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Understand and Avoid Health Care Reform Tax Penalties

Updated for Tax Year 2018 • December 1, 2022 09:19 AM


OVERVIEW

The Affordable Care Act has brought new options for health care coverage to millions of previously uninsured Americans. While you can still choose not to purchase health insurance, that decision may come at a cost, for tax years 2014 through 2018. Eligible taxpayers who remain without insurance may be required to pay penalties, though there are exemptions for which you may qualify.


Avoid Affordable Care Act Penalty

What qualifies as minimum essential coverage?

"Insurance plans that qualify under provisions of the ACA must include coverage of a minimum of 10 categories," says Mac Schneider, retired certified public accountant. “This amounts to comprehensive coverage for most health insurance needs, providing access to health care services and helping to prevent financial hardship often caused by illness or hospitalization.”
Health plans sold to individuals and small groups must cover:

  • Ambulatory patient services
  • Emergency services
  • Hospitalization
  • Pregnancy, maternity and newborn care
  • Mental health and substance use disorder services
  • Prescription drugs
  • Rehabilitative and habilitative services and devices
  • Lab services
  • Preventive and wellness services
  • Pediatric care, including vision and certain dental services

Exemptions from health insurance requirement

There are a number of exemption provisions under which you may avoid the requirement to have health insurance. These provisions include:

  • Unaffordable care—if minimum coverage would cost more than 8 percent of your household income, you may qualify for an exemption.
  • No tax filing requirement—having an income below the Internal Revenue Service's filing threshold exempts you from the coverage requirement.
  • Hardship—if you experience a hardship that prevents you from getting coverage, the Health Insurance Marketplace may certify your exemption. Situations include those whose pre-existing health coverage was canceled due to the ACA.
  • Short coverage gaps—if your coverage lapses for less than three consecutive months.
  • Membership in an exempt group—Native American tribes, prisoners, undocumented immigrants, members of health care sharing ministries and those whose religious beliefs prevent them from having insurance are exempt from the requirement to be insured.

Not sure if you are exempt from the requirement to purchase health insurance? See "Are You Exempt From Health Care Coverage?" to help determine whether you might be eligible to waive the tax penalty entirely and apply for a health care exemption.

Assessment and collection of penalties

For tax years between 2014 and 2018, if you qualify for health insurance and don’t meet the exemption requirements, but still choose to remain without coverage, the IRS assessed penalties through your tax return. This fee was calculated as either a flat rate, or a percentage of your qualifying annual household income, whichever rate was higher.

Like any other tax, it was deducted from your refund or added to your balance due. However, unlike other outstanding taxes, the IRS was limited in the actions it can take to recover health insurance fees.

Penalty amounts

For 2014, the penalty was set at 1 percent of income or $95 per uninsured adult and $47.50 per uninsured child under 18 (whichever is higher). Penalties for 2015 rose to 2 percent of income or $325 per uninsured adult, and in 2016 the rates climbed to 2.5 percent of income or $695 per uninsured adult.

From 2016 through 2018, annual rates have been adjusted for inflation. If you were uninsured for only part of the year, the penalty was prorated to cover only your uninsured months. You were not assessed a penalty for a gap in coverage less than three months long. This is called a “short gap.” However, you were only allowed one short gap per year.

The penalty for not having coverage was eliminated beginning with the 2019 tax year. Although you are technically still required to have minimum essential coverage, there is no longer a penalty for not having it.

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