The penalty for not having health insurance
- The individual mandate penalty still applies if you’re uninsured in 2018.
- The penalty is pro-rated for the number of months you’re without coverage.
- The penalty is higher than it used to be.
- The penalty is based on your modified adjusted gross income (MAGI).
- Your penalty can’t exceed the national average cost of a bronze plan.
- This tool will calculate your Obamacare penalty.
When the Affordable Care Act was written, lawmakers knew that it would be essential to get healthy people enrolled in coverage, since insurance only works if there are enough low-cost enrollees to balance out the sicker, higher-cost enrollees. So the law included an individual mandate, otherwise known as the shared responsibility provision.
But that tax penalty is being eliminated after the end of 2018, although the individual mandate itself will remain in effect. So there will still be a rule that says you have to have coverage, but there will no longer be a penalty for people who don’t comply, other than the fact that they’ll be without coverage if and when they eventually need medical care (the continued existence of the mandate, but without the penalty, is the crux of the Texas v. Azar case, in which 20 states are suing the federal government, challenging the constitutionality of the mandate without the penalty, and arguing that the entire ACA should be overturned if the mandate is unconstitutional).
And tax returns filed in 2019 — for the 2018 tax year — will still include penalty assessments. So even though the penalty is being eliminated after 2018, you’ll need to understand how it works if you were uninsured in 2018.
The mandate penalty still applies for 2018
Although Republican lawmakers tried throughout 2017 to repeal the ACA, they were only successful in repealing the “Obamacare penalty,” as part of the Tax Cuts and Jobs Act (the GOP tax bill that was enacted in December 2017).
But the elimination of the individual mandate penalty doesn’t take effect until 2019. The penalty is still in place for 2018, and is still being collected by the IRS.
On President Trump’s first day in office, he signed an executive order directing federal agencies to be as lenient as possible in their enforcement of the ACA. Shortly afterward, the IRS published a statement noting that they would continue to accept “silent returns” for 2016. Silent returns are those on which the tax filers simply don’t answer the question about whether they had health insurance throughout the year.
Silent returns were accepted for 2014 and 2015, but the IRS had planned to reject 2016 returns that didn’t answer the question one way or the other. Their decision to continue to accept silent returns was a direct result of Trump’s executive order, but all it did was maintain the status quo that had existed for the prior two years.
And that changed in 2018, when the IRS began requiring tax filers to answer the question about whether they had health insurance in 2017. Silent returns were not accepted for the 2017 tax year.
Other than that, everything about penalty enforcement is still the same as it was in previous years (the penalty became higher for 2016 than it was in prior years, and remained at that level in 2017 and again in 2018 — but enforcement is unchanged). The IRS confirmed in a June 2017 letter that Trump’s executive order “does not change the law,” and that “taxpayers remain required to follow the law, including the requirement to have minimum essential coverage for each month, qualify for a coverage exemption for the month, or make a shared responsibility payment.”
People who are uninsured in 2018 and ineligible for a penalty exemption will owe the penalty on their 2018 tax return that’s filed in early 2019. Starting with 2019 tax returns that are filed in early 2020, there will no longer be a federal penalty. But some states will have their own penalties that will apply to state tax returns.
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 time 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 was projected to be almost $1,000.
The penalty for being uninsured in 2016 was assessed when tax returns were filed in 2017. The IRS published preliminary data showing penalty amounts on tax returns filed by March 2, 2017, when there were still several weeks remaining in the tax filing season. At that point, 1.8 million returns had been filed that included a penalty, and the total penalty amount was $1.2 billion – an average of about $667 per filer who owed a penalty.
For 2014, the penalty was $95 per uninsured adult (plus $47.50 per uninsured child – the flat rate for children is 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), OR 1 percent of modified adjusted gross income (MAGI) in excess of the tax filing threshold (2015 numbers here) whichever was 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 2.5 percent of MAGI above the filing threshold – clearly a sharp increase from 2014, which is why the average uninsured tax filer owed so much more in penalties for 2016.
For 2017 and 2018, the percentage of income penalty remains unchanged, at two and a half percent of MAGI above the tax filing threshold. The flat fee was subject to annual inflation adjustment, although no adjustments ended up being made. For 2017, the inflation adjustment was zero. And for 2018, the IRS again confirmed that there would be no inflation adjustment, so the flat-rate penalty continues to be $695 per uninsured adult in 2018. And the penalty will be eliminated altogether after 2018, unless you’re in a state that will impose its own penalty (there will be an individual mandate penalty in Massachusetts, New Jersey, and DC in 2019; Vermont will join them in 2020).
Regardless of the year, for tax filers 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. But when bronze plan rates increase, the maximum penalty amount increases too. Overall rates increased by roughly 25 percent for 2017, so it was no surprise that the national average cost of a Bronze plan – and thus the maximum penalty – was quite a bit higher in 2017 than it had been in 2016. Revenue Procedure 2017-48 set the maximum penalty at $272 per month for a single individual ($3,264 for the year), and $1,360 per month for a family of five or more ($16,320 for the year), if they were uninsured in 2017.
Average premiums once again increased considerably for 2018, but the bulk of the rate hikes applied to silver plans (due to the elimination of federal funding for cost-sharing reductions); rate hikes for the other metal levels, including bronze plans, were more modest. In August 2018, the IRS published Revenue Procedure 2018-43, setting the 2018 maximum penalty amount (ie, the national average cost of a bronze plan) at $3,396 for a single individual and $16,980 for a family of five or more.
The maximum penalty for 2018 only applies to uninsured households with incomes of $146,240 for a single individual, and $700,000 for a family (assuming the family’s filing status is married filing jointly). Most penalties for people who are uninsured in 2018 will be 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 1 percent in 2014 to 2 percent in 2015. And it increased again – to two and a half percent – in 2016, where it remains in 2018.
But the national average cost of a Bronze plan has also been steadily increasing, which means that people must have a higher income in order to have 2.5 percent of it reach or exceed the maximum penalty. The short story is that while average penalty amounts have risen considerably since 2014, the maximum penalties only apply to households that are quite well off, and most of those households tend to be insured and thus not subject to the penalty.
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 was assessed when 2016 tax returns were filed in 2017. Our hypothetical uninsured family of four earning $90,000 would have been 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 were penalized 2.5 percent of their taxable income when they filed their returns in early 2017.
For people who remained uninsured in 2017, the penalty was unchanged from 2016 (although the tax filing threshold increased, which effectively results in a slight reduction in the penalty if the percentage of income calculation is used). For people who are uninsured in 2018, the penalty continues to be 2.5 percent of income above the tax filing threshold, and the flat-rate penalty is the same as it was in 2016 and 2017.
The IRS reported in January 2016 that 7.9 million tax filers owed the penalty for being uninsured in 2014, while 12.4 million tax filers qualified for exemptions. The following year, the number of people who owed the penalty decreased (which makes sense, given that the uninsured rate also decreased), but there was a slight uptick in the number of people who claimed exemptions: The IRS reported that 6.5 million tax filers owed the penalty for being uninsured in 2015, while 12.7 million tax filers qualified for exemptions.
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 2018. 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.
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.