Understanding The Obamacare Health Insurance Penalty

Unless you’ve been living in an alternative universe for the past few years, you are surely aware of Obamacare, also known as the Affordable Care Act of 2010 or ACA for short. In a nutshell, it requires that almost every man, woman and child legally residing in the United States buy health insurance that meets provisions of the law or face a penalty. Depending on who’s doing the talking, that penalty is also sometimes called the individual mandate, a tax or the shared responsibility payment.

Whatever you call the penalty, in 2014, it will be assessed at $95 per adult and $47.50 per child, up to a maximum of $285, or 1% of your taxable income, whichever is greater. Not a huge hit, but it increases every year. In 2015, it will be the greater of $325 per adult (and half that amount per child) to a maximum of $975, or 2% of your taxable income. In 2016, it jumps to $695 per adult (and half that per child) to a maximum of $2,085 or 2.5% of your taxable income, again, whichever is more. After that, the penalty will be adjusted annually for inflation. According to the IRS, which the Affordable Care Act has empowered to enforce the penalty, “You will owe 1/12th of the annual payment for each month you (or your dependents) do not have coverage and are not exempt.” This year, you have until March 31 to buy your ACA-compliant health care policy before being slapped with the penalty. (If you’d like to stop reading now and shop for health care coverage online, go right ahead.)

How does the IRS collect the penalty?

This all seems simple enough, but like everything else in the 3000-plus pages of the Affordable Care Act, the devil is in the details. One of the most interesting details is the provision in the law that covers collecting the penalty.

Now, normally, if you owe the IRS money, they have plenty of ways to collect it. The collection process usually starts with a scary official IRS letter warning you to pay up or else. Ignore the letter the “or else” escalate to garnishing your wages, attaching your bank account or seizing your personal property. In the worse-case scenario, they can even put you on trial and send you to jail. (All of this can severely mess up your credit rating –  more on that in a minute. ) But when it comes to the ACA penalty, the Democrat-controlled Congress that passed the law  thought it might look bad to have some single mom’s minivan confiscated because she couldn’t come up with her shared responsibility payment. So, Congress banned the IRS from using any of those tactics. As of now, the only way the IRS can assess the penalty is by deducting it from any tax refund you’re due. What if you aren’t due a tax refund? According to Andy Grewal, a University of Iowa law professor who specializes in tax issues, “They might send you a sternly worded letter.”

Before you breathe a huge sigh of relief and decide to play the odds that you’ll skate through another year without a serious illness or savings-account-busting accident, keep this in mind: President Obama has already changed provisions of his signature law several times. He might decide to get out his pen and change this provision, too.

Then there’s that little issue about your credit rating that we mentioned earlier. According to Herb Weisbaum, a Today.com contributor, “Unlike many other debts owed to the federal government, unpaid taxes are not reported to credit bureaus. The IRS is not allowed to directly share this information because of federal privacy laws.” Weisbaum points out that cash-strapped Congress can always change that, and while nobody has proposed doing so yet, the Senate Finance Committee has asked the General Accounting Office to “look at the issue.” While the relatively small Obamacare penalty might not deter you, the prospect of being denied a mortgage or paying two-digit interest rates for a new car because you laughed at that sternly-worded IRS letter could do the trick.

Of course, the real reason to buy health care coverage shouldn’t be based on your fear of what the President, Congress or the IRS might do. As Linda Riddell, health policy analyst points out, “The real reason to buy health insurance is to avoid having to sell your house, your car, and all that you own and love…if you or a family member became seriously ill.”

If you’d like to learn more about provisions of the Affordable Care Act specific to your state, see the State Guides to Health Insurance Coverage at Einsurance.com.


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