ACA Penalty Increased Sharply Through 2016; Remained Steady in 2017

There Is Still a Penalty in 2017, Although GOP Lawmakers Want to Repeal It

Average Obamacare individual mandate penalty will be nearly $1000 in 2016
Still uninsured? The average Obamacare penalty in 2016 is projected to be 5 times what it was in 2014. Tetra Images/Getty Images

One of the most controversial aspects of the Affordable Care Act is the shared responsibility provision, often referred to as the individual mandate penalty. The ACA requires most individuals to maintain health insurance coverage or pay a penalty.

This caught some people unawares when they filed their 2014 tax return - they found out the hard way when they realized they owed a penalty for not having had health insurance in 2014.

Since open enrollment for 2015 had already ended before many Americans filed their tax returns for 2014, the government granted a one-time special enrollment period in the spring of 2015, allowing people another chance to enroll in 2015 coverage if they had just found out about the penalty when they filed their taxes.

At this point, midway through the third full year of ACA implementation and in the midst of the GOP efforts to repeal and replace the ACA, awareness of the shared responsibility provision is much higher than it was prior to 2014. But there is still considerable confusion about how much the penalty is and how much it will be in the future, assuming it's not repealed.

Average Penalty in 2014 was $200

The IRS reported that the average tax filer who owed a shared responsibility provision penalty for 2014 had a penalty amount of about $200. That's based on the fact that the penalty in 2014 was the greater of $95 per uninsured adult (half that amount for a child), OR 1% of household income above the tax filing threshold.

Average Penalty in 2015 was $470

The penalty was significantly higher for people who remained uninsured in 2015. The IRS reported that the average tax filer who owed a shared responsibility provision penalty for 2015 had an average penalty amount of $470—more than double the average penalty from the year before.

But the good news is that fewer people were subject to the penalty in 2015. The IRS reported that about 6.5 million tax filers owed the penalty on their 2015 returns, versus about 7.5 million who owed the penalty on their 2014 returns.

Penalty Expected To Be Nearly $1,000 for 2016

The penalty climbed sharply again for people who didn't have health insurance in 2016. For people who are uninsured in 2017, the penalty remains at the same level it was in 2016.

The 2016 tax filing season is over, but we won't know exactly how much the actual average penalty for 2016 was until the IRS finishes compiling the data. But we can estimate, and the estimates confirm that people who remained uninsured in 2016 faced larger penalties when they filed their 2016 tax returns than they had faced in prior years. 

A December 2015 Kaiser Family Foundation analysis estimated that the average penalty for 2016 would be $969 per tax household for people who remained uninsured in 2016 and were "marketplace eligible" (for that group, the analysis excluded people who are eligible for Medicaid, in the coverage gap because their states haven't yet expanded Medicaid, or eligible for coverage through their employers).

So the average penalty for 2016 was projected to be nearly a thousand dollars, and it doesn't buy anything at all...

people who owe the penalty are still uninsured and have no safety net if they end up needing significant medical care during the year. 

The actual penalty amount varies depending on household size and income (you can calculate the penalty for your specific situation), but the calculations used to determine the penalty in 2015 and 2016 resulted in much higher total penalties than in 2014:

  • In 2015, the penalty was the greater of $325 per uninsured adult and $162.50 per uninsured child (up to a maximum of $975 per household), OR 2% of household income above the tax filing threshold. 
  • In 2016, the penalty was the greater of $695 per uninsured adult and $347.50 per uninsured child (up to a maximum of $2,085 per household), OR 2.5% of household income above the tax filing threshold.
  • Starting in 2017, the flat rate penalty is adjusted for inflation, but the 2.5% of household income penalty remains at that level going forward. For 2017 only, however, the IRS confirmed that there would be no inflation adjustment for the flat rate penalty. So the penalty for being uninsured in 2017 is the same as it was in 2016. 
  • Assuming the ACA's individual mandate penalty isn't repealed, people should expect an inflation adjustment to the flat rate penalty for 2018 (ie, it will be higher than $695 per person), but the 2.5% of income penalty will remain in place.

Penalty deducted from refund

If you get a refund from the IRS at tax time, the shared responsibility penalty will be subtracted from your refund. 80% of tax filers get a refund, which has averaged about $2,800 in recent years - more than enough to cover the average penalty owed by uninsured tax filers.

Get covered instead

If you're uninsured and considering remaining that way, make sure you know how much your penalty will be when you file your taxes the following year. Particularly if you're eligible for a premium subsidy through the exchange, you may find that the penalty amount you'd otherwise have to pay would be enough to cover several months of subsidized health insurance premiums—instead of just paying a penalty and getting nothing at all in return.

Enroll through the exchange if you qualify for a subsidy, or if you think there's a chance your income might make you subsidy eligible at a later point in the year. But if you're certain there's no chance you'll be eligible for a premium subsidy, you can also consider off-exchange plans (subsidies are available in the exchange if your income doesn't exceed 400% of the poverty level, which is $98,400 for a family of four).

Will the ACA Penalty Continue to Exist?

For the time being, there is still a penalty for being uninsured in 2017. But the American Health Care Act (AHCA), which passed the House in May 2017 and is under consideration in the Senate, would eliminate the penalty retroactively to the beginning of 2016. 

If that legislation were to be enacted, the IRS would have to refund the penalties that were collected during the 2017 tax filing season, since those were assessed on people who didn't have coverage in 2016. According to the Congressional Budget Office, retroactive repeal of the individual mandate penalty would result in approximately 1 million people dropping coverage in the individual market in 2017, and a total of 8 million fewer people enrolling in individual market coverage in 2018.

As a result, the CBO also estimates that health insurance premiums in the individual market would climb by 20 percent in 2018 (in addition to whatever increase they would have seen under current law), because the people who would tend to drop coverage would be the healthy enrollees who are necessary in order to stabilize the risk pool.

Sources:

Congressional Budget Office, H.R.1628, American Health Care Act of 2017, Cost Analysis. May 24, 2017.

Internal Revenue Service, Revenue Procedure 2016-55.

Kaiser Family Foundation, Cost of the Individual Mandate Penalty for the Remaining Uninsured. December 9, 2015.

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