As of January 1, 2014 the Patient Protection and Affordable Care Act (PPACA) imposes an “Individual Mandate” that requires almost all legal residents in the United States to have “minimum essential coverage” for themselves and their dependents, or pay a tax. The tax is phased in from 2014-2016. Beginning in 2017, the tax amounts will be increased by the cost-of-living adjustment.
The Tax for Failure to have Minimum Essential Coverage
The tax is equal to the greater of a flat-dollar amount or a percentage of household income that is above the federal tax filing threshold. The flat dollar amounts and percentages of income are:
- 2014: $95/person/year or 1% of household income above the tax filing threshold
- 2015 : $325/person/year or 2% of household income above the tax filing threshold
- 2016 : $695/person/year or 2.5% of household income above the tax filing threshold
For individuals under 18 years old, the applicable per person penalty is one-half of the amounts listed above. The maximum tax on a family is three times the individual tax amount for the year, but there is no cap on the percentage of income test. There is an overall cap on the annual tax amount: it cannot be more than the national average premium for a “bronze” level plan purchased through the state exchange. (Bronze is the lowest-cost plan available on the exchange.)
Some Examples of How the Tax Will Apply
- The “maximum dollar” tax in 2016 for a family of four (two parents and two children) would be $2,085 (3 x $695).
- The maximum “percentage of income” tax in 2016 for a family of four with household income of $50,000 would be $750, because the penalty would be 2.5% of the difference between $50,000 and the tax threshold. The tax threshold in 2012 is $19,000 for Married Filing Jointly status if both parents are under age 65, so assume it will be $20,000 in 2016. The tax calculation is: 2.5% x (%50,000 – $20,000) = 2.5% x $30,000 = $750). This is less than the flat dollar penalty of $2,085 that would apply.
- The maximum “percentage of income” tax in 2014 for a couple (both under age 65) with household income of $50,000 would be $305, because the penalty would be 1% of the difference between $50,000 and the tax threshold. The tax threshold in 2012 is $19,000 for Married Filing Jointly status if both are under age 65, so assume it will be $19,500 in 2014. The tax calculation is: 1% x (%50,000 – $19,500) = 1% x $30,500 = $305). This is more than the flat dollar penalty of $190 that would apply in 2014 (2 x $95), so the percentage of income tax of $305 would apply.
Exemptions from the Mandate or the Tax
The following categories of individuals will be exempt from the mandate to have health coverage:
- Individuals who are incarcerated
- Individuals who are not lawfully present in the United States (undocumented)
- Individuals with a “religious conscience exemption” (applies only to certain faiths)
Additionally, the tax will not be imposed on the following categories of individuals even though they are otherwise subject to the mandate to have health coverage:
- Individuals who cannot afford coverage based on formulas contained in the law (e.g., premium for lowest cost bronze policy is more than 8% of household income)
- Individuals with income below the federal income tax filing threshold (for 2012 this is $9,500 for singles under age 65 and $19,000 for couples under age 65)
- Members of American Indian tribes
- Individuals who were uninsured for short coverage gaps of less than three months
- Individuals who have received a “hardship” waiver from the Secretary
- Individuals who are residing outside of the United States or are bona fide residents of any possession of the United States.
What qualifies as “Minimum Essential Coverage”
The following types of health coverage qualify as “minimum essential coverage”:
- Employer-sponsored plans including both private and public sector employers, insured and self-funded plans, grandfathered and non-grandfathered plans and any other group health insurance policies offered in the small or large group market
- Government sponsored programs including: Medicare, Medicaid, Children’s Health
Insurance Program coverage (CHIP), TRICARE, coverage through Veterans Affairs, and Health Care for Peace Corps volunteers
- Individual health insurance policies, whether grandfathered and non-grandfathered
- Any other coverage designated as “minimum essential coverage” by Health and Human Services (HHS) and/or the Treasury Department.