Affordable Care Act Penalties
As the end of the tax year rolls around and people begin to put their financial houses in order, many are getting a rude awakening in terms of the penalties that they have to pay for not having health insurance. With the passage into law of the Affordable Care Act, certain mandatory provisions needed to be added to the coverage that taxpayers chose, and the added coverage ended up raising policy rates so much that many determined that purchasing had become too costly, and made a conscious decision to skip it and bite the penalty bullet.
What they didn’t realize was just how expensive that penalty was going to be. For tax year 2015, the average penalty that households will be paying is $661, and for those who make too much to qualify for financial aid to buy Obamacare plans, that average jumps to $1,177. Next year the numbers will go even higher.
One of the biggest reasons that the fines come as such a shock is that the way that the penalty provisions are written can be difficult to understand. Most people miss the fact that when they decide to skip coverage entirely, they are opting to be charged the higher of two calculations – a flat dollar amount of a percentage of their income.
In 2014, most people read that the flat dollar amount was $95 per adult and $47.50 per child with a maximum of $285 per family and decided that it was worth not having to pay increased policy rates. Had they continued reading and seen that if 1 percent of their household income (after deducting their filing threshold) would be the amount that they would be fined if it was higher than the flat maximum rate, then that would be their penalty. The difference between the two came as quite a shock.
By way of example, let’s take a look at how the penalties worked out for an Indiana resident named Benjamin Miller, who tweeted out a picture of the penalty notice that he received from the IRS. Miller had opted not to purchase health insurance because the minimum essential coverage requirements of the Affordable Care Act had jumped the premiums for his family from $1,000 per month to $1,400 per month.
He thought that he would be charged the maximum flat dollar amount of $285. Instead, his penalty was $2,344 – a reflection of one percent of his income, which is over $234,400. Though Mr. Miller saved the $14,456 that he would have spent on his insurance premiums, the over $2,000 penalty caught him off guard.
And though he may still have come out ahead in terms of the amount that he spent in the fine versus what he would have paid in premiums, it is difficult to say whether that would have been the case had his family needed any expensive medical care without the benefit of health insurance. Perhaps most important of all is the fact that the amount that he paid for tax year 2014 pale in comparison to what he will be fined in 2015 and 2016, as the flat dollar amount and the percentage of income penalty rate are being phased in, with each year’s numbers increasing.
By 2016 the flat dollar amount per family will be a maximum of $2,085 and the percentage of income penalty rate will be 2.5 percent. It’s a big penalty, and as it continues to climb - and people become more aware that they are going to be paying whichever is the higher of the two – the decision to opt out of health insurance coverage is going to become even more expensive.
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