Affordable Care Act Uninsured Tax Penalty - Learning Center | Nations Health Insurance

Affordable Care Act Uninsured Tax Penalty

People who are not enrolled in a qualified health plan are required to pay the Obamacare uninsured tax penalty unless they qualify for an exemption. Because term insurance plans are not considered a qualified health plan under the Affordable Care Act (ACA), people enrolled in a term health plan are required to pay the uninsured penalty unless they qualify for one of the exemptions. The following will provide an overview of the tax, its costs, who must pay, and who may qualify for an exemption.

The uninsured tax is the higher of one of the following amounts:1

  • $695 per person for the year, but only $347.50 per child under 18, up to a maximum of $2,085
  • 2.5 percent of taxable household income, capped at the national average premium for an Obamacare bronze plan in 2016 2

A common misconception is the uninsured tax penalty is based on total household income. The fact is the uninsured tax is based only on taxable income over the tax filing threshold. The 2016 tax filing threshold for taxable income is $10,450. Individuals with household income below the the tax filing threshold do not have to pay any uninsured tax. Tax income is considered salary, adjustments for additional income, exemptions, and deductions. The uninsured tax penalty is paid when the income tax return is filed for the year in which the person was uninsured.

While an affordable alternative to Obamacare coverage, enrolling in a term health plan does not prevent people from having to pay the uninsured tax penalty under the ACA. The Congressional Budget Office has project in 2016 only 3.9 million Americans will be required to pay the tax.3

The Affordable Care Act has provided many exemptions to the uninsured tax penalty including:4

  • The lowest priced qualified health plan available to you (either through an Obamacare marketplace or a job-based plan) would cost more than 8.13% of your household income
  • You don’t have to file a tax return since your income is below the filing threshold
  • You were uninsured for no more than 2 consecutive full months of the year
  • You would have qualified for Medicaid if your state had expanded Medicaid
  • You’re a member of a recognized health care sharing ministry or a religious sect with objections to insurance, a tribe or you are eligible for services through an Indian Health Services provider
  • You’re incarcerated, a U.S. citizen living abroad, or not lawfully present in the U.S.

People may also qualify for an exemptions based on hardship including:

  • You filed for bankruptcy in the last 6 months or had substantial debt as a result of medical expenses that you couldn’t pay in the last 24 months
  • You had increased expenses due to caring for an ill, disabled or aging family member
  • You recently experienced domestic violence
  • You recently experienced the death of a close family member, a fire, flood, or other natural or human-caused disaster that caused substantial damage to your property
  • You were homeless, evicted in the past 6 months, faced eviction or foreclosure, or received a shut-off notice from a utility company
  • You’re eligible to enroll in an on-exchange qualified health plan or get subsidies for a time period when you were not enrolled in an on-exchange qualified health plan
  • Your individual insurance plan was cancelled and other marketplace plans are unaffordable

Additional information on uninsured tax penalty exemptions is provided by the IRS. To receive an exemption an individual must file a request with the IRS and have it approved. Investor website Motely Fool noted an unconventional approach for people who do not qualify for an exemption but don't want to pay the uninsured tax penalty is to forgo a tax refund.5 Since the tax penalty is paid out of a tax refund, if a person does not receive a tax refund they would not pay the penalty. However, following this approach can cause other penalties including a penalty for underpaying taxes and refunds in future years would have to be avoided.

These health insurance plans count as a qualified plan; people enrolled in any of these plans would not have to pay the uninsured tax penalty:6

  • Any job-based plan, including retiree plans and COBRA
  • Any Obamacare marketplace plan
  • Certain veterans’ health coverage types from the Department of Veterans Affairs
  • Coverage under a parent’s plan if you’re under 26 or self-funded coverage for university students
  • Department of Defense Non-appropriated Fund Health Benefits Program
  • Medicaid or Children’s Health Insurance Program
  • Medicare Part A or Medicare Advantage
  • Most individual plans bought outside the marketplace including grandfathered plans
  • Most TRICARE plans
  • Peace Corps volunteers health coverage
  • Refugee Medical Assistance
  • State high-risk pools for plan years starting on or before December 31, 2014

Conclusion

There are several ways to avoid the ACA tax penalty for being uninsured by a qualified health plan. Individuals who do not qualify for an exemption can avoid paying the tax if they do not receive a tax refund

Individuals enrolled in a term health plan can avoid paying the tax penalty if they qualify for one of the exemptions listed above. Individuals enrolled in a term health plan can still save money even if they have to pay the uninsured tax penalty because the premiums for term health plans are much lower than Obamacare plan premiums.

This article is for informational purposes and should not be construed as tax advice. For information or advice on ACA tax obligations seek the advice of a professional tax consultant.

  1. Health Care Law: What’s New for Individuals and Families. https://www.irs.gov/pub/irs-pdf/p5187.pdf
  2. For the purposes of the uninsured tax, the national average premium for a bronze plan in 2015 was $207 per person per month, but only $1,035 per month for a family of five or more.Examination of returns and claims for refund, credit, at abatement; determination of correct tax liability. www.irs.gov/pub/irs-drop/rp-15-15.pdf
  3. Payments of Penalties for Being Uninsured Under the Affordable Act: 2014 Update. www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/45397-IndividualMandate.pdf
  4. Ibid.
  5. Caplinger et al. 3 ways to avoid paying Obamacare’s tax penalties. August 18, 2015. Motley Fool. www.fool.com/how-to-invest/personal-finance/taxes/2015/08/18/3-ways-to-avoid-paying-obamacares-tax-penalties.aspx
  6. Plan types that count as coverage. www.healthcare.gov/fees-exemptions/plans-that-count-as-coverage/