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. But the penalty is enforced, and millions of people have paid it each year since 2014.
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.
What’s the status of the penalty? Has it been repealed?
There has been considerable confusion about the status of the penalty. So to clarify, the penalty was repealed as part of the GOP tax bill that was signed into law in late 2017, but the repeal doesn’t take effect until 2019. People who were uninsured in 2017 will still face a penalty when they file their taxes in early 2018, and people who are uninsured in 2018 will still face a penalty when they file their taxes in early 2019. But people who are uninsured in 2019 and beyond will not be subject to a penalty.
How is penalty enforcement handled?
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 report this data directly to the IRS, but each tax filer has to answer the question each year. The question appears on 2017 tax returns (question 61 on the 1040), just as it did for 2014 through 2016; nothing has changed about that under the Trump Administration.
And enforcement is actually a little more strict for 2017 tax returns than it has been in previous years. For the first time, the IRS is not accepting returns if the filer leaves the question about health insurance blank. So while you could just skip the health insurance question altogether in prior years, that’s no longer an option. And lying to the IRS is considered fraud, so filers will need to truthfully state whether or not they had coverage in 2017.
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 73 percent of tax filers received a refund in 2017, averaging nearly $3,000.
In January 2017, the IRS reported that 6.5 million tax filers had reported a total of $3 billion in ACA penalty payments for 2015 (but far more people—12.7 million—were uninsured and qualified for an exemption from the penalty). The average penalty amount was about $470, with a median penalty of about $330.
So the average penalties are far lower than the average refunds that people are owed, making it easy for the IRS to simply deduct the penalty from the refund. The IRS noted that for 2015 returns, 77 percent of the filers who owed a penalty still received a refund after the penalty was deducted.
The average penalty was quite a bit higher for 2015 than it had been for 2014 (it averaged $210 for that year). The penalty increased again for 2016, on the tax returns that were filed in 2017. But for 2017 and 2018, the penalty has remained unchanged from 2016. The ACA called for the flat-rate penalty to be adjusted for inflation each year after 2016, but the IRS confirmed that there was no adjustment for 2017 or for 2018. So the penalty continues to be 2.5 percent of income OR $695 per uninsured adult (and $347.50 per uninsured child, up to $2,085 per family), whichever is greater. And it will never be adjusted higher than that, since 2018 is the last year that the penalty will apply.
For most people, the penalties 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.
Note that if you structure your taxes so that you always owe money and never get a refund, the IRS applies payments to your oldest debts first. So in a future year, your tax payment could be applied to a prior year’s penalty, rather than the income tax you owe for that year. Here’s more about how that works.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.