Small Business News
Small Business News

Filed under Tax Center.

Health Insurance Will Be Mandatory Beginning in 2014

By Marcia Richards Suelzer | July 17, 2012

The Supreme Court has upheld the linchpin of the Patient Protection Affordable Care Act: The requirement that each individual carry at least a minimum level of health insurance or face a tax penalty beginning in 2014. However, as with nearly every other law, the actual requirements can be complex and the rhetoric surrounding this provision makes it even more difficult to decipher what the impact will be. This article attempts to provide a straightforward analysis of who will be affected by the requirement to purchase insurance.

Individual Mandate Will Apply to Relatively Few

Surprising as it sounds given the intense emotions expressed by both sides of the debate, relatively few individuals will be forced to buy insurance when the mandatory coverage provisions go into place in 2014. If you already have insurance from another source--and over 80 percent of Americans do--then it's very likely that you satisfy the coverage requirement and have no need to worry about the individual mandate. Acceptable sources of insurance coverage are

  • Employer-provided health insurance
  • Medicare
  • TRICARE (for active and retired military and military families) and Veteran's Administration care programs
  • Medicaid or CHIP (Children’s Health Insurance Program)
  • Privately purchased insurance that is at least at the Bronze level
Tip

What is a bronze plan? If you've done any insurance comparison shopping, whether for auto, home or health insurance, you realize that policy terms and conditions can vary widely and coverage levels can be very different. The Affordable Care Act requires that insurers all standardize their policies. This means that you will be able to make true comparisons between plans.

Beginning in 2014, all insurance policies must fit into one of four levels of coverage: bronze, silver, gold or platinum. (Not every company must offer plans in each of the four levels.) Each plan level must offer the cover a minimum set of "essential health benefits." Although federal regulations have not yet been issued that spell out exactly what are "essential plan benefits," they must include coverage for doctor's visits, emergency care, hospital care, maternity and newborn care, mental health care, substance abuse treatment, prescription drugs, rehabilitative services, laboratory tests, wellness services, chronic disease management services and pediatric care.

While the covered services will be the same across all four plan levels (for example, all four levels must cover doctor visits), the amount the individual will be required to contribute for these benefits will vary across the plan levels. As expected from the name, an individual in a bronze plan has the least advantageous coverage. He or she may have to bear up to 40 percent of the actuarial value of the costs. Whereas, an individual covered by a platinum plan might bear only 10 percent of the costs. The actual amount an individual pays would depend on the insurance company, the risk pool, and the existence of high-cost health conditions.

Certain types of individuals are exempt. In addition, there are a significant number of individuals who do not have insurance but who are exempt from the individual mandate. The following individuals are exempt.

  • Those who belong to a religion that is opposed to acceptance of benefits from a health insurance policy.
  • Those who are undocumented immigrants.
  • Those who are incarcerated.
  • Those who are members of an Indian tribe.
  • Those whose family income is below the threshold requiring the filing of a federal tax return ($9,500 for an individual or $19,000 for married filing jointly in 2011).

Hardship exemption also available.  In addition, there is a hardship exemption for those who are unable to afford coverage. You are considered to be unable to afford coverage if your required contribution, after taking into account tax credits, to an employer-sponsored plan or a state insurance exchange is more the eight percent of your household's income for the year.

Tax Credit Available to Help Fund Insurance Purchase

If you or your family members purchase silver-level qualified health care coverage through one of the health insurance exchanges in your state, you may be entitled to refundable income tax credit to help offset the costs. The Congressional Budget Office estimates that the average credit will be about $5,000 per year.

Advance payment of the credit amount can be made directly to the insurance exchange, thereby reducing out-of-pocket costs during the year.  The advance payment amounts are subtracted from the total amount of the credit when determining the amount, if any, you will receive when you file your return.

Eligibility is based on income and family size. Your eligibility for the credit is based upon your family's household income.

Warning

If you are married, you must file a joint income tax return to claim this tax credit.

In order to be eligible for the credit, your household income must be at least at the federal poverty level (FPL) for a family of your size, but your household income can't be more than four times the FPL. The federal poverty level is adjusted annually, but numbers below should provide a ballpark of the income range that will be eligible for the credit.

2012 Poverty Guidelines for the
48 Contiguous States and the District of Columbia
Persons in
family/household
Poverty Guideline
(100%)
400% of
Poverty Guideline
1 $11,170 $44,680
2 $15,130 $60,520
3 $19,090 $67,360
4 $23,050 $92,200
5 $27,010 $108,040
6 $30,970 $123,880
7 $34,930 $139,720
8 $38,890 $155,560
For families/households with more than 8 persons, add
$3,960 for each additional person.

Your household generally includes anyone for whom you claim a tax exemption. Your household income is your Modified Adjusted Gross Income (AGI) plus the Modified AGI of all individuals for whom you can claim a personal exemption and who must file a tax return for the tax year.  For purposes of this credit, modified AGI means a person's AGI (shown on Form 1040, Line 38) with certain amounts added to it. (These additions include any foreign earned income tax exempt interest, and Social Security or tier 1 Railroad Retirement Benefits.)

Warning

Undocumented aliens are not counted in determining household size and special rules apply to determine your family size and family income if you have one or more undocumented aliens living in your household.

Computing the credit. The premium assistance credit operates on a sliding scale that begins at two percent of income for those at 100 percent of the federal poverty line (FPL) and phases out at 9.5 percent of income for those at 300-400 percent of the FPL. The credit is computed based on the premium for the applicable lowest cost silver plan in the rating area where you live. However, the rules for computing the credit amount are exceedingly complex and vary based on a number of factors. It is expected the IRS will issue further guidance and forms for the computation as the deadline for required coverage draws nearer.

Penalty Imposed for Failure to Have Insurance

Every person who does not have insurance and is not an exempt individual will have to pay a penalty for failure to carry insurance beginning in 2014.

Tip

The law refers to this payment as a penalty. In upholding the provision, the Supreme Court determined that it is, in fact, a tax. The Court determined that it was a tax because: It is paid as part of the annual income tax return; it does not apply to individuals who are not required to pay federal income tax; the amount of the penalty varies based upon taxable income, filing status and number of dependents; and it was incorporated into the Internal Revenue Code.

The requirement to have insurance is imposed on every person (unless they have insurance or are exempt), but the penalty for a dependent is reported on the tax return of the person claiming him or her.  If a husband and wife file a joint return, the penalty for each spouse is reported on that return. (If they file separate returns, they would each report the penalty on their individual returns.)

Although it is paid annually, the amount of the penalty is based on the number of months during which a person is uninsured during the year. 

The amount that must be paid is the LESSER of:

  • the sum of the monthly penalty amounts OR
  • the amount of the national average premium that a family the size of the taxpayer's would be charged for a bronze-level insurance plan.

The Congressional Budget Office estimates that the national average premium for a bronze-level plan for an individual would be $4,500 to $5,000.  For a family, the cost of bronze-level plan is estimated to be $12,000 to $12,500.  

Determining the monthly penalty amount. For each person, their applicable monthly payment amount is one-twelfth of the GREATER of:

  • the flat-dollar amount (capped at three times the base amount) or
  • the applicable-income amount.

Both the flat-dollar amount and the applicable-income amount are phased in over time.

Penalty Phase-in
Year   Flat-Dollar
Amount
Per Individual  
Cap On
Flat Amount 
Per Family
Percentage of
Applicable Income
2014 $95 $285 1.0%
2015 $325 $975 2.0%
2016 $695 $2,085 2.5%

Applicable income amount.  Your applicable income amount is the amount by which your Modified AGI (discussed above) exceeds your filing threshold. The filing threshold is the amount of income that triggers the need to file a federal income tax return.  This amount is determined by adding the number of exemptions claimed on the return and the standard deduction amount that applies to your filing status.  For example, the filing threshold for a married couple with no dependents was $9,000 for 2011.  

Penalty based on applicable income for higher-income families. Once the flat-dollar amount is exceeded, the percentage of applicable-income computation will be used to compute the penalty (which is capped at the national average premium for a bronze-level plan.)

Income Level Triggering Use of Applicable Percentage *
Single Family
2014 greater than $20,000 greater than $55,000
2015 greater than $25,000 greater than $75,000
2016 greater than $37,000 greater than $110,000
* Dollar amounts are approximate.

Penalty Enforcement Is Limited

Generally, failure to pay one's taxes can lead to liens being placed upon your property and even to that property being sold.  Especially egregious misbehavior can even be considered a crime.

However, neither of these apply to failure to pay the individual mandate. The law specifically states that you can not be subject to any criminal prosecution or penalty for failing to timely pay the "failure to have insurance penalty." What's more, the IRS cannot use liens or levies to collect any unpaid penalty. The IRS can offset an unpaid penalty against any federal tax refund owed to the taxpayer.

Tax Center

Article 6 of 6

View All »
blog comments powered by Disqus