We can talk all day about the ACA’s “carrots” – your incentives to enroll in an ACA-compliant health plan – but the fact of the matter is that the Affordable Care Act also provides “the stick” in the form of its individual mandate, also known as the shared responsibility provision.
This well-known – and yes, controversial – provision stipulates that people who don’t have minimum essential coverage are subject to a tax penalty unless they’re exempt from the shared responsibility provision.
And individual health insurance (the kind you buy on your own, instead of getting coverage from an employer) is only available for purchase during open enrollment, unless you have a qualifying event later in the year. The open enrollment period applies both on and off the exchange.
So enroll between November 1 and January 31 to gain the peace of mind that comes with having insurance, and to avoid paying a significant penalty when you file your 2017 tax return.
How the penalty is calculated
The “Obamacare penalty” is pro-rated for the number of months you’re without coverage. It’s one-twelfth of the annual penalty amount for each month you don’t have coverage – and “having coverage” means being insured for at least one day of the month in question.
One annual gap of less than three months is allowed with no penalty, and there’s also a provision for handling gaps in coverage that span across two calendar years. (Note that a three-month gap in coverage would result in a penalty for all three months; the gap has to be less than three months in order to be exempt from the penalty.)
The penalty is higher than it used to be
The IRS reported in 2016 that for tax filers who owed a penalty for being uninsured in 2014, the average penalty amount was around $210. But for tax filers who were uninsured in 2016, the average penalty is expected to be almost $1,000. (This will be assessed when 2016 tax returns are filed, in early 2017).
For 2014, the penalty was $95 per uninsured adult (plus $47.50 per uninsured child – the flat rate for children will always be half of the adult amount) up to a maximum of $285 per family (three times the single adult penalty, which continues to be the case going forward), OR one percent of modified adjusted gross income (MAGI) in excess of the tax filing threshold (2015 numbers here) whichever is greater.
For 2015, the penalty was the larger of $325 per uninsured adult, or two percent of MAGI above the tax filing threshold.
And for 2016, the penalty was the larger of $695 per uninsured adult, or 2½ percent of MAGI above the filing threshold – clearly a sharp increase from 2014, which is why the average uninsured tax filer will pay so much more in penalties for 2016.
For 2017 and beyond, the percentage of income penalty will remain unchanged, at two and a half percent of MAGI above the tax filing threshold. But the flat fee will be adjusted annually for inflation.
Regardless of the year, for taxfilers with lower household incomes, the flat rate penalty applies, while for those with higher incomes, the percentage of income penalty applies – because the assessed penalty is whichever method results in a larger penalty.
The major matter of MAGI
It’s important to note that the MAGI calculation for the penalty is slightly different from the MAGI calculation for the ACA’s premium tax credits (subsidies). For premium tax credits, MAGI = AGI + foreign earned income + tax-exempt interest income + non-taxable Social Security benefits (this chart is a helpful guide).
But for the shared responsibility penalty calculation, MAGI = AGI + foreign earned income + tax-exempt interest income. Non-taxable Social Security benefits are not added back to AGI for the penalty calculation. The majority of Americans do not have foreign earned income or tax-exempt interest income, so for most people, MAGI for the penalty will be equal to AGI (from your tax return).
Your maximum penalty
The penalty can never exceed the national average cost for a Bronze plan. For 2015, the maximum penalty was $2,484 ($207 per month) for a single individual and $12,420 ($1,035 per month) for a family of five or more, which was slightly higher than 2014’s maximum.
For 2016, we knew that the national average cost for a Bronze plan would be higher, given that overall rates increased by roughly 9 percent in 2016. The IRS published the national average cost of a 2016 bronze plan in August 2016, and the numbers are indeed a bit higher than they were for 2015: For a single individual, the national average cost of a bronze plan is $223 per month ($2,676 for the year), and for a family with five or more members, it’s $1,115 per month ($13,380 for the year).
The maximum penalty for 2015 only applied to uninsured households with incomes of $134,500 for a single individual, and $641,600 for a family (assuming the family’s filing status is married filing jointly). Most penalties for 2015 were much lower, because few households have incomes that high, and most that do are already insured.
But while the maximum penalties only apply to the wealthiest among us, those income thresholds where the maximum penalty begins to apply were half as much in 2015 as they were for 2014, since the percentage of income penalty increased from one percent in 2014 to two percent in 2015.
And it increased again – to two and a half percent – in 2016, where it will remain going forward. So the maximum penalty will kick in at even lower income levels starting with 2016 tax returns. The maximum penalty in 2016 is $2,676 for a single individual, and $13,380 for a family of five or more. If the tax filing threshold remained unchanged for 2016 (it likely won’t, but we can use those numbers as estimates) the maximum penalty for 2016 would apply to a single individual with an income at or above $117,340, and to a family of five with an income at or above $555,800.)
For a family of two adults and two children with a $40,000 MAGI, the individual mandate penalty for 2015 was $975 (calculated by adding $325 + $325 + $162.50 + $162.50). But if that same family had a $90,000 MAGI, the penalty was $1,388 instead, calculated as [(90,000 – 20,600) times 0.02 = $1,388] (note that the flat rate penalty results in a larger penalty at the lower income, while the percentage of income penalty results in a larger penalty at the higher income level).
For 2016, the penalty again increased substantially; it will be assessed when 2016 tax returns are filed. Our hypothetical uninsured family of four earning $90,000 would be subject to the flat rate penalty of $2,085 for 2016 ($695 per adult, $347.50 per child), as this is larger than the percentage of income penalty [(90,000 – 20,600) times 0.025 = $1,735]. But uninsured families with even higher incomes will be penalized 2.5 percent of their taxable income when they file their returns in early 2017.
The IRS reported in January 2016 that 7.9 million tax filers owed the penalty for being uninsured in 2014, while 12.4 milion tax filers qualified for exemptions. Going forward, it’s expected that exemptions will apply more often than penalties for uninsured tax filers. But for those who are not exempt, the penalty assessed on 2016 tax returns will be quite significant.
For those who remain uninsured in 2017, the percentage of income penalty will be the same as it was in 2016, but the flat rate penalty will be higher than $695 per uninsured adult (and the household maximum flat rate penalty will be higher than $2,085).
Know your penalty before tax time
It’s important to be aware of how the penalty works before tax season gets here. If you don’t learn about the 2016 penalty until you file your taxes, you may find yourself stuck with a penalty for 2017 as well, because the 2017 health insurance open enrollment period will end two and a half months before the tax filing deadline for 2016 returns (open enrollment for 2017 plans ends on January 31, 2017).
The tax filing season in early 2015 was the first time that people encountered the ACA’s tax penalty on their returns. Prior to that, a significant number of people weren’t aware that they’d be penalized for not having health insurance, and in all but three states, a special enrollment period was available to allow people facing 2014 penalties to enroll in a plan for 2015.
But no such special enrollment period was granted in 2016, since people are much more aware of the fact that they have to maintain health insurance coverage in order to avoid a penalty.
ACA individual mandate penalty calculator
You can use our calculator to see how much your penalty will be if you are without coverage this year, or if you’re considering remaining uninsured in 2017. If you’re planning to go without health insurance and just pay the shared responsibility provision’s penalty, take a moment to calculate what the penalty will actually be.
You’ll probably find that it makes more sense to purchase health insurance instead, especially if you qualify for subsidies to help pay for it.