Although there is no longer a federal tax penalty for being uninsured, some states have created their own penalties with enforcement mechanisms that largely mirror the federal rules that applied through 2018.
Q. I’ve heard that the government can’t really enforce the penalty for not having health insurance. Is this true?
A: As of 2019, there is no longer a federal penalty for being uninsured. There was a penalty for the individual shared responsibility provision (individual mandate) that applied from 2014 through 2018. Enforcement of the penalty was not the same as it was for other taxes, but it was still enforced and millions of people paid it each year.
States that have their own individual mandates
Although the federal penalty for not having health insurance was eliminated by the Tax Cuts and Jobs Act, a few states have stepped up to implement their own individual mandates with penalties for non-compliance. In 2019, that includes Massachusetts (which has had an individual mandate since 2006), DC, and New Jersey.
When the federal individual mandate penalty was in effect, the IRS used information reported by insurers and employers to cross-check the details that tax filers included in their returns. States that implement their own individual mandates are using a similar approach. And since exchanges, insurers, and employers are still required to report coverage information to the IRS (ie, Forms 1095A, B, and C) in 2019 and future years, these states are generally allowing those entities to submit the same form to the state tax agency. Here are the specifics:
How was federal penalty enforcement handled?
Starting in 2015 (for the 2014 tax year), federal tax returns began to include a question about whether you had health insurance in force throughout the year. And starting with 2017 tax returns, the IRS did not accept returns if the filer left the question about health insurance blank (informational reporting submitted by insurers and employers was used to verify the details reported by each tax filer—it wasn’t just an honor system).
If a tax filer did not have coverage and was not eligible for an exemption, a tax penalty was assessed. 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 didn’t pay their ACA penalty would not be subject to levies, liens, or criminal prosecution.
The only way that the IRS could collect the ACA penalty was if you paid it voluntarily, or if you were owed a refund—and most tax filers do get refunds. If you owed a penalty and were also due a refund, the IRS would deduct the penalty from your refund. Roughly 73 percent of tax filers received a refund in 2017, averaging nearly $3,000 (but average refunds were lower for 2018, and fewer people received them, due to other changes implemented by the Tax Cuts and Jobs Act).
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 (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 average penalties tended to be far lower than the average refunds that people were 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.
Enforcement of penalty collection in states that have their own mandates
The states that have their own individual mandates mostly take the same approach that the IRS used, with individual mandate penalties that can be paid voluntarily or deducted from refunds by the state tax agency. And with the exemption of Massachusetts, which enforced its own individual mandate from 2006 through 2013, none of these states have started collecting penalties yet, since 2019 taxes won’t be filed until early 2020.
Massachusetts’ health care reform law, which predates the ACA, includes a section about the individual mandate penalty. Although it notes that the penalty is to be deducted from a filer’s tax refund, it also clarifies that if the refund isn’t sufficient to cover the penalty, the state “shall notify the taxpayer of the balance due on the penalty and related interest,” and then goes on to say that “the commonwealth shall have all enforcement and collection procedures available under chapter 62C to collect any penalties assessed under this section.” Chapter 62C does include liens and levies (see Section 50).
New Jersey’s individual mandate legislation also indicates that the tax can be collected under the same manners as any other tax in the state.
But in general, states are taking the same approach that the federal government used: Penalties can be paid voluntarily or deducted from state tax refunds, but the state cannot use liens or levies to enforce the penalty:
- DC (legislation incorporates the federal penalty enforcement rules from Internal Revenue Code 5000A, which prohibits liens and levies)
- California (section 42)
- Rhode Island (penalties can be deducted from refunds, and interest will accrue if the penalty is not paid. But as is the case in DC, the legislation references the federal enforcement rules).
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.