6.6 Million Choose Paying Penalties over Healthcare Coverage

By Richard A. McGrath, CIC, LIA

For the first time this year, the Affordable Care Act (ACA), commonly known as Obamacare, imposed a penalty on American taxpayers for not having health insurance. The Obama administration estimated that 6 million people would pay the penalty. Instead, 6.6 million people paid the penalty, which is 10 percent more than expected.

In addition, in 2014:

  • About 10.7 million taxpayers filed for an exemption from the penalty.
  • About 8 million people purchased health coverage through government-run marketplaces.
  • Of those who purchased coverage, 2.6 million filed for premium tax credits to help pay for their insurance.

The penalty was created to encourage people to sign up for health insurance, so the more people who signed up, the lower the number of taxpayers paying the penalty would have been.

Of course, paying the penalty costs significantly less than buying health insurance, so, if anything, it may be surprising that more people didn’t pay it. The maximum penalty was the greater of the following: one percent of income or $95 per adult and $47.50 per child, up to a maximum of $285.

The average penalty paid was just $190, according to a report from the National Taxpayer Advocate, the in-house ombudsman of the Internal Revenue Service.  In comparison, the National Conference of State Legislatures reported that annual health insurance premiums for an average family now exceed $16,800.

This year, the penalty for not having coverage, which the federal government calls a “shared responsibility fee,” increases to two percent of income or $325 per person and $162.50 per child for each year during which a taxpayer lacks eligible health insurance, whichever is greater.

The penalty will increase each year by set increments until 2017, after which it will adjust for inflation.

About 300,000 taxpayers overpaid the penalty this year by an average of just over $110, for a total of $35 million. Most should have been exempt because of their low income, according to the National Taxpayer Advocate. Since more taxpayers who overpaid would likely spend more than $110 in preparer fees to amend their returns, the IRS recently had not decided whether to issue refunds.

Exemptions and Credits

Anyone seeking an exemption must file the exemptions form, 8965, which is available at Obamacarefacts.com.

Individuals are eligible for exemptions from the penalty if their income is below the tax-filing threshold; if the cheapest health insurance they can buy, either inside or outside the workplace, would cost more than 8 percent of household income for self-only coverage, or if employer-sponsored coverage would cost more than 9.5 percent of household income, after the employer’s contribution.

The tax-filing threshold ranges from $10,150 for a single person under 65 to $21,500 for a married couple filing jointly, where at least one spouse is 65 or older.

An exemption is also available for those who go without coverage for less than three months. Those who are denied coverage because they fail to qualify for Medicaid or the Children’s Health Insurance Program (CHIP) can typically receive an exemption if they are unable to enroll for insurance during the open enrollment period.

Those who exceeded tax-filing thresholds, but needed help with the cost of health insurance received tax credits totaling $7.7 billion, with an average credit of $3,000.

Tax credits for premiums are available only to those who are not eligible for affordable coverage from other sources and whose incomes fall within two to four times the federal poverty level. This year, any individual earning less than $11,770 is considered to be under the poverty guideline. An additional $4,160 is added for each family member. For example, the poverty level for a family of four is $24,250.

The tax credit can either be applied to monthly health insurance premiums by the insurer or claimed on a federal income tax return.

Upcoming Cadillac Tax

The law’s excise tax, commonly referred to as the “Cadillac Tax,” is scheduled to go into effect on January 1, 2018. This provision will implement a 40 percent tax on high-cost employer plans with aggregate expenses that exceed $10,200 for individual coverage and $27,500 for family coverage. The Independent Agents & Brokers of America (Big “I”) is working closely with Congress to fight the impending Cadillac Tax.

Americans should, of course, purchase health insurance, not because of the possibility of being penalized for not having it, but because their health and the well-being of their family depends on it.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.