Penalties for Noncompliance with the Affordable Care Act’s Individual Mandate

In June, the U.S. Supreme Court upheld the constitutionality of Obamacare’s individual mandate by concluding that imposing a penalty for not purchasing health insurance is a valid exercise of Congress’ power to tax. As of Jan. 1, 2014, all Americans will be required to purchase either a private health plan or health insurance through a state exchange if they are not otherwise exempt or covered by their employer. The requirement does not apply to Americans age 65 and older who are covered by Medicare.

The penalties, which will be administered by the IRS, will be pro-rated based on the number of months during the year that an individual is not covered by health insurance, although there is no penalty if an individual is not covered for less than three months. Insurance companies will send their plan participants and the IRS a form confirming that the minimum essential coverage was held, which taxpayers will be required to attach to their tax forms beginning in 2015.

For the tax year 2014, the penalty for the entire year will be $95 per adult and $47.50 per child, up to a family maximum of $285 or 1 percent of the family’s income, whichever is greater. In 2015, these amounts increase to $325 per adult, $162.50 per child, and a family maximum of $975 or 2 percent of the family’s income. For 2016 and subsequent years, the full penalties will be $695 per adult, $347.50 per child, and a family maximum of $2,085 or 2.5 percent of the family’s income.

The nonpartisan Congressional Budget Office estimates that 4 million people will choose to pay the penalties instead of buying insurance. The belief is that these will mostly be younger Americans without children who believe they are healthy enough to go without coverage.

Certain individuals will be exempt from the insurance requirement. These include undocumented immigrants, individuals who are incarcerated, members of Indian tribes, people who are between jobs and without insurance for up to three months, and people with certain religious objections. In addition, people who calculate that their premiums will be greater than 8 percent of their family income, taking into account certain tax credits which would be gained from the lowest-quality plans in their state’s health exchange, will also be exempt from the insurance requirement and the penalties. Finally, individuals and families whose income is below the threshold required to file a tax return (currently $9,500 for an individual and $19,000 for a family) will not have to pay the penalties if they cannot prove they hold insurance.

The law states that the IRS cannot initiate any criminal prosecutions for failure to comply with the act, and no liens or levies can be placed on taxpayers’ property based solely on the failure to pay the penalty. The IRS intends to send letters to taxpayers notifying them that they owe the penalty, and it will also have the power to withhold future tax refunds. However, it is still unclear whether failure to pay the penalty will result in late payment penalties and interest imposed by the IRS. Regulations issued by the Department of the Treasury sometime in the next year should clear up this uncertainty.

The Affordable Care Act will still face more obstacles to its implementation as efforts to repeal its provisions intensify. But with the Supreme Court upholding the act’s constitutionality, the odds have greatly increased that the individual mandate will be implemented beginning in 2014.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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