Come January 1, 2014, the Affordable Care Act (commonly known as the health care reform law) will require every American to purchase health insurance. That’s the “individual mandate” part of the law that you heard so much about last year.
So what happens if you don’t buy coverage? That’s what we’ll cover today. But first, let’s discuss the reason the requirement exists in the first place.
Why an individual mandate?
The idea behind requiring every American to buy health insurance is to get as many people as possible—young, old, men, women, healthy, sick—into the insurance pool. The more people in the pool, the more premiums are paid to help cover claims. It’s known as “risk management,” and because the ACA takes away the ability of insurance companies to deny coverage to people with pre-existing conditions, requiring healthy people to buy insurance is the only practical way to keep coverage affordable for everyone.
Put another way: If healthy people abstain from insurance and only sick people seek coverage, then insurance costs spiral out of control as insurers, who have no means of controlling their risk, are forced to raise premiums to pay claims.
Who is affected?
The people most affected by the individual mandate are those who are not insured. In 2010, about 16% of Americans carried no insurance. Those 49.9 million people are the ones who need to get coverage or risk paying the penalty tax.
If you have health insurance through an employer or through an individual policy purchased from a private health insurance company, you’re in the clear. Well, probably. I say that because there will be some instances where existing health plans fail to meet the coverage requirements of ACA, and these plans must be changed or dropped. Also, employers, who themselves have new rules and mandates to deal with, will have to consider their circumstances and decide whether to add, drop, or continue to offer coverage.
Your insurance options
So what kind of insurance do you need to avoid having to pay the penalty tax? Any one of the following sources will do:
- Medicaid or the Children’s Health Insurance Program (CHIP)
- TRICARE, which is for service members, retirees, and their families
- The veteran’s health program
- A plan offered by an employer
- An individual health insurance plan (see our previous blog post on health insurance exchanges)
- A grandfathered health plan in existence before the ACA was enacted
- A government-sponsored health program
- A state health benefits risk pool plan, such as HIRSP (Health Insurance Risk-Sharing Plan)
If you don’t buy health insurance
If you choose not to buy health insurance, you may have to pay a penalty tax. The Internal Revenue Service (IRS) is charged with collecting it from you. When you file your taxes, if you have a gap in coverage for a continuous three-month period or more during the previous year, the IRS will take the penalty tax money out of your tax refund unless you meet one of the following requirements:
- You are part of a religion opposed to acceptance of benefits from a health insurance policy
- You are an undocumented immigrant
- You are incarcerated
- You are a member of certain Native American tribes
- Your family income is below the threshold requiring you to file a tax return ($9,350 for an individual in 2010; $18,700 for a family in 2010)
- You have to pay more than 8% of your income for health insurance, after taking into account any employer contributions or tax credits
- You have a gap in coverage for less than a continuous three-month period (this exemption may only be used for one period without coverage in a year)
What will the penalty tax cost you? It depends on the year. The chart below shows the annual totals that may be assessed.
Penalty tax amounts
2016 and beyond
$95 per adult and $47.50 per child (up to $285 per family) OR 1% of family income, whichever is greater
$325 per adult and $162.50 per child (up to $975 per family) OR 2% of family income, whichever is greater
$695 per adult and $347.50 per child (up to $2,085 per family) OR 2.5% of family income, whichever is greater
What if you can’t afford health insurance? You may qualify for a subsidy from the federal government.
What do YOU think?
Are you one of the nearly 50 million uninsured Americans who will have to choose between buying a plan and paying a penalty? What do you plan to do?