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, beginning with the 2014 tax year. Eligible taxpayers who remain without insurance may be required to pay penalties, though there are exemptions for which you may qualify.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
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, improving access to health care services and preventing financial hardship often caused by illness or hospitalization.”
Health plans sold to individuals and small groups must cover:
- Ambulatory patient services
- Emergency services
- Maternity and newborn care
- Mental health and substance use disorder services
- Prescription drugs
- Rehabilitative services and devices
- Lab services
- Preventive and wellness services
- Pediatric care, including vision and dental services
Exemptions from health insurance requirement
There are a number of exemption provisions under which you may avoid paying penalties for not having insurance coverage. 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, you will not be charged a fee for the uninsured time.
- 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 tax penalty or 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.
How penalties are assessed and collected
If you qualify for health insurance and don’t meet the exemption requirements, but still choose to remain without coverage, the IRS will collect penalty fees through your tax return for the year. This fee is calculated as either a flat rate, or a percentage of your qualifying annual household income, whichever rate is higher.
Like any other tax, it’s deducted from your refund or added to your balance owing. However, unlike other outstanding taxes, the IRS is limited in the actions it can take to recover health insurance fees.
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 rise to 2 percent of income or $325 per uninsured adult, and in 2016 the rates climb to 2.5 percent of income or $695 per uninsured adult.
After 2016, annual rates are adjusted for inflation. If you are uninsured for only part of the year, the penalty is prorated to cover only your uninsured months. You're not assessed a penalty for a gap in coverage less than three months long. This is called a “short gap.” However, you are only allowed one short gap per year.
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