The Affordable Care Act requires most individuals to carry qualifying health insurance or pay a penalty when filing their taxes. With the Tax Cuts and Job Act (TCJA) taking effect for tax year 2019, however, penalties for not having insurance have been removed as part of filing taxes.
However, some states still impose individual mandate penalties; many offer exemptions or hardship waivers; read on to gain more insight into how the individual mandate works in different states.
Federal Individual Mandate
As part of the Affordable Care Act, the individual mandate required most Americans to possess health insurance; those who failed to comply were assessed a penalty on their tax returns. Though Congress later repealed these financial penalties at a federal level, many states still impose their own mandates and penalties may still exist in those cases where penalties exist; regardless of penalties though it’s essential that everyone has sufficient coverage as health insurance serves as an essential safety net against costly medical emergencies and illnesses.
The Affordable Care Act’s (ACA) mandate has long been controversial, with opponents alleging it violates people’s constitutional rights by forcing them to purchase something they didn’t want or need. These arguments made their way all the way to the Supreme Court which upheld it in 2021, though penalties may make having health insurance cheaper than not having it.
One reason health insurance has become so popular is because it reduces the risk of catastrophic illness or accidents, which could have devastating repercussions for an entire family’s finances. An illness could cost an average of $25,000 annually in hospital bills while accidents could incur costs as high as $30,000 over time.
Health insurance works through risk pools in which all participants pay premiums and only those filing claims receive reimbursements. By including healthy people in the pool, it can help offset costs incurred by sicker members while maintaining affordability for everyone involved. Individual mandates play an integral part in meeting this goal as they ensure only individuals in good health contribute towards it.
Ericson and Kessler’s recent study suggests otherwise; some individuals will continue to forgo health insurance even when no longer mandatory. Their experimental survey tested how people responded to a hypothetical requirement to purchase health insurance; results varied depending on its description; when described more as a tax than as a mandate, respondents were more likely to respond negatively.
State Mandate
As soon as the federal individual mandate penalty was abolished in January 2019, state governments assumed this responsibility and set their own health insurance coverage requirements and penalties. Penalties vary by jurisdiction ranging from flat dollar amounts to percentages of household income for failing to have coverage; just like under federal rules, in order to avoid being penalized you must maintain minimum essential coverage or qualify for an exemption.
California state law mandates that its residents either possess health insurance coverage or qualify for an exemption through Covered CA website or their state tax returns, otherwise penalties of $800 for adults and $400 per child (as of 2022) could apply.
Lacking health coverage has numerous ramifications beyond its financial effects; gaps can make accessing care difficult or impossible, prompting many states to implement mandatory coverage requirements to ensure residents maintain coverage.
Local officials from counties and large cities often voice various reservations about state mandates. Their main complaints center around funding inadequacies, preemption of local authority, and lack of attention paid to local issues. A study by Jason Levitis who oversaw implementation of the Affordable Care Act at Treasury suggests otherwise; his research demonstrated how mandates can have positive results such as encouraging compliance with its coverage requirements, discouraging substandard insurance spread, and helping improve insurance markets.
Levitis used survey data from California and Washington to demonstrate that consumers who were required to buy insurance reported greater willingness to do so when described as mandataries rather than taxes; this research only considered responses made before the Supreme Court case challenging the ACA’s individual mandate was filed for.
Understand the specific rules and penalties in your local jurisdiction is key to maintaining good health, so for more specific guidance regarding mandates and coverage requirements it would be advisable to speak to a healthcare provider.
Tax Penalty
Individual Mandate Penalty for lack of health coverage was officially phased out as of 2018. However, five states and Washington DC still impose penalties through state tax returns should you fail to maintain coverage and don’t qualify for a waiver.
In these states, an uninsured penalty equal to the national average cost of a bronze plan will apply each month that you remain uninsured unless a qualifying exemption exists such as religious beliefs, financial hardship or serious illness.
There remains some debate as to the extent to which ObamaCare’s individual mandate penalty deterred people from enrolling. Frean and Gruber released a study in 20178 using nationally representative consumer data to compare penalties with factors like tax credits or Medicaid eligibility eligibility.
They found that in general, penalties had minimal effects on enrollment rates when comparing individuals of similar income and age; however, higher-income individuals in the 400% poverty and above category experienced some impact from it, likely because these individuals are most financially sensitive.
Note, however, that most enrollees of ACA marketplaces benefit from tax credits and cost-sharing reductions that significantly offset or reduce health insurance premiums; consequently, this subsidized part of the individual market won’t be as significantly impacted by repeal of individual mandate penalty.
While it may not always be feasible, it’s always prudent to purchase health insurance when possible. Without the Individual Mandate Penalty affecting many, insurance can become more affordable, and it is better to be safe than sorry when it comes to serious illnesses or injuries.
A health insurance plan can be acquired easily through two sources: either your employer or an individual marketplace. For those currently employed, check with their HR department or individual marketplace to see if your company provides health coverage and obtain information on any available discounts; otherwise if self-employed this would be your go-to place to shop for health coverage.
Exemptions
The individual mandate penalty (also referred to as the individual shared responsibility penalty) was an integral component of the Affordable Care Act (ACA, or Obamacare). It required most Americans to maintain health insurance or face a financial penalty assessed and collected by the IRS when individuals filed their federal tax returns between 2014 and 2018 who did not have qualifying coverage or qualified for an exemption. The penalty applied whether an exemption existed or not.
Federal health insurance penalties have since been discontinued; however, many states still impose individual mandates with penalties that must be paid if qualifying coverage isn’t present. Details regarding state mandates regarding required coverage amounts and penalties vary by state.
California, Massachusetts, Rhode Island, New Jersey and Vermont require residents to declare their coverage status when filing state taxes. Furthermore, all of these states and DC offer exemptions from individual mandate that can be claimed on your tax return; some examples are:
Hardship exemptions may apply if you found it financially impossible to afford affordable coverage or were faced with qualifying life events, such as losing your job, getting married, having children, or moving. Additional exemptions are available for members of the military or residents living abroad as well as short coverage gaps (Short Coverage Gap). With supporting documentation provided you may even claim an exemption!
Though the individual mandate penalty has been lifted from the Affordable Care Act (ACA), it’s essential that you are informed and prepared for potential changes. The ACA mandate has long-term financial ramifications; stay abreast of all developments regarding it for optimal results. If you have any inquiries about how it could impact you or a family member, reach out to our team – they would be more than happy to guide you through all available solutions.
