Q. I’ve heard that the government can’t really enforce the penalty for not having health insurance. Is this true?
A: Although the Supreme Court officially deemed the penalty a tax in their 2012 ruling that upheld most parts of the ACA, enforcement is not the same as it is for other taxes.
The individual shared responsibility provision (individual mandate) requires most Americans to have health insurance, although there are numerous exemptions. For those who don’t qualify for an exemption, the penalty for non-compliance is assessed on annual income tax returns, starting with the 2014 returns that were filed in early 2015.
Tax returns now include a question about whether you had health insurance in force throughout the year. In many cases, employers, insurance companies, and the exchanges are reporting this data directly to the IRS, but each tax filer has to answer the question each year.
For most unpaid taxes, there are a variety of ways that the IRS can recoup their money. But the text of the ACA is very clear in stating that taxpayers who don’t pay their ACA penalty are not subject to levies, liens, or criminal prosecution.
The only way that the IRS can collect the ACA penalty is if you pay it voluntarily, or if you’re owed a refund. In the latter case, the IRS deducts the penalty from your refund. Roughly 70 percent of tax filers receive a refund, and the average refund was nearly $3,000 in 2014 and 2015.
In January 2016, the IRS reported that 7.9 million tax filers had reported a total of $1.6 billion in ACA penalty payments for 2014. The average payment was about $210 (even in 2014, it wasn’t just $95), and 82 percent of the filers who owed a penalty still received a refund, since average refunds are far larger than the average 2014 penalties.
But the penalty increased significantly for 2015 (reported on tax returns that were filed in early 2016), and will jump sharply again for 2016, on the tax returns that are filed in 2017. By April 30, 2016, the IRS reported that 5.6 million 2015 returns had included an individual mandate penalty at that point, and the average penalty was $442.
In most cases, the penalties will continue to be lower than the average refund amount. So the IRS can collect a good chunk of the penalties simply by withholding the penalty from the filers’ refund checks. And for filers who are not owed a refund in a given year, the penalty can be deducted from a future year’s refund instead.
At this point, the future of the ACA — including the individual mandate and its penalty — is uncertain (you can read more in our Repeal & Replace section). The individual mandate is one of the more unpopular aspects of the law, and is almost certain to be repealed by the GOP congress and President-elect Trump. But it remains to be seen what will replace it, in terms of an incentive to get people to enroll in health coverage while they’re healthy.