As we press forward with implementation of health care reform, one of the things that has not been fully discussed is the penalty for not having “minimum essential coverage.” This is the “tax” on the individual who does not have coverage. We know that for large employers (over 50 employees) who do not offer a qualified health plan, the penalty is between $2,000 and $3,000, depending on the individuals who participate in the exchange. But what about those who don’t have coverage? What is their penalty?
First, a side note about “minimum essential coverage.” Minimum essential coverage is not the same as “essential health benefits.” Minimum essential coverage is simply that coverage that is sufficient to satisfy the individual mandate. It can be offered by an employer (or governmental entity). If an employer offers a qualified health plan (meaning it satisfies the requirements of PPACA related to benefits and limits and meets the bronze, silver, gold or platinum standards), the assumption is that this plan will meet the definition of “minimum essential coverage.” But they are not interchangeable.
Assuming an individual does not have minimum essential coverage, the annual penalty will be the greater of a flat dollar amount per individual or a percentage of the individual’s taxable income. Dependents under 18 are not treated as a full person so for dependents under the age 18, the penalty is half of the penalty for an individual.
The flat dollar amount per individual is $95 in 2014; $325 in 2015 and $695 in 2016. After 2016, the flat dollar amount is indexed to inflation. The flat dollar penalty is capped at 300% of the flat dollar amount. It works something like this:
- A family of three, with two partners and one child under 18 would have a flat dollar penalty of $237 for 2104 ($95 + $95 + $47)
- A family of four, with two parents and two children over 18 would have a flat dollar penalty of $285 in 2014 because the 300 % cap would apply ($95 * 4 = $380).
Since it is the greater of the flat or a percentage, you also have to consider the percentage of income test. The Act contains a specific definition of “income” for this test, but generally it would be similar to calculating household income for tax filing purposes. The percentage of taxable income is an amount equal to a percentage of a household’s income less the tax filing threshold. For 2014, it is 1%, 25 in 2015 and 2.5% in 2016. So as an example:
- If an individual has a household income of $50,000 in 2014, the percentage would be 1% of the difference between $50,000 and the tax threshold for 2014 (which is not yet defined). Assuming that the threshold is $15,000, for 2014, the percentage would be calculated on $35,000 ($50,000 - $15,000) and 1% of that is $350. Because this percentage penalty is greater than the flat dollar penalty for 2014 ($95), the individual would pay the higher penalty of $350.
Ideally everyone will get coverage and not pay any penalties. But individuals seeking to remain self-insured should be aware of these penalties.