Individual Mandate - What Happens if You Don't Buy Health Insurance

The Health Care Reform bill requires certain individuals to purchase health insurance, else pay a tax penalty:

Effective January 1st, 2014, "applicable individuals" will be required to maintain "minimum essential coverage" for themselves and their dependents.  "Applicable individuals" who fail to maintain "minimum essential coverage" will be required to pay a "penalty" on their tax return.

You are probably are wondering....

1) Who are "applicable individuals"?

2) What is "minimum essential coverage"?

3) How much is the "penalty"?

Here it goes...

1) Who are "applicable individuals" for the Individual Mandate?

A person is defined as an applicable individual on a monthly basis.  For example, you could be an applicable individual in January, but not in February.  A person is an applicable individual, unless one of the following circumstances apply:

1. the person has been approved for a religious exemption under Section 1311(d)(4)(H) of the Patient Protection and Affordable Care Act (PPACA)

2. the person is a member of a health care sharing ministry

3. the person is not a citizen or national of the United States or an alien lawfully present in the United States

4. the person is incarcerated without any pending disposition of charges

Simple translation: A U.S. citizen is an applicable individual unless he or she is religiously exempt, a member of a health care sharing ministry or in jail.

2) What is "minimum essential coverage" for the Individual Mandate?

Minimum essential coverage is the minimum amount of health insurance coverage an applicable individual must purchase to avoid paying the penalty (see #3, below).

The following plans qualify as minimum essential coverage:

1. Coverage under government sponsored programs (e.g. Medicare and Medicaid) 

2. Coverage under an employer-sponsored group health plan offered in the small or large group market within a State

3. Coverage under a plan offered in the individual market within a State

4. Coverage under a grandfathered health plan

5. Coverage under a State risk pool as recognized by the Secretary of Health and Human Services (HHS) 

The following plans do not qualify as minimum essential coverage:

1. Coverage only for accident, or disability income insurance, or any combination thereof

2. Limited scope dental or vision benefits

3. Benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof

4. Coverage for on-site medical clinics

5. Coverage only for a specified disease or illness

6. Hospital indemnity or other fixed indemnity insurance

7. Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits

Simple translation: "If you have individual health insurance, employer-sponsored group health insurance, or if you participate in a State risk pool, Medicare or Medicaid, then you have minimum essential coverage.

3) How much is the "penalty" for the Individual Mandate?

If an applicable individual does not maintain minimum essential coverage for 1 or more months during a tax year, then they must pay a penalty.

The size of the penalty is phased-in over three years: 

• In 2014, the penalty will be $95 per person up to a maximum of three times that amount for a family ($285)* or 1% of household income if greater 

• In 2015, the penalty will be $325 per person up to a maximum of three times that amount for a family ($975)* or 2% of household income if greater 

• In 2016, the penalty will be $695 per person per year up to a maximum of three times that amount for a family ($2,085)* or 2.5% of household income if greater

*Note: If you claim dependents, you are responsible for making sure they have minimum essential coverage.   

Each year, the penalty is capped at an amount equal to the national average premium for bronze level health plans offered through state exchanges.

An applicable individual can be exempted from the penalty calculation for a month if during the month:

1. the individual has income below the filing threshold determined by the Secretary of the HHS.

2. the individual's cost to purchase health insurance exceeds 8% of gross income

3. the individual is a member of an Indian tribe.

4. the secretary of HHS determines the individual qualifies for a hardship that made him/her incapable of obtaining health insurance.

Simple translation: The amount of the penalty depends on a number of factors including your income, the size of your household and your access to affordable health insurance.  

In most cases, it will make most economic sense to purchase health insurance vs. paying the penalty.