EDITOR’S NOTE: As part of healthinsurance.org’s continuing coverage of the 2014-2015 Obamacare open enrollment period, we recently published a 38-page eBook, The Insider’s Guide to Obamacare’s Open Enrollment. Authored by contributor Louise Norris, the publication book is filled with advice written to help consumers more easily – and more quickly – navigate this open enrollment period.
In December, we launched a video series that expands on the topics in the eBook and explores topics that may not have been covered in the book. In the fourth segment of the series, Norris talks with fellow healthinsurance.org blogger Andrew Sprung about the penalty consumers might face if they do not adhere to the Affordable Care Act’s individual mandate provision.
Who’s exempt from the individual mandate penalty? Is the penalty increasing in 2015? And, as many have asked, does the law have any teeth when those who can afford coverage decline it anyway? It’s a great conversation.
We hope you enjoy the series and – if you have an open enrollment question that you haven’t seen answered in the eBook or in the pages of this site – drop us a note with your suggestion.
Andrew: Hello. My name is Andrew Sprung. I’m a writer about health insurance and health reform. I’m here with Louise Norris, who has been writing about this subject since 2006. She also writes at healthinsurance.org and is the author of the free e-book available there, the Insiders Guide to Obamacare’s Open Enrollment which will walk anyone through everything you need to know about getting health insurance under the Affordable Care Act.
Louise brings a broker’s perspective to her work. She’s been a health insurance broker in Colorado for 10 years.
So we are here today to talk about the so-called individual mandate, that is the ACA’s requirement that everybody in the country buy health insurance if they can afford it. The law’s designed to make it affordable for people who don’t get insurance through their employers, but there are some exceptions to that … some people who fall through the cracks.
And so we’re going to talk about, first of all, those who can get exemptions from the requirement and secondly what the penalty is involved if you do choose not to get insurance and the law deems that you should because it’s affordable for you.
So Louise why don’t we start with a broad view of who does not have to pay the penalty if they can’t find insurance either through their employer or through the health insurance exchanges that the ACA set up.
Who’s exempt from the penalty?
Louise Norris: Sure. That’s a great place to start. So basically it’s important to keep in mind that the penalty is really there for people who do have access to health insurance and it would be affordable for them, but for one reason or another they have chosen to not be insured. The law is designed not to punish people who truly have problems affording or accessing health insurance.
So with that in mind the Treasury Department announced last week that they expect somewhere between 3 and 6 million Americans to pay the penalty … to owe the penalty for 2014 … but around 30 million Americans will be exempt from the penalty. So of the people who are remaining uninsured, by far the majority have access to the exemption instead of a penalty.
And the exemption applies across a broad range of people. If you are in a state that has not expanded Medicaid and you’re in the coverage gap … meaning you just don’t have access to health insurance because you can’t get subsidies in the exchange … your income is too low for that and your income’s also too high for Medicaid or you don’t qualify for Medicaid, you get an exemption. Even if you’re …
Andrew: Louise let’s back up on that for a second. So you’re in a state that chose not to extend Medicaid eligibility as the ACA originally stipulated … the Supreme Court said that the states could choose to do it or not do it and if you … the way it was supposed to work … if your income was below a certain level then you got Medicaid. So what happens if you were supposed to be eligible for Medicaid but your state didn’t expand?
Louise: Well you mean in terms of a penalty or in terms of how you get health insurance?
Andrew: Yeah. Why you’re likely not to be able to get health insurance.
Louise: Well because if your income is below the poverty level, you don’t qualify for subsidies in the exchange. The subsidies weren’t ever intended for that population because it was assumed everyone in that population would get Medicaid.
But in those states, the Medicaid guidelines haven’t been changed and so for people who … childless adults in most of those states … it doesn’t matter how low your income is … you do not qualify for Medicaid. And even if you have dependent children in some states you might have to earn less than say 30 percent of poverty … just a few thousand dollars a year … In order to qualify for Medicaid so there are several million people right now who are stuck essentially with no access to coverage because their states didn’t expand Medicaid.
Andrew: Right and they can all … they all automatically get exemptions. If they apply and they’re told “Sorry, you can’t get Medicaid because your state didn’t expand it, and you’re not eligible for tax credits,” they’re exempt.
Louise: Yes. In every state, if your income is below the tax filing threshold … which is a little over $10,000 for a single filer and a little over $20,000 for a married couple filing jointly … if your income is below that threshold, in every state you get an exemption from the penalty. There’s also … if you’re a Native American, you can qualify for an exemption. If your health insurance policy was canceled because a prior policy that didn’t meet the ACA’s requirements … if it got canceled, you qualify for an exemption. Obviously it’s probably a better plan to just go get a new health insurance policy, but if you choose not to, you do get an exemption.
Now that one does not last forever. That exception is only valid through the fall of 2016, so at the end of next year, even people whose plans were terminated are going to have to move themselves into the new health insurance pool.
But there’s also hardship exemptions that cover a wide range of situations. If you are subject to domestic violence … if you’ve had a natural disaster … if you’re homeless … if you are … there’s just a lot of things that can trigger a hardship exemption from the individual mandate.
Right. [unintelligible crosstalk]
Louise: What’s that?
Andrew: The death of someone really close to you in the family.
If you’ve been overwhelmed by medical bills, that’s another exemption … if you’re subject to large medical debt.
Louise: Or even bankruptcy … even if it doesn’t have to do with medical debt. If you’ve had to file for bankruptcy recently.
And then as far as the price of health insurance, if you’re unable to obtain a policy that costs … if you can’t get any policy that’s less than 8 percent of your household income … you are exempt from the penalty.
Now because of subsidies, in most cases that is a non-issue because the subsidies automatically bring your costs down, but for example if you are if the “family glitch” applies to you where you can’t get … say you have an offer of coverage from an employer and it’s heavily subsidized for you but not for your family and then your family is not eligible to go get coverage in the exchange with a subsidy because technically you have “affordable” coverage through your employer even though it’s only affordable for you … not your family … in that case, that would be an example of where the family is exempt from the penalty because they’d have to pay more than 8 percent of their income for coverage.
So because of all these exemptions, that’s why 30 million people qualified for exemptions where only between 3 and 6 million are going to have to pay the penalty.
Is the penalty increasing?
Andrew: Right. Okay so the people who are subject to the penalty are a relatively small group. But let’s say that you … that the law’s formulas say that the coverage is affordable for you but you just feel that you can’t do it.
Your income might be $19,000 a year and you might need to pay $60 a month for a plan and your budget might be too tight … or you might be a little more affluent … your family might make $100,000 a year … a family of four or five … and the cost of insurance without any subsidy seems to you … it might be $900 a month and you just don’t want to do it.
So what happens then if you are subject to the penalty? How big is that penalty and how is it changed this year since last year?
Louise: Sure … well, for 2014, the penalty was a minimum of $95. $95 is the flat rate for one uninsured person but the penalty is the larger of either the flat rate or a percentage of your income and for 2014 it was 1 percent of your income. So $95 per uninsured adult … half that amount for children up to a maximum of $285 or 1 percent of your income.
TurboTax, I believe it, was did an analysis where they estimated that the average … for the average tax filer or who does owe a penalty, the average penalty is going to be right around … I think they said … $301.
So clearly the percentage of income is a factor. It’s definitely not just … you will often hear people say “well it’s just a $95 penalty.” That’s your bare minimum. And for 2015, if you remain uninsured … or if you’re uninsured in 2015 … it’s going up considerably.
For this year, it’s $325 per uninsured adult … half that amount per child … or 2 percent of your income … your taxable household income. So if you owed the percentage of your income penalty last year, it’s going to double for this year.
And then it will climb again next year to $695 per uninsured adult and 2½ percent of your income … whichever one of those is higher … so it always is capped at the … you’ll never pay more in penalty than the national average cost of a Bronze plan which for 2014 is right around $2,500 for one person and then they cap it at a family of five, so the maximum that a family would pay is right around $12,000 … a little over $12,000.
Andrew: But that’s a pretty affluent family, right?
Louise: Exactly. Obviously to reach that range, you’d have to be bringing in a really significant salary and most people with that sort of income are not uninsured.
Andrew: Right. I think it’s like $500,000 a year that would take you up to that level.
Louise: Exactly. Exactly. Which most people again in that income range have health insurance. So the penalty … that’s the maximum it can ever be. It’s very unlikely for most families that it even comes close to that amount but especially by 2016, it can be a significant chunk of money if you choose to remain uninsured.
What can Uncle Sam do if you don’t pay?
Andrew: Well so some people are going to be subject to it and that’s been the subject of a lot of anger and resentment. What happens … what can the government do if you don’t pay it?
Louise: Well if you don’t pay it … and I mean this is part of the reason why the anger and resentment … people are … it definitely gets blown out of proportion. There’s been a lot of fear mongering about this penalty and really it’s … the only way the IRS can … if you choose not to send in the money for the penalty the only way they can get it from you is by taking it out of your refund.
Now that does apply to most people because three quarters of American tax filers do get a refund and the average refund in 2013 was about $2,700. And so if TurboTax is correct and the average penalty is only around $300, clearly the IRS is going to be able to get most of these penalties just by taking it from the refunds.
Andrew: Taking it [unintelligible].
Louise: Not exactly. It will just be rejected from your refund.
Andrew: It’s there for them.
Louise: And then there it is … but if you’re a holdout and you don’t get a refund … so you owe taxes instead … the IRS can not use any of the normal tactics for recouping this penalty that they can with regular taxes and that is very clearly stated right in the text of the ACA. They can’t use criminal prosecution. They can not use liens, levies, wage garnishment … it’s basically limited just to taking it from your refund.
Now they can do that in future years, so if you don’t get a refund this year and you owe your penalty and you don’t pay it but then four or five years from now you are due a refund, they’ll take it then. If possible, they’ll get it. But it is not at all going to result in the sort of the ways the IRS can normally recoup their money.
And I did .. there’s been some of the sort of fear-mongering tactics about that you will sometime see where people say, “Oh but what if you don’t get a refund and instead you owe taxes … like let’s say I owe $1,000 in income taxes and then I also owe $300 for the penalty and what if I only send in $1,000 … what if the IRS applies my $1,000 to my $300 penalty first and then say that I’ve only paid $700 in income tax and that I owe them $300 in income tax?”
Andrew: And they come after you and the way that they can when you just don’t pay your taxes.
Louise: Well that was the … that has definitely been circulated around the Internet as a sort of gotcha thing where they say “Yeah, see the IRS CAN actually use all these means” and so to address this, I talked at length about this with an attorney from the IRS Chief Counsel’s office and that is absolutely not the case.
Basically if you’re in that situation and you send in that $1,000, they will apply it first to your income tax and anything that’s left, they will apply to your penalty. So in that case you would have … the penalty would remain unpaid but you would be paid up as far as income taxes and again no liens, levies, prosecution, wage garnishment … nothing like that.
Andrew: [unintelligible] build up a debt over years in what you haven’t paid on the individual mandate.
Louise: Exactly. And again if you did … if you would do a refund several years down the road they would start recouping that money from that refund. It is … basically there’s a long-standing rule with the IRS that they … if you don’t tell them … if you owe more than your pay and you don’t tell them where to apply your money, they apply it to your oldest debt first.
So if we’re talking about the current tax year and you send in … you have income tax and a penalty due and you just send in the amount for the income tax, they do consider the income tax to have accrued first, which is why the money gets applied there. But if you still owe a penalty from 2014 and the same scenario arises next year and you send in your money, at that point it is important to let the IRS know … which is very easy to do … you just send a note with your tax return … you just let them know that that you want them to apply your payment to your income tax rather than the penalty … and they will do that …
Andrew: It sounds like they’re giving people a license to conscientious object it in a way and build up sort of an individual penalty debt or balance. It’s a lot … they have a lot less power than they do in ordinary tax noncompliance … seems to be the bottom line.
Louise: Definitely. And I think part of the way to look at this is this was never designed to be a … there’s not supposed to be fear here. It’s more of … I mean it is a carrot and a stick … you can look at the subsidies are your carrot and the penalty’s your stick.
Obviously the subsidies are much more significant in terms of the total dollar amount that they’re providing to families than the penalty, but you know there’s definitely a lot of people don’t like the idea of owing money to the IRS and the penalty will motivate some of those people to get health insurance where they might not otherwise have been motivated to do so.
But if you are just strongly opposed to it for one reason or another, don’t believe any of the hype that you might hear about what the IRS is going to do to you for not paying the penalty.
Andrew: Well that seems clear enough. Because the penalty is so sensitive, there’s kind of extraordinary forbearance there for those who really take umbrage at it.
Uh well …
Will the IRS rely on the ‘honor system?’
Louise: One other thing is that with the … people will sometimes say “Well is the penalty just based on the honor system, then? I mean does anybody is anybody even checking whether I have health insurance?” And it is important to keep in mind that although the penalty doesn’t … they don’t have the sort of enforcement tactics at the IRS on the penalty compared with what they can normally do, you still have to be truthful when you file a tax return and lying to the IRS is illegal regardless of the situation.
So everyone is going to have to answer on their tax return starting for 2014, “Did you have health insurance last year?” And that you do have to truthfully answer …
Andrew: And why would any of us not want to? I mean, that’s just an obligation as a citizen to be truthful.
Louise: Right. So you do have to say yes or no on that question and then there will also be … some of this has been delayed until the 2015 tax year but there will definitely be some documents being filed with the IRS from the exchanges, from health insurance carriers and from employers … so the IRS … they’re not just going to be relying on what people say on their tax return to see whether or not you had health insurance and what months you had health insurance.
Basically large employers, health insurance carriers, and exchanges are all going to be letting the IRS know this.
Andrew: Okay. Well thank you, Louise. I guess bottom line is:
- If you can afford health insurance, you should get it.
- If you can’t afford it, you can probably get an exemption.
- If you can’t get an exemption, you will have to pay a penalty.
- If you refuse to pay that penalty, there’s no risk of criminal prosecution and
- There is a kind of a limbo there: there’s no … the only recourse the IRS has is to take it out of your eventual refund.
So maybe we can leave it at that and hope that most of our listeners find their way to affordable insurance as the law was designed to ensure.
Louise: Absolutely that is the … it’s far better to pay for health insurance than to owe a penalty or be uninsured.
Louise: Thank you, Andrew.
Andrew: Thank you. Take care.
Louise: Take care.