The Lowdown on the Health Insurance Penalty

What is the penalty if I decide not to buy health insurance in 2014? How will I be charged?

The health care law requires just about everyone to have health insurance in 2014 or pay a penalty. The penalty starts small and grows over the next three years – beginning at $95 per person (half that per child under 18) or 1% of household income, whichever is higher, in 2014. In 2015, the penalty is $325 per person or 2% of household income, and in 2016 it’s $695 per person or 2.5% of household income. The penalty will stay at that level, adjusted for inflation, after that. The IRS will assess penalties for 2014 when you file your 2014 tax return. The penalty will be taken out of any refund you're owed (but the IRS can't use tax liens to try to collect the money, as it can with other types of payments due).

The penalty isn’t as dire as it sounds for large families. The amount is capped at 300% of the per-person penalty, regardless of your family size (a maximum of $285 for 2014, which is 300% of $95). The percentage-of-income penalty is based on your modified adjusted gross income (your adjusted gross income, found on the bottom of page one of your Form 1040, plus tax-exempt interest and foreign income) minus the filing threshold for your family size ($10,150 for an individual). The percentage-of-income calculation uses joint income if you’re married filing jointly, regardless of the number of people who are uninsured. The household income penalty is based on joint income even if one of the spouses is covered, says Mirian Rosenberg, a tax analyst with Thomson Reuters.

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Good news for super-high earners: The maximum penalty is limited to the national average annual premium for a bronze plan, which will be calculated in 2014 (many examples currently use $4,500 or $5,000 for individual coverage, which is the Congressional Budget Office’s estimate for the average bronze plan premium amount for individuals in 2016).

If you’re uninsured for part of the year, you’ll have to pay one-twelfth of the yearly penalty for each month you’re uninsured. The penalty doesn’t apply if you’re uninsured for less than three months or if you buy a policy through your state exchange by March 31, 2014.

To dodge the penalty, you need health insurance that qualifies as minimum essential coverage. That usually includes employer-sponsored coverage, retiree health insurance, policies purchased on and off the exchanges, individual policies you already have (see President Obama Allows Insurers to Extend Canceled Health Insurance Policies for more information), Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), Tricare for servicemembers, military retirees, their families and survivors, Veterans health care programs and some other types of coverage. See the list of qualifying types of policies at HealthCare.gov. And for more information about the types of policies that qualify, groups that are exempt and how to claim an exemption, see the IRS’s Q&As about the Individual Shared Responsibility Provision.

Certain groups are exempt from the penalty, including people who were uninsured for less than three months during the year. Low-income people are exempt if the lowest-priced coverage available to you would cost more than 8% of your household income, or if you didn’t have to file a tax return because your income is too low. You’re also exempt if you’re a member of certain religious or other groups. See the HealthCare.gov fact sheet for a list of exemptions.

If you’re thinking about forgoing health insurance, remember that you’ll have to pay any health care bills out of your own pocket – which can quickly top thousands of dollars if you have an illness, accident or emergency. The cost of not having insurance can add up even if you’re lucky enough to remain healthy and have just a few doctor’s visits, tests or prescription drugs.

Starting in 2014, insurers can’t reject you or charge you more because of your health, and people who earn from 100% to 400% of the federal poverty level (up to about $46,000 for an individual and $94,000 for a family of four) can qualify for subsidies to help pay the premiums (see Calculating the Health Insurance Subsidy for details). For more information about the new law, see Get Ready for Obamacare. For advice on finding a policy, especially considering the difficulties with the HealthCare.gov Web site, see Navigating Around the Obamacare Sign-Up Problems.