The Health Care Mandate
The United States implemented a “Mandate” to have health insurance on January 1, 2014 as a part of the Patient Protection and Affordable Care Act (PPACA or ACA) also known as Obamacare. The mandate applies to individuals and to employers. This page is about the Individual Mandate.
The Individual Mandate
Most individuals who are U.S citizens or legal residents are required to buy qualifying health insurance or pay a tax penalty. Many people already have qualified health insurance (also known as Minimum Essential Coverage) through an employer or through a public program like Medicare or Medi-Cal. Those who do not have health insurance offered through an employer or public program need to buy their own through a private insurance company or through a state or federally run health benefits exchange. Subsidies or Tax Credits may be available to lower income families through health benefit exchanges such as Covered California to help make premiums more affordable. Insurance must be carried throughout the year without gaps in coverage of 90 days or face a Tax Penalty when they file their tax return. There are a few instances where individuals may be exempt from paying the Tax Penalty.
Subsidies or Tax Credits
A subsidy or tax credit refers to financial assistance from the federal government that can be received monthly or as a lump sum. When a tax credit is received monthly it is called an Advanced Premium Tax Credit (APTC) and is paid direct to the insurance carrier to reduce your monthly bill. APTC is available only to individuals who purchase their health insurance on a state or federal health benefit exchange.
Californians seeking Tax Credits must buy their insurance through their state exchange called Covered California. APTC in California is available to households who do not have an offer of affordable employer health insurance and whose income falls between 138% and 400% of the Federal Poverty Level. According to a 2017 report – Bringing Health Care Coverage Within Reach, Covered CA stated that enrollees received an average of $5,300 per household ($442/month) per year in tax credits.
The Tax Penalty or “Individual Shared Responsibility Payment” refers to a provision made in the ACA that requires individuals to pay a penalty if they don’t carry qualifying health coverage and they do not qualify for any exemptions. The Health Insurance Penalty is paid at tax time when you file your federal tax return and is calculated in one of two ways.
For 2017, the Tax Penalty will be the greater amount of one of the methods below:
- Percentage method: 2.5% of your household income above your filing threshold*
- Flat dollar amount method: $695 per adult and $347.50 per child (family maximum is $2,085) plus COLA (Cost of Living Adjustment) for 2017 and beyond
For Tax Penalty caps see Individual Shared Responsibility Provision at irs.gov.
*Filing threshold is your minimum amount of gross income at your age and your tax filing status that you must make to be required to file taxes.
There are a number of exemptions that you may be able to use to escape the Tax Penalty. Below are some of the more common exemptions:
- Short coverage gap – When you are uninsured less than 3 consecutive months of the year
- Coverage is considered unaffordable – When the lowest priced coverage available to you (through an employer or a health benefit exchange) costs more than 8.13% of your household income
- Income is lower than tax filing threshold – When you’re not required to file taxes because your income is lower than the tax filing requirement
- Members of Indian Tribes – When you are a member of a Federally-recognized Indian Tribe
- Members of certain religious sects or members of a healthcare sharing ministry
- General Hardship – When you experienced circumstances that prevented you from obtaining qualified health insurance such as homelessness, eviction, foreclosure, domestic violence, death of a close family member, or unpaid medical bills
It is advisable to check with a tax professional about details within these exemptions as well as various other exemptions that may apply to your individual circumstances. You can also review the IRS ACA exemptions page or the Healthcare.gov exemptions page.
Minimum Essential Coverage
Minimum Essential Coverage (MEC) is the type of Qualifying Health Insurance that meets certain requirements by the ACA. You are required to have MEC insurance or else pay a Tax Penalty. Marketplace or Exchange plans, Grandfathered plans, Medicare, Medi-Cal or Medicaid, and most employer sponsored plans have MEC.