How Long Can You Go Without Insurance & Not Owe a Penalty?

The ACA allows for a "short gap" in coverage—here's how it works

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The overarching goal of the Affordable Care Act was to extend health insurance coverage to as many Americans as possible. In that regard, it's had significant success, with the uninsured rate now hovering around 9 percent. Since 2010, the number of people with health insurance in the U.S. has increased by roughly 20 million. 

But while access to health insurance is important, it's also important that people maintain their coverage going forward.

Keeping as many people as possible in the risk pool - especially when they're healthy and not in need of immediate care - keeps premiums affordable. And while health insurance coverage is certainly not cheap, it would be far more expensive if people could just wait until they were sick before purchasing coverage.

A Penalty for Being Uninsured

The ACA has plenty of carrots in the form of guaranteed-issue coverage and subsidies to make coverage and care more affordable, including premium subsidies, and cost-sharing subsidies. But there's also a stick, in the form of a financial penalty for people who fail to maintain health insurance coverage throughout the year.

The penalty has gotten progressively steeper since 2014. The average penalty for people who were uninsured in 2015 was $470—up from $210 the year before. And for people who owed penalties during the 2017 tax filing season (for being uninsured in 2016), the average penalty was expected to be almost $1,000.

A Short Gap in Coverage—How Does That Work?

But there are numerous exemptions from the penalty. One of them is a provision that allows people to have one short gap in coverage during the year, as long as it's less than three months long. This is somewhat self-explanatory, but there are still some points that might need clarification:

  • The gap in coverage has to be less than three months long. As long as you have coverage for at least one day in the month, you're considered to have coverage for that month. So for example, if a health plan through a former employer were to end on the 15th of March (not a common scenario for a plan to end on a day other than the last day of the month, but it's possible), you could be uninsured for the rest of March, all of April, and all of May. But you'd need to have coverage in place for June in order to avoid the penalty. And individual health insurance is now only available with first-of-the-month effective dates (unless you have a new baby or adopted child and are backdating the coverage to the date of the birth/adoption).
  • You only get an exemption for one short gap in coverage per year. So if you're uninsured for one month in June and then uninsured again for a month in September, you would not be exempt from the penalty in September.
  • If you were uninsured at the end of 2016 but not for long enough to trigger a penalty in 2016, the IRS will add that time onto the total length of your coverage gap if you remained uninsured at the start of 2017. So for example, if you were uninsured in November, December, January, and February, you wouldn't pay a penalty for 2016, since your coverage gap that year was only two months (assuming you were insured from January to October). But your 2017 coverage gap would start from November, and would count as four months—and you'd owe a penalty. If your gap in coverage at the end of 2016 was long enough that you did owe a penalty (for example, October, November, December), then your gap in coverage for 2017 would start counting as of January—ie, they won't double-penalize you for the same months, but you can't put two gaps of two months each back-to-back at the end/beginning of the year and avoid the penalty.
  • If your gap in coverage lasts three months or longer, you'll owe a penalty, and it will apply to the entire gap. The penalty amount is prorated based on how long you're uninsured, but if your gap in coverage is three months or longer, none of the uninsured months are exempt from the penalty.
  • The penalty for the full year in 2017 is the greater of: $695 per uninsured adult (half that amount for a child), up to $2,085 for the whole tax household, OR 2.5% of household income above the tax filing threshold (this is the same as the 2016 penalty; although the flat rate was scheduled to increase for inflation each year starting in 2017, the IRS clarified that the inflation increase for 2017 was zero, so the penalty did not change). Your prorated monthly penalty is 1/12 of the annual penalty amount. If you have a gap in coverage of three months or longer (and you're not eligible for one of the other exemptions from the penalty), you'll have to pay 1/12 of the total penalty times the number of months you were uninsured. The penalty will be collected when you file your tax return (if you are owed a refund, the IRS will subtract the penalty from your refund).
  • If you have one short gap in coverage that lasts less than three months, you can claim your exemption from the penalty when you file your tax return.

What about the AHCA and the Trump Administration?

Although the future of the ACA is uncertain under the Trump Administration and a Republican-controlled Congress, nothing has changed for now, and there is still a penalty for being uninsured in 2017.

House Republicans passed the American Health Care Act in early May, and the Senate is working on their version of the bill. If the House version were to be enacted, it would eliminate the individual mandate penalty, retroactively to the start of 2016. That would mean no penalties for being uninsured in 2017, and refunds for people who were already assessed penalties for being uninsured in 2016. 

But the AHCA has an uncertain future in the Senate, and we don't know what their version of the legislation will contain, assuming they pass a bill.

It's also notable that the AHCA would impose higher premiums on people who don't maintain continuous coverage and later purchase coverage in the individual market. The House version of the bill calls for a 30 percent premium increase for one year if an applicant had a gap in coverage of at least 63 days during the previous year. Alternatively, states could seek waivers that would allow insurers to base premiums on medical history if an applicant hadn't maintained continuous coverage. If the AHCA is enacted, the only way to fully protect against these higher premiums will be to maintain coverage year-round. 

Sources:

Centers for Disease Control, National Center for Health Statistics. Health Insurance Coverage: Early Release of Estimates from the National Health Interview Survey, 2016.

IRS, Revenue Procedure 2016-55.

IRS Commissioner, John Koskinen. Letter to Congress regarding penalty and APTC payments for 2014 tax year. January 8, 2016.

IRS Commissioner, John Koskinen. Letter to Congress regarding penalty and APTC payments for 2015 tax year. January 9. 2017.

Kaiser Family Foundation. Summary of the American Health Care Act, May 2017.

 

 

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