change to your residence status outside of open enrollment.

Signing up for a health insurance plan during a special enrollment period helps you avoid a gap in your coverage. Avoiding that gap means you have the insurance you need should you require medical treatment. It also helps you avoid paying the tax penalty for not having health insurance coverage.

Get Health Insurance Today With Help From Health for California

Whether it’s open enrollment or you’re eligible for a special enrollment period, signing up for a health insurance policy means you can avoid paying the tax penalty in California. It also means you’ll have access to the health care and treatments you need without having to pay a lot out-of-pocket.

Health for California can help you decide which type of insurance plan is right for you and can help you get the subsidies you’re eligible for. Contact us today for a quote.