Penalty for Not Being Insured

• Posted on July 6, 2010
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Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, which includes:

o Government-sponsored programs (e.g., Medicare, Medicaid, Children's Health Insurance Program),
o Eligible employer-sponsored plans,
o Plans in the individual market, and
o Certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS.

The penalty will be phased in beginning in 2014 and fully implemented in 2016.

Penalty - The penalty for noncompliance is the greater of:

(A) The sum of the monthly penalty amounts for months in the taxable year during which 1 or more such failures occurred, or

(B)  An amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.

Monthly Penalty Amounts – The monthly penalty amount is an amount equal to 1/12 of the greater of the following amounts:

(A) Flat dollar amount – (See computation of the flat dollar amount below)

(B) Percentage of income - An amount equal to the applicable percentage for the year (see table below) multiplied by the amount the taxpayer's household income for the year exceeds the taxpayer’s income tax filing threshold.

Flat Dollar Amount – The flat dollar amount is the lesser of:

1. The sum of the applicable dollar amounts (see table below) for all individuals who were not covered for the month or

2. 300% of the per adult penalty (maximum $1,875 in 2016).

Percentage of Income – The percentage of income used to determine the monthly penalty is phased in for 2014 through 2016 and inflation adjusted for years after 2016.  The amounts are:



Applicable Dollar Amounts (Code Sec 5000A(c)(3)) - The amounts are:



If an applicable individual has not attained the age of 18 as of the beginning of a month, the “applicable dollar amount” for the month will be equal to one-half of the amount shown in the table.

Household Income - Household income is the sum of the modified adjusted gross incomes (MAGIs) of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified AGI means AGI increased by all tax-exempt interest and foreign earned income.

Penalty Enforcement - For a joint return, the individual and spouse are jointly liable for any penalty payment.  The penalty is not subject to the enforcement provisions of subtitle F of the Code and the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Noncompliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner. Therefore, enforcement is generally limited to seizing a refund.

Three-Month Grace Period – No penalty is assessed for individuals who do not maintain health insurance for a period of three months or less during the tax year. If an individual exceeds the three-month maximum during the taxable year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage. IRS is to provide rules when a coverage gap includes months in multiple calendar years.

Taxpayers Exempt from the Penalty –The coverage requirement does not apply to:

• Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income for the year. After 2014, the 8% exemption is increased by the amount by which premium growth exceeds income growth. If self-only coverage is affordable to an employee, but family coverage is unaffordable, the employee is subject to the penalty if he does not maintain minimum essential coverage. However, any individual eligible for employer coverage due to a relationship with an employee (e.g. spouse or child of employee) is exempt from the penalty if that individual does not maintain minimum essential coverage because family coverage is not affordable (i.e., exceeds 8% of household income).
  
  
• Taxpayers with income below the income tax filing threshold (which for 2010 generally is $9,350 for a single person or a married person filing separately and is $18,700 for married filing jointly).
  
  
• Those exempted for religious reasons (who must be members of a recognized religious sect exempting them from self-employment taxes).
  
  
• Individuals residing outside of the U.S. (who are deemed to maintain minimum essential coverage).
  
  
• Individuals who are incarcerated or are not legally present in the U.S.
  
  
• All members of Indian tribes.

Example – Monthly Penalty Amount – For the example, assume the following: Married taxpayers under the age of 65 who were not insured for five months during 2016. Their AGI for the year was $50,000 and they had $500 in tax-exempt interest income.  For this example, use the 2010 income filing threshold, which for a married couple is $18,700 ($11,400 + $3,600 + $3,600).  The penalty is determined as follows:

• Flat Dollar Amount is the lesser of (1) the sum of the applicable dollar amounts for all individuals not insured (per person penalty) or (2) 300% of the dollar amount for the year (per family penalty).

             (1) = ($625 x 2) = $1,250 (the lesser amount)

             (2) = 300% x $625 = $1,875

• Percentage Income Amount is the applicable percentage for the year times the taxpayer’s income in excess of the income tax filing threshold for the taxpayer determined as follows:

             Taxpayer’s income = AGI plus tax-exempt income = $50,000 + $500 = $50,500

             Percentage Amount = ($50,500 - $18,700) x 2.5% = $795

Thus, the taxpayer’s monthly penalty amount is 1/12 of the greater of the flat dollar amount ($1,250) or the percentage of income amount ($795). Thus, the taxpayer’s monthly penalty amount is: $104.17 ($1,250/12).  Thus, the taxpayer will be subject to a penalty of the greater of $520.85 ($104.17 x 5 months) or an amount based on the national average premium for qualified health plans which have a bronze level of coverage.