The Health Insurance Individual Mandate: How It Works

The IRS's ability to collect the penalty for those who remain uninsured under the new health care law is very limited.

The most controversial portion of the Patient Protection and Affordable Care Act ("Obamacare") is the individual health care mandate--the requirement that most legal residents of the United States have at least minimal health insurance coverage. Starting in 2014, individuals who can afford health insurance coverage and are not otherwise exempt, must either purchase minimum essential health coverage, or pay a penalty to the IRS with their tax returns.

The purpose of the penalty is to discourage people from waiting until they get sick to purchase health insurance. This is something they will be able to do because Obamacare does not allow health insurers to refuse to insure people with preexisting conditions. The penalty only applies to taxpayers who can afford insurance but do not purchase it.

How Much Is the Penalty?

The exact amount of the tax penalty is based on household income above the level at which an uninsured individual is required to file a tax return. This penalty is scheduled to be phased in over the next several years as follows:

  • for 2014, the penalty was the greater of $95 or 1% of income
  • for 2015, the greater of $325 or 2% of income
  • for 2016, the greater of $695 or 2.5% of income, and
  • the $695 amount is indexed for inflation after 2016.

The penalty for children is half the amount for adults and an overall cap will apply to family payments. This cap will be three times the amount of the per-person penalty, regardless of how many people are in the family. Thus, the cap was $285 in 2014 but rises to $2,085 in 2016, after which point it will be indexed to inflation. Moreover, the total penalty can never be more than the cost of a minimal "bronze" heath insurance plan that can be purchased through a state health insurance exchange. The CBO estimates that these policies will cost $4,500-$5,000 per person and $12,000-$12,500 per family in 2015, with the costs rising thereafter.

All in all, for most people the penalty will be less than the cost of obtaining health insurance.

The Congressional Budget Offices says that of the 30 million non-elderly Americans it estimates will not have health insurance in 2016, only about six million will be subject to the tax. The remainder will be exempt because their income is too low or they qualify for another exemption.

How Will the IRS Collect the Penalty?

Taxpayers subject to the penalty are supposed to report the amount due on their tax returns and pay it along with their income taxes. What happens if they don't? Not nearly as much as when they don't pay their regular taxes.

The law greatly limits how the IRS can collect the penalty. It cannot use liens or levies to collect it and taxpayers are not subject to criminal prosecution or any additional penalty if they don't pay. Moreover, the IRS says that its revenue agents will not be involved in enforcing the penalty--that is, they won't ask you about it during an audit. All enforcement will be done through automatic assessments and computer-generated correspondence.

The only power the IRS will have to collect the penalty is to withhold it from an uninsured taxpayer's tax refund. Currently, most taxpayers get refunds because they have too much tax withheld during the year. Thus, one easy way an uninsured person can avoid paying the penalty is to make sure enough tax is withheld during the year that he or she will have little or no refund. As a result, some experts predict that the IRS will be unable to effectively enforce the penalty tax.

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How It Works

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