The Obamacare Shared Responsibility Tax

While Term health insurance is an affordable alternative to Obamacare, coverage does not prevent people from paying the uninsured tax under the Affordable Care Act. Below is an overview of the tax, its costs, who has to pay it, and who may be exempt.

The tax applies to individuals who have gone without a qualified health plans (such as Obamacare or employer-based plans) for three months or more within a calendar year. Term Health plans are designed to be for a defined period of time. Thus, a consumer who has a Term Health plan for a period of less than three consecutive months, and Obamacare coverage for the remainder of the year, may not be subject to the uninsured tax.

For those who are considering Term Health for three months or longer, the tax is prorated based on the number of months a consumer went without coverage compliant with the Affordable Care Act (“ACA”). Taxpayers will be charged a portion of the total penalty for the months that they are considered not covered by an ACA plan.

For 2016, the uninsured tax is the higher of the following two amounts: 1

  • $695 per person for the year, but only $347.50 per child under 18, up to a maximum of $2,085
  • 2.5 percent of taxable household income, capped at the national average premium for an Obamacare bronze plan in 2016 2

A common misconception about the Obamacare uninsured tax is that the tax is based on total household income. However, the uninsured tax is only based on taxable income over the tax filing threshold. Individuals with household income less than the tax filing threshold do not have to pay any uninsured tax. Taxable income includes salary, adjustments for additional income, exemptions, and deductions. People pay the uninsured tax when they file their tax return for the year that they were uninsured.*Taxable income over the estimated 2016 tax filing threshold of $10,450

Since term insurance plans are not considered qualified health plans under the Affordable Care Act, people that enroll in a term health insurance plan have to pay the uninsured tax unless they qualify for one of the exemptions to the uninsured tax. The Congressional Budget Office has projected that only 3.9 million Americans will pay the tax for being uninsured in 2016.3

Are there exemptions from the Obamacare Uninsured Tax?

There are many exemptions to the Obamacare uninsured tax including: 4

  • The lowest priced qualified health plan available to you (either through an Obamacare marketplace or a job-based plan) would cost more than 8.13% of your household income
  • You don’t have to file a tax return since your income is below the filing threshold
  • You were uninsured for no more than 2 consecutive full months of the year
  • You would have qualified for Medicaid if your state had expanded Medicaid
  • You’re a member of a recognized health care sharing ministry or a religious sect with objections to insurance, a tribe or you are eligible for services through an Indian Health Services provider
  • You’re incarcerated, a U.S. citizen living abroad, or not lawfully present in the U.S.

People can also qualify for an exemption based on the following hardships:

  • Your individual insurance plan was cancelled and other marketplace plans are unaffordable
  • You filed for bankruptcy in the last 6 months or had substantial debt as a result of medical expenses that you couldn’t pay in the last 24 months
  • You were homeless, evicted in the past 6 months, faced eviction or foreclosure, or received a shut-off notice from a utility company
  • You recently experienced domestic violence
  • You recently experienced the death of a close family member, a fire, flood, or other natural or human-caused disaster that caused substantial damage to your property
  • You had increased expenses due to caring for an ill, disabled or aging family member
  • You’re eligible to enroll in an on-exchange qualified health plan or get subsidies for a time period when you were not enrolled in an on-exchange qualified health plan

The IRS provides additional information on exemptions from the Obamacare uninsured tax. In order to receive the exemption, an individual must file a request with the IRS and be approved. As noted by investor website The Motley Fool, an unconventional approach for people that do not qualify for an exemption but still desire not to pay the uninsured tax is to forego a tax refund.5 The tax penalty is paid out of a person’s would-be tax refund so, technically, if a person does not receive a tax refund then the Obamacare tax will not be taken out. If someone uses this approach, then they must also be careful to avoid the penalty for underpaying taxes, and they must also avoid having a tax refund in future years.

The following types of plans count as qualified health plans, so people enrolled in these plans would also not need to pay the Obamacare uninsured tax6:

  • Any Obamacare marketplace plan
  • Most individual plans bought outside the marketplace including grandfathered plans
  • Any job-based plan, including retiree plans and COBRA
  • Medicare Part A or Medicare Advantage
  • Medicaid or Children’s Health Insurance Program
  • Coverage under a parent’s plan if you’re under 26 or self-funded coverage for university students
  • Peace Corps volunteers health coverage
  • Certain veterans’ health coverage types from the Department of Veterans Affairs
  • Most TRICARE plans
  • Department of Defense Non-appropriated Fund Health Benefits Program
  • Refugee Medical Assistance
  • State high-risk pools for plan years starting on or before December 31, 2014

Conclusion

Each individual’s tax situation and health insurance needs are different. To calculate their specific tax penalty, consumers should consult a tax expert, or use a calculator such as the one available at: http://taxpolicycenter.org/taxfacts/acacalculator.cfm.

This article is offered for informational purposes and not advice. For advice on Obamacare tax obligations, always consult a professional tax consultant.

  1. Health Care Law: What’s New for Individuals and Families. https://www.irs.gov/pub/irs-pdf/p5187.pdf
  2. For the purposes of the uninsured tax, the national average premium for a bronze plan in 2015 was $207 per person per month, but only $1,035 per month for a family of five or more.Examination of returns and claims for refund, credit, at abatement; determination of correct tax liability.www.irs.gov/pub/irs-drop/rp-15-15.pdf
  3. Payments of Penalties for Being Uninsured Under the Affordable Act: 2014 Update. https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/45397-IndividualMandate.pdf
  4. Ibid.
  5. Caplinger et al. 3 ways to avoid paying Obamacare’s tax penalties. August 18, 2015. Motley Fool.www.fool.com/how-to-invest/personal-finance/taxes/2015/08/18/3-ways-to-avoid-paying-obamacares-tax-penalties.aspx
  6. Plan types that count as coverage.www.healthcare.gov/fees-exemptions/plans-that-count-as-coverage/

AFFORDABLE CARE ACT TAX. Term health insurance is health insurance outside of the Affordable Care Act ("Obamacare"). It does not include all ten of the minimum essential benefits of Obamacare and it does not cover pre-existing conditions. To learn more about the tax, its exemptions, and how to calculate the affordability of term health with the tax, see here. To learn more about the differences between Term health insurance and Obamacare, see here.