Yes, the ACA’s individual mandate penalty is still in effect, and will continue to be in effect in 2018. If you’re uninsured in 2018 and not eligible for an exemption, you’ll owe a penalty when you file your taxes in early 2019. But after that, the penalty will not be assessed.
Nearly eight years after it was enacted, most parts of the Affordable Care Act (aka Obamacare) are supported by the majority of Americans. This includes guaranteed-issue coverage regardless of pre-existing conditions, premium tax credits (subsidies) that make coverage more affordable, coverage for essential health benefits, the elimination of annual and lifetime benefit maximums, and the expansion of Medicaid.
But the individual shared responsibility penalty, aka the individual mandate, has remained an unpopular provision of the law. The mandate went into effect in 2014 and requires all Americans to maintain health insurance coverage unless they’re eligible for an exemption. There’s a penalty assessed by the IRS on people who don’t maintain coverage and who aren’t eligible for an exemption.
The Penalty Started Out Small But Has Grown Over Time
- In 2014, the penalty was $95 per uninsured adult (half that amount per child), up to $285 per family, OR 1 percent of household income above the tax filing threshold.
- The IRS reported that among tax filers who owed a penalty on 2015 returns, the average penalty was $210.
- In 2015, the penalty was $325 per uninsured adult (half that amount per child), up to $975 per family, OR 2 percent of household income above the tax filing threshold.
- The IRS reported that among tax filers who owed a penalty on 2015 returns, the average penalty was $470.
- In 2016, the penalty was $695 per uninsured adult (half that amount per child), up to $2,085 per family, OR 2.5 percent of household income above the tax filing threshold.
- The 2.5 percent of income penalty was slated to remain level in 2017 and beyond, but the flat-rate penalty was to be adjusted annually for inflation, starting in 2017. However, the IRS announced in late 2016 that the inflation adjustment for 2017 would be zero, and the same thing happened for 2018; the flat-rate penalty for 2017 and 2018 has thus remained at $695 per adult, half that amount for children, up to $2,085 for a family.
Is the Penalty Still Being Assessed Under the Trump Administration?
Yes, the penalty is still being assessed. That will change as of 2019, but people who are uninsured in 2018 will still owe a penalty when they file their taxes in early 2019.
President Trump campaigned on a promise to repeal the ACA and replace it with something else. Republicans in the House passed the American Health Care Act (AHCA) in 2017 but the legislation failed in the Senate, despite repeated attempts by GOP Senators to pass it.
Ultimately, Republican lawmakers passed the Tax Cuts and Jobs Act and President Trump signed it into law in December 2017. Although the tax bill leaves the rest of the ACA intact, it repeals the individual mandate penalty, as of 2019 (other provisions of the tax bill take effect in 2018, but the individual mandate repeal is delayed by a year).
On his first day in office, Trump issued an executive order aimed at “minimizing the economic burden” of the ACA. It essentially instructed federal agencies to be as lenient as possible in their enforcement of ACA taxes and penalties.
The penalty itself is specified in the text of the ACA, meaning that legislation (as opposed to just regulatory action by HHS or the IRS) was necessary in order to change or eliminate the penalty. The tax bill will repeal the penalty as of 2019, but until then, the IRS has to continue to enforce it.
However, under the terms of Trump’s executive order, the IRS can more lenient in terms of granting exemptions from the penalty. And they quietly made a change in February 2017, noting that they would continue to accept “silent returns” for 2016. But that changed in early 2018, when tax returns for 2017 were processed. Here’s what it all means:
- On line 61 of Form 1040, the IRS asks all tax filers whether or not they had health insurance coverage throughout the year (this has been the case since 2014). Most Americans do have health insurance, and can just check the box that says “full year coverage” and carry on with the rest of the return. But for those who didn’t have full-year coverage, the process is a bit more complex: they have to either attach Form 8965 for an exemption, or calculate the applicable penalty.
- For 2014 and 2015 tax years, the IRS did not reject returns when line 61 was left blank (ie, a “silent” return). Most tax filers completed line 61 anyway (about 90 percent of Americans have health insurance, so this isn’t really an issue for most filers, and millions of tax filers did have penalty assessments for 2014 and 2015).
- For 2016 tax returns, however, the IRS had intended to stop accepting silent returns. They were going to begin rejecting returns that didn’t indicate whether the tax filer had health insurance during the year (and although the IRS does not have their normal enforcement authority for the ACA penalty, it’s always illegal to lie to the IRS).
- The IRS reversed course, however, and continued to accept silent returns for the 2016 tax year. They noted that the change was a direct result of Trump’s executive order.
- However, for 2017 tax returns, filed in early 2018, the IRS no longer accepted silent returns. Every tax filer had to answer the question about whether they had health insurance during the year. This will continue to be the case with 2018 returns that are filed in early 2019, as the penalty will still apply for people who were uninsured in 2018. After that, it won’t matter as much. Although the individual mandate will technically still be in effect in 2019 and beyond, there will no longer be a penalty associated with non-compliance. The IRS will likely focus instead on reconciling premium subsidies and enforcing the employer mandate.
So although there has been considerable confusion in terms of what’s going on with the individual mandate penalty under the Trump Administration, the filing process with regards to the individual mandate was the same for 2014-2016 returns, but became more strict for 2017 returns, as silent returns were no longer accepted. And although the penalty will ultimately be eliminated, there will still be a penalty, assessed in 2019, for people who are uninsured in 2018.
Penalty for the 2018 Tax Year
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 was implemented in 2014, and became progressively steeper through 2016. For 2017 and 2018, the penalty remained at the same level it was at in 2016. The penalty will be eliminated after the end of 2018, however, as a result of the Tax Cuts and Jobs Act (H.R.1) that was enacted in late 2017. But for 2018, the penalty still applies, just as it has since 2014.
The average penalty for people who were uninsured in 2015 was $470—up from $210 the year before. And according to preliminary data from the IRS, the average penalty was $667 for tax filers who owed the penalty for being uninsured in 2016 and who had filed their tax returns by early March, 2017.
Exemptions to the Penalty
When filing your taxes, it is important to note that 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. In order to be exempt from the penalty in 2018, there are a number of things you should know:
- The gap in coverage had to be less than three months. 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 was to end on the 15th of March (it’s 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 adopt a child and are backdating the coverage to the date of the birth/adoption).
- You are only allowed one gap each coverage 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.
- Even if the only part of the gap was in 2018, you may still be penalized. Say that you were uninsured at the end of 2017 but not for long enough to trigger a penalty in 2017, the IRS will add that time onto the total length of your coverage gap if you remained uninsured at the start of 2018. So for example, if you were uninsured in November, December, January, and February, you wouldn’t pay a penalty for 2017, since your coverage gap that year was only two months (assuming you were insured from January to October). But your 2018 coverage gap would start from November and would count as four months—meaning that you’ll owe a penalty.
- You cannot be penalized twice. Under the same scenario, if your gap in coverage at the end of 2017 was long enough that you did owe a penalty (for example, October, November, December), then your gap in coverage for 2018 would start counting as of January. As such, you won’t be double-penalize for the same months. What you cannot do, however, is put two gaps of two months each back-to-back at the end or beginning of the year to avoid the penalty.
Calculating Your Penalty
Calculating the penalty can often seem complicated. To put it into the simplest terms, if you were uninsured for all 12 months of 2018 the penalty would be the greatest of:
- $695 per uninsured adult (half that amount for a child)
- Up to $2,085 for the whole tax household
- 2.5% of household income above the tax filing threshold
Whatever the greatest of the three amounts is what you would pay.
If you have a gap in coverage of three months or longer (and are not eligible for an exemption), you will have to pay 1/12th of the total penalty times the number of months you were uninsured.
For example, if you are single tax filer who was without insurance for six months and are subject to the annual $695 penalty, simply divide $695 by 12 months ($695 ÷ 12 = $57.92) to get your monthly penalty.
You would then multiply $57.92 by the six months you were without insurance ($57.92 x 6 = $347.52) to calculate your penalty for 2018.
The penalty is collected when you file your tax return. If you are owed a refund, the IRS will subtract the penalty from that refund.
How Will Elimination of the Individual Mandate Penalty Affect Your Health Insurance?
Republican lawmakers introduced a variety of health care reform bills during the 2017 legislative session, aimed at repealing or changing various aspects of the ACA. However, the bill that ultimately passed, the Tax Cuts and Jobs Act, leaves most of the ACA intact. The only part that’s changed is the individual mandate penalty. And while it’s eventually eliminated by the tax bill, that won’t take effect until 2019. People who are uninsured in 2018 will still face a penalty when they file their 2018 taxes in early 2019.
The elimination of the individual mandate penalty in 2019 is contributing to higher premiums for 2019, because insurers expect that the people likely to drop their coverage after the penalty is eliminated will be healthy, whereas sick people will tend to keep their coverage. The penalty’s original purpose was to encourage healthy people to join the risk pool, as a balanced risk pool (with enough healthy people to offset the claims costs of the sick people) is necessary for any health insurance product to function.
According to the rate filings that have been publicized as of July 2018, a significant portion of the average proposed rate hikes across the country is due to the impending elimination of the individual mandate penalty, along with the Trump Administration’s efforts to expand access to short-term plans and association health plans (those plans are likely to appeal to healthier individuals, so their expansion has the same effect as the penalty repeal, in terms of reducing the number of healthy people who maintain ACA-compliant individual market coverage).
Some States Will Continue to Have Individual Mandate Penalties
With the impending elimination of the federal individual mandate penalty, some states have considered implementing their own mandates and penalties:
- Massachusetts already had a mandate and penalty, which has been in place since 2006. The state has not been assessing the penalty on people for whom the federal penalty applied, but will start assessing the penalty again in 2019.
- New Jersey will have an individual mandate and an associated penalty starting in 2019.
- The District of Columbia will also have an individual mandate and associated penalty as of 2019.
- Vermont will have a mandate and penalty starting in 2020, but the state is still working out the details of how it will be implemented, and there will not be a mandate or penalty in Vermont for 2019.
Rejection of Your Tax Return
Although the penalty’s days are numbered, the IRS has actually stepped up enforcement of the penalty in 2018. When filing your 2018 tax return (due April 15, 2019), be aware that the IRS is no longer accepting returns that don’t answer the question as to whether the tax filer had health insurance during the year.
If the question is not answered, your return will not be processed and you may be subject to late filing penalty fees.