The Affordable Care Act’s Individual Shared Responsibility provision requires nonexempt individuals to obtain minimum essential coverage for themselves and any nonexempt dependents. Starting January 1, 2014, those failing to get the required health insurance will have to pay a monthly penalty.
Who is subject to the penalty?
The penalty, which is calculated monthly, applies to individuals of all ages, including senior citizens and children. An individual is liable for the penalty assessed against any other individual who can be claimed as a dependent for federal income tax purposes. If an individual files a joint return, that individual and their spouse are jointly liable for the penalty. Penalties will be paid by including them with an individual’s tax return.
What is Minimum Essential Coverage?
Minimum essential coverage generally includes:
- Employer-sponsored coverage (including COBRA coverage and retiree coverage)
- Coverage purchased in the individual market
- Grandfathered health plans
- Medicare and Medicaid coverage
- Children’s Health Insurance Program (CHIP) coverage
- Certain types of Veterans’ health coverage
- TRICARE (Department of Defense health care program)
How much is the penalty?
The Individual Shared Responsibility penalty is calculated monthly by using a flat dollar amount or a percentage of household income, whichever is greater. Under the flat dollar amount method, each nonexempt individual is penalized a fixed amount. For individuals under the age of 18, the penalty is one-half the fixed amount. If an individual is responsible for multiple dependents, the total penalty cannot be more than 300% of the applicable fixed amount.
The fixed amounts used to calculate the penalty are:
- $95 in 2014 ($7.92 per month)
- $325 in 2015 ($27.08 per month)
- $695 in 2016 ($57.92 per month)
- $695 + cost-of-living increase in 2017 and beyond.
Under the percentage of income method, the penalty is a percentage of an individual’s household income, less specific deductions. To calculate household income, add the individual’s modified adjusted gross income to the modified adjusted gross incomes of the individual’s family members.
The percentages used to calculate the penalty are:
- 1% in 2014
- 2% in 2015
- 2.5% in 2016 and beyond.
For example, in 2014, the annual penalty will be $95 per adult and $47.50 per child, but no more than $285 (300% of $95) or 1% of the household income, whichever is greater.
Is there a maximum limit for the penalty?
Yes. The Individual Shared Responsibility penalty cannot be more than the national average premium for bronze-level (covering 60% of costs) qualified health plans offered through Affordable Insurance Exchanges. The Congressional Budget Office estimates that in 2016, the national average will be approximately $5,000 for individuals and $12,500 for families of four.
Are there any exemptions from the Minimum Essential Coverage requirement?
Yes. The following individuals are not required to obtain Minimum Essential Coverage:
- Members of a religious sect that is legally recognized as being conscientiously opposed to accepting any insurance benefits.
- Members of a recognized health care sharing ministry.
- Individuals who are not U.S. Citizens, U.S. Nationals or lawfully present aliens.
- Individuals incarcerated following disposition of criminal charges.
- Members of a recognized Indian tribe.
- Individuals with income below the threshold for filing a tax return.
- Individuals whose required contribution for coverage exceeds 8% of their household income.
- Individuals who have been certified as suffering a hardship.
- Individuals with a gap in health insurance coverage of less than three consecutive months during the year.
Though proposed regulations explaining the Individual Shared Responsibility penalty have been published by the Internal Revenue Service and the Department of Health and Human Services, they are not final and may change.
At Setnor Byer Insurance & Risk, we are committed to guiding you through Health Care Reform. Check back with us periodically for future informational updates about the Affordable Care Act. If you have specific questions about the Act or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.
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