You May be in for a Big Surprise!

Consumers who avoided signing up for a qualified health care plan under the Affordable Care Act may be in for a rude surprise. It turns out that the widely-quoted $95 tax penalty for singles for all of2014 is simply the minimum. The actual penalty could be higher.

The penalty, also known as the “individual shared responsibility payment,” begins with a flat fee of $95 for singles making more than $19,600 next year, and a flat fee of $285 for families. But this figure can increase dramatically depending income and other factors, and can increase rapidly. That’s because the actual penalty is calculated two ways – the flat fee, or a percentage of income above a standard threshold set by the law. The tax is then whichever is the greater of the two.

The Congressional Budget Office explains it this way:

“Under the Affordable Care Act, most legal residents of the United States are required to obtain health insurance or pay a penalty. That penalty is the greater of two amounts: a flat dollar penalty for each uninsured adult, which will rise from $95 in 2014 to $695 in 2016 and be indexed to inflation thereafter (the penalty for a child is half the amount, and an overall cap applies to family payments); or a percentage of a household’s adjusted gross income in excess of the threshold for mandatory tax-filing, which will rise from 1.0 percent in 2014 to 2.5 percent in 2016 and subsequent years (also subject to a cap). For fiscal years 2015 to 2024, CBO and the staff of the Joint Committee on Taxation (JCT) estimate that such payments will total $46 billion.

CBO and JCT have estimated that about 30 million nonelderly residents will be uninsured in 2016 but that the majority of them will be exempt from the penalty. Those who are exempt include:

• Unauthorized immigrants, who are prohibited from receiving almost all Medicaid benefits and all subsidies through the insurance exchanges;
• People with income low enough that they are not required to file an income tax return;
• People who have income below 138 percent of the federal poverty guidelines (commonly referred to as the federal poverty level) and are ineligible for Medicaid because the state in which they reside has not expanded eligibility by 2016 under the option provided in the ACA;
• People whose premium exceeds a specified share of their income (8 percent in 2014 and indexed over time); and
• People who are incarcerated or are members of Indian tribes.

CBO and JCT estimate that 23 million uninsured people in 2016 will qualify for one or more of those exemptions. Of the remaining 7 million uninsured people, CBO and JCT estimate that some will be granted exemptions from the penalty because of hardship or for other reasons. Among the uninsured people subject to the penalty, many are expected to voluntarily report on their tax returns that they are uninsured and to pay the amount owed. However, other people will try to avoid payments. CBO and JCT’s estimates of the number of people who will pay penalties account for likely compliance rates as well as the ability of the Internal Revenue Service (IRS) to administer and collect the penalty payments.”

The formula used for calculations is somewhat difficult to understand, but there are tools available to assist. The Tax Policy Center, for example, has created an online calculator for the tax here.

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Sources: Congressional Budget Office report at https://www.cbo.gov/publication/45397, Tax Policy Center calculator at taxpolicycenter.org/taxfacts/acacalculator.cfm.