8845 / What is the penalty if an individual fails to obtain the required health insurance under the Affordable Care Act?

Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed. Late in 2019, the 5th Circuit Court of Appeals held that the individual mandate was unconstitutional. The rest of the ACA survived the latest Supreme Court constitutional challenge in 2021 and continues to be effective.

Health care reform required that most Americans have health insurance beginning in 2014, or a monetary penalty is imposed.

Unless exempt, individuals must have major medical health coverage provided by their employer or that they purchase themselves, or, for tax years prior to 2019, they were required to pay a fine that was the greater of a flat amount, or a percentage of income (above the tax filing threshold). The amounts were as follows:

(1)  $95 or 1 percent of income in 2014;

(2)  $325 or 2 percent of income in 2015; and

(3)  $695 or 2.5 percent of income in 2016-2018.¹

Families were to pay half the penalty amount for children under 18, up to a cap of $2,085 per family. After 2016, penalties were indexed to the Consumer Price Index.

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Planning Point: Despite the repeal of the federal individual mandate, several states have already enacted their own state-level versions of the mandate. For example, New Jersey adopted its own state-level individual mandate for failure to purchase qualifying health insurance. The New Jersey law references the federal law. Like the federal rule, individuals may be exempt from the penalty if they fail to obtain coverage for religious reasons or if they are incarcerated. The penalty is equal to the amount that would have been owed had the federal mandate not been repealed: the greater of $695 for adults or 2.5 percent of income. The penalty is capped at the average premium cost of a bronze level policy in the state.

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Exemptions from the individual penalty were granted for financial hardship, religious objections, American Indians, those without coverage for fewer than three months, undocumented immigrants, incarcerated individuals, those for whom the lowest cost plan option exceeds 8 percent of an individual’s income, and those with incomes below the tax filing threshold.² See Q 8847 for a detailed discussion of these exemptions.

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1.  IRC § 5000A(c), Rev. Proc. 2016-55; Rev. Proc. 2017-58.