The Billups Company CPA's Inc. | Tax and Accounting News and Information

Jul/10

6

Penalty for Individuals Without Health Insurance After 2013

One of the most controversial provisions of the Obama health care reform legislation is the individual health care mandate. This is a requirement that individuals maintain essential health care insurance coverage beginning in 2014 or face an excise tax enforced by the Internal Revenue Service. This provision has already spawned numerous court challenges by individual states challenging whether the federal government has the constitutional authority to compel Americans to buy something they may not want to buy.

The basics of the provision are this.

Beginning on January 1, 2014, all applicable individuals will be required to maintain “minimum essential coverage”, each month, for themselves and their dependents.

Failure to maintain coverage will result in a penalty which will be calculated and included on the taxpayer’s individual tax return. Taxpayers are responsible for the penalties of their dependents. Married taxpayers, filing a joint return, are jointly liable for any penalties.

The penalty is assessed on a monthly basis with the monthly penalty equal to the lesser of a “monthly penalty amount” or an amount equal to the average premium for a qualified health plan. This is getting complex but it is probably safe to conclude that monthly insurance premiums will never be lower than the “monthly penalty amount”.

The monthly penalty amount is the greater of 1/12 of a, per person, flat dollar amount, ($95 for 2014, $325 for 2015, $695, indexed for inflation for 2016 and following), or a small percentage of the amount by which the taxpayer’s household income exceeds gross income.  For most taxpayers, the penalty amount will probably be based on the flat dollar amount. Individuals who are under age 18 only get hit with half the penalty, and the flat dollar amount will only apply to three members of the family maximum.

Here is an example.

Mr. Smith is married and has nine kids. He defiantly refuses to buy federally mandated health insurance and is therefore subject to the penalty under Internal Revenue Code Section 5000A. Assuming his household income is equal to his adjusted gross income, he would be subject to a monthly penalty amount of $24, ($95 divided by 12 times 3 individuals), for each month he does not have coverage in 2014. In 2015, the penalty will be $81 per month and in 2016, $174 per month. The total penalty for each year with no coverage in any month will be $285 in 2014, $975 in 2015, and $2,085 in 2016.

There are numerous exemptions to the penalty for individuals in particular situations and for short coverage gaps. The law also limits the tactics the Internal Revenue Service may use to collect the penalty so Mr. Smith will not go to jail if he refuses to pay it.

It is likely that the individual mandate will be subject to a Supreme Court test and there is uncertainty whether it will survive Constitutional scrutiny. This law brings to mind something Robert Heinlein wrote, “There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him”.

Internal Revenue Code Section 5000A.

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