ACA Penalty Increased Through 2016; Remained Steady in 2017 & 2018

There Is Still a Penalty in 2018, But It Will Be Eliminated As Of 2019

One of the most controversial aspects of the Affordable Care Act is the shared responsibility provision, often referred to as the individual mandate penalty. The ACA requires most individuals to maintain health insurance coverage or pay a penalty. And yes, that's still the case in 2018. The penalty no longer applies as of 2019, but people who were uninsured in 2018 will still have to pay a penalty on their 2018 tax returns (filed in 2019) unless they qualify for an exemption.

[Note that while the individual mandate penalty is being eliminated starting in 2019, there will continue to be an employer mandate penalty for large employers that don't offer coverage to their full-time employees.]

The individual mandate penalty caught some people unaware when they filed their 2014 tax return—they found out the hard way when they realized they owed a penalty for not having had health insurance in 2014. Since open enrollment for 2015 had already ended before many Americans filed their tax returns for 2014, the government granted a one-time special enrollment period in the spring of 2015, allowing people another chance to enroll in 2015 coverage if they had just found out about the penalty when they filed their taxes.

The penalty amount increased each year through 2016, and then remained steady from 2016 through 2018. But there was constant talk of repealing it, and that eventually came to pass with legislation that was enacted in late 2017. Unlike earlier legislation that had been considered with a retroactive effective date, the repeal effective date was more than a year in the future, which created lots of confusion and uncertainty. People heard that the penalty had been repealed, but might not have been aware that there was still a penalty for being uninsured at any point until the end of 2018.

That confusion was in addition to the underlying confusion created by the fact that the penalty amount changed each year in the beginning, and could be calculated as a flat rate or a percentage of income, depending on the circumstances.

Let's take a look at how the penalty worked for the five years that it was in effect, and how it changed over time.

Average Penalty in 2014 Was $210, for 7.9 Million Tax Filers

The IRS reported that the average tax filer who owed a shared responsibility provision penalty for 2014 had a penalty amount of about $210. That's based on the fact that the penalty in 2014 was the greater of $95 per uninsured adult (half that amount for a child), OR 1% of household income above the tax filing threshold.

7.9 million tax filers were subject to the penalty for being uninsured in 2014.

Average Penalty in 2015 Was $470, for 6.5 Million Tax Filers

The penalty was significantly higher for people who remained uninsured in 2015. The IRS reported that the average tax filer who owed a shared responsibility provision penalty for 2015 had an average penalty amount of $470—more than double the average penalty from the year before.

But the good news is that fewer people were subject to the penalty in 2015. The IRS reported that about 6.5 million tax filers owed the penalty on their 2015 returns, versus about 7.9 million who owed the penalty on their 2014 returns.

Average Penalty in 2016 Was $708, for 4 Million Tax Filers Who Had Filed By April 2017

The penalty climbed sharply again for people who didn't have health insurance in 2016. For people who were uninsured in 2017 and 2018, the penalty remained at the same level it was in 2016.

In 2017, the IRS published data based on 2016 tax returns that had been filed by April 27, 2017 (so this included most 2016 tax returns, but tax filers who had been granted extensions were still able to file 2016 returns after that point).

At that point, 4 million tax filers had filed returns for 2016 that included a penalty for being uninsured. The average penalty was $708. 

The actual penalty amount varies depending on household size and income (you can calculate the penalty for your specific situation), but the calculations used to determine the penalty in 2015 and 2016 resulted in much higher total penalties than in 2014:

  • In 2015, the penalty was the greater of $325 per uninsured adult and $162.50 per uninsured child (up to a maximum of $975 per household), OR 2% of household income above the tax filing threshold. 
  • In 2016, the penalty was the greater of $695 per uninsured adult and $347.50 per uninsured child (up to a maximum of $2,085 per household), OR 2.5% of household income above the tax filing threshold.
  • Starting in 2017, the flat rate penalty was subject to inflation adjustments, although the 2.5% of household income penalty remained unchanged. For 2017 and 2018, however, the IRS confirmed that there would be no inflation adjustment for the flat rate penalty. So the penalty for being uninsured in 2018 was the same as it was in 2016 and 2017.
  • However, the maximum penalty that applies to people with very high income has grown steadily since 2014, as it's based on the national average cost of a bronze plan, and those rates have increased every year. So although the flat rate penalty is unchanged from 2016, and the percentage of income is also unchanged, the maximum amount that high-income tax filers have to pay for being uninsured is significantly higher for 2018 than it was for 2016.

Penalty Is Deducted From Your Tax Refund

If you get a refund from the IRS at tax time, the shared responsibility penalty will be subtracted from your refund. 80% of tax filers get a refund, which has averaged about $2,800 in recent years—more than enough to cover the average penalty owed by uninsured tax filers.

The IRS will continue to use this strategy through the 2019 tax filing season (for 2018 returns). After that, starting with the returns that are filed in 2020, there will no longer be a penalty.

Get covered instead

If you're uninsured and considering remaining that way, make sure you know how much your penalty will be when you file your taxes the following year. Particularly if you're eligible for a premium subsidy through the exchange, you may find that the penalty amount you'd otherwise have to pay would be enough to cover several months of subsidized health insurance premiums—instead of just paying a penalty and getting nothing at all in return.

Enroll through the exchange if you qualify for a subsidy, or if you think there's a chance your income might make you subsidy eligible at a later point in the year. But if you're certain there's no chance you'll be eligible for a premium subsidy, you can also consider off-exchange plans (subsidies are available in the exchange if your income doesn't exceed 400 percent of the poverty level, which is $100,400 for a family of four for coverage effective in 2019).

What Happens After the Penalty Is Eliminated?

The ACA's penalty for being uninsured will be eliminated after 2018. That means people who are uninsured in 2019 and beyond will not face a penalty, unless they live in a state that imposes one (New Jersey, Massachusetts, and DC will all impose penalties on people who are uninsured in 2019; Vermont will join them in 2020 and other states may decide to follow suit in 2020 or later).

When the penalty is eliminated, some healthier people are expected to drop their coverage, while sick people will continue to maintain health insurance, as it provides more of a clear and immediate value to them. This effect is expected to be most profound in the individual market, as people with job-sponsored insurance are more likely to keep their coverage regardless of whether the federal government penalizes them for being uninsured.

So in the individual market, the projection is that the overall balance of the insured risk pool will tilt more towards sicker, older enrollees, as younger, healthier people opt to go without coverage or to switch to non-ACA-compliant coverage.

As a result, the Congressional Budget Office estimated that health insurance premiums in the individual market will be an average of 10 percent higher in 2019 and future years than they would have been if the individual mandate penalty had remained in effect. The effect of the individual mandate penalty repeal was evident in the rate filings that insurers submitted for 2019 plans. In almost every state, premiums are higher for 2019 individual market coverage than they would have been if the individual mandate penalty hadn't been eliminated.

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