What Is a Shared Responsibility Payment?

Frustrated woman paying shared responsibility payment
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Definition

A shared responsibility payment is a tax penalty created by the Affordable Care Act (and in some cases by state laws). There are two types of shared responsibility payments: the employer shared responsibility payment and the individual shared responsibility payment.

Employer shared responsibility

The employer shared responsibility payment is a tax penalty imposed on businesses with 50 or more full-time equivalent employees if the businesses don't offer affordable health insurance benefits, or if the benefits offered do not provide minimum value. If any of the employees get subsidies (tax credits) to help them buy health insurance from a health insurance exchange, their employer gets a tax penalty, assessed by the IRS.

Although the individual mandate penalty no longer applies at the federal level, nothing has changed about the employer mandate and its associated penalties. Large employers that don't offer affordable, minimum value coverage to their employees are still subject to penalties.

Individual shared responsibility

The individual shared responsibility payment, created by the ACA’s individual mandate, was a tax penalty imposed on individual US citizens and legal residents who didn't have health insurance between January 1, 2014 and December 31, 2018. The payment was assessed by the IRS when people filed their tax returns for tax years 2014 through 2018 (state-based shared responsibility payments are assessed by the state treasury department when residents file their state tax returns).

The ACA's individual shared responsibility penalty was eliminated after the end of 2018, under the terms of the Tax Cuts and Jobs Act that was enacted in late 2017. But people who were uninsured in 2018 still owed the penalty when they filed their tax returns in 2019, and a few states implemented their own individual mandates and associated penalties for 2019 and beyond.

There is no longer a penalty for being uninsured unless you live in New Jersey, Massachusetts, or the District of Columbia. As of 2020, Rhode Island and California also have individual mandates with penalties for non-compliance (and California has created new state-funded premium subsidies—in addition to the ACA's premium subsidies—to make coverage more affordable and make it easier for people to comply with the mandate).

Massachusetts has had an individual mandate and penalty since 2006, but deferred the penalty in favor of the federal penalty from 2014 to 2018; New Jersey, DC, Rhode Island, and California have implemented individual mandates and penalties due to the elimination of the federal penalty. Vermont has also implemented a mandate in 2020, but has not created a penalty for non-compliance.

Exemptions

There are a variety of exemptions from the individual shared responsibility penalty. The IRS reported in 2017 that for the 2015 tax year, 12.7 million uninsured tax filers had claimed an exemption from the penalty, while 6.5 million had been subject to the penalty.

For the 2015 tax year, the average penalty paid by those 6.5 million filers was $470. But the penalty increased in 2016, and the IRS published preliminary data in 2017 showing an average penalty amount of $667 for people who were uninsured in 2016.

The penalty calculations remained unchanged for 2017 and 2018, although the maximum penalty amounts (which are based on the average cost of a bronze plan) grew each year as health insurance premiums increased.

Although there is no longer a federal individual mandate penalty for people who are uninsured, if you're in DC, Massachusetts, New Jersey, Rhode Island, or California, you'll want to familiarize yourself with the local rules for the individual mandate penalty and how to obtain an exemption if you think you might be eligible for one. In general, the state-based individual mandates are using exemption rules that are similar to the ones the federal government used from 2014 to 2018, although there are some local differences.

Background and Legal Challenges

The threat of the shared responsibility payment is meant to motivate employers to offer health insurance to their employees and motivate uninsured individuals to get health insurance.

The constitutionality of the individual mandate was challenged by Obamacare opponents arguing that the government doesn’t have the right to penalize its citizens for not buying something. But the mandate was upheld by the Supreme Court on June 28, 2012. The court found that the shared responsibility payment was actually a type of tax, and determined the individual mandate was constitutional because the government has the right to tax its citizens.

A few years later, in late 2017, the Tax Cuts and Jobs Act was enacted, calling for the eventual elimination of the individual mandate penalty. That triggered another lawsuit—Texas v. Azar, also referred to as Texas v. U.S.—in which 20 states argued that without the individual mandate penalty, the entire ACA ought to be overturned (that has since dropped to 18 states; Maine and Wisconsin pulled out of the lawsuit after Democratic governors took office in early 2019). In mid-December 2018, a federal judge in Texas sided with those 20 states and ruled that the entire ACA is unconstitutional. The case is being appealed with Democratic-led states stepping in to defend the ACA after the Department of Justice agreed with the judge's ruling that the ACA should be overturned.

Nothing has changed for the time being—the ACA remains the law of the land, and only the individual mandate penalty has been repealed. But Texas v. Azar is far from over. The oral arguments in the appeal were heard by the 5th Circuit Court of Appeals in mid-2019 and agreed that the ACA should be overturned in December 2019. As of 2020, the case is before the Supreme Court. If the ACA were to eventually be overturned as a result of Texas v. Azar, the employer mandate and employer shared responsibility provision would no longer apply. But state-based individual mandate laws—and state-based employer mandate laws, such as Hawaii's—would remain in force.

Small Employers

Although there is no employer mandate for small businesses, offering health benefits is a good way for small employers to attract and retain a talented workforce.

Also Known As: health insurance penalty, health insurance penalty tax, individual mandate penalty, employer mandate penalty, shared responsibility penalty.

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Article Sources
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  6. Internal Revenue Service. Letter to Congress regarding 2016 tax filings related to Affordable Care Act provisions. Published January 9, 2017.

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  11. Health Affairs. Fifth Circuit Questions Standing Of Parties Defending ACA In Texas v. Azar. Published June 28, 2019.

  12. Kaiser Family Foundation. Explaining Texas v. U.S.: A Guide to the Case Challenging the ACA. Published January 28, 2020.

Additional Reading