Calculating the health care individual mandate penalty

The shared-responsibility payment by applicable individuals, better known as the “individual mandate” penalty for failure to have qualifying health insurance coverage, was at the heart of the litigation over the Patient Protection and Affordable Care Act of 2010, P.L. 111-148 (PPACA), that culminated in the U.S. Supreme Court’s upholding the provision (National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566 (U.S. 6/28/12)).

As this article went to press, the mandate was scheduled to take effect Jan. 1 as stated in Sec. 5000A(a). However, the Obama administration was quoted in news reports saying that the payment would not be imposed on taxpayers who did not have coverage before April 1, noting that open enrollment on PPACA’s insurance exchanges ends March 31, and coverage begins the month after enrollment.

CPAs’ clients may need or just be curious to know how much the payment might be, or have mistaken or oversimplified notions of it. Beyond that, tax preparers will need to familiarize themselves with information-reporting guidelines for minimum essential benefits and their implications for the individual mandate, as those procedures, currently the subject of proposed regulations (REG-132455-11 and REG-136630-12), are finalized. They will no doubt also need to take the mandate into account in their client organizers and checklists for the 2014 tax year. Here is what is intended as a brief but helpful explanation.

Applicable individual. The shared-responsibility payment applies to anyone who does not have minimum essential coverage with respect to any month and who is not exempt from the requirement under Sec. 5000A(d) or (e). Exempt individuals are:

• Members of certain religious groups or “health care sharing ministries.”
• Those not lawfully present in the United States.
• Those incarcerated.
• Those unable to afford coverage (required annual contribution exceeds 8% of household income for the year, increased by any exclusion for a required contribution to an employer-sponsored plan made by a salary reduction arrangement).
• Those with income below the return filing threshold. Generally, the filing threshold is the personal exemption amount (doubled for married taxpayers filing jointly) plus the applicable standard deduction. Therefore, the filing threshold in 2014, for taxpayers under 65 and not blind, is $10,150 for single taxpayers and $20,300 for married couples filing jointly.
• Members of Indian tribes, as defined in Sec. 45A(c)(6).
• Those with a short coverage gap (less than three consecutive months during the year).
• Those who have suffered a hardship (certified by a PPACA insurance exchange) affecting their ability to obtain coverage. See Regs. Sec. 1.5000A-3(h). Department of Health and Human Services (HHS) regulations (45 C.F.R. §155.605(g)(1)) define hardships applicable to federally sponsored exchanges. State exchanges may follow federal guidelines or develop their own criteria. The HHS regulations state that an exchange may certify hardship where:
• An individual has experienced financial or domestic circumstances causing a significant, unexpected increase in essential expenses preventing him or her from obtaining coverage;
• Paying for coverage would cause serious deprivation of food, shelter, clothing, or other necessities; or
• An individual has experienced other circumstances that prevented him or her from obtaining coverage.

Additional HHS guidance (available at tinyurl.com/kbdndmu) lists 11 specific hardship circumstances, including filing for bankruptcy in the previous six months, recently experiencing domestic violence, experiencing a natural or human-caused disaster that resulted in substantial damage to the individual’s property, the recent death of a close family member, substantial debt from unreimbursed medical bills in the past 24 months, and an unexpected increase in essential expenses from caring for an ill, disabled, or aging family member.

Penalty amount. The penalty is the sum for each tax year of the lesser of (1) the sum of “monthly penalty amounts” for each month of failure to meet the coverage requirement, or (2) an amount equal to the national average premium for qualified health plan coverage offered through the exchanges at the “bronze” level for the applicable family size. The bronze plan has an actuarial value of 60%, which means that it covers 60% of total average costs of benefits covered under the plan.

The monthly penalty amount is one-twelfth of the greater of (1) a “flat dollar amount” or (2) a percentage of the taxpayer’s household income for the tax year above the applicable filing threshold, both phased in between 2014 and 2016. The flat dollar amount is an “applicable amount” times the number of family members without coverage, capped at 300% of the applicable amount. The applicable amount for adults is $95 for 2014, $325 for 2015, and $695 for 2016 and subsequently (indexed for inflation). The applicable amount for children under age 18 is half the adult amount (Sec. 5000A(c)(3)(C)). The excess household income percentage is 1% in 2014, 2% in 2015, and 2.5% in 2016 and subsequently.

Household income is aggregate modified adjusted gross income (MAGI) of the taxpayer and all other family members taken into account in determining family size for purposes of the penalty that are required to file an income tax return for the tax year. MAGI is adjusted gross income increased by foreign earned income and housing costs excluded under Sec. 911 and tax-exempt interest (Sec. 5000A(c)(4)(C)).

Therefore, in 2016, the excess household income percentage will exceed the flat dollar amount for a single taxpayer at an MAGI above about $38,200 (estimating an inflation-adjusted 2016 filing threshold of $10,400: ([$38,200 − $10,400] × 2.5% = $695)). For a married couple filing jointly with two children under 18, the corresponding household income is $104,200 ([$104,200 − $20,800] × 2.5% = $2,085 ($695 × 3)).

Bronze average premium likely higher. But the key figure—still unknown as this article went to press—is the average bronze plan premium. In 2010, the Congressional Budget Office (CBO) estimated an average bronze plan annual premium in 2016 of between $4,500 and $5,000 for single policies and between $12,000 and $12,500 for family policies (letter from CBO Director Douglas Elmendorf to Sen. Olympia Snowe, R-Maine, Jan. 11, 2010, available at tinyurl.com/b99b2wy).

If the CBO estimate is accurate, for taxpayers whose actual premiums are at or perhaps even to some extent below the average, those costs are likely to be more—perhaps much more—than the monthly penalty amount for all but high-income taxpayers, who are likely to have coverage anyway.

For example, a single taxpayer would have to have an income of about $190,400 before the penalty for a full year would overtake the lower end of the estimated average bronze premium range (again, based on an estimated 2016 filing threshold: (2.5% × [$190,400 − $10,400] = $4,500)). For a married couple, the corresponding household income would be $500,800 (2.5% × [$500,800 − $20,800] = $12,000).

In any case, in deciding whether to maintain coverage instead of simply paying the penalty, taxpayers will also have to consider many factors including the risks of noncoverage, availability of a premium tax credit under Sec. 36B to help pay for coverage through an exchange, and deductibles and other out-of-pocket amounts and limits. Such individuals may be asking CPAs to help them assess their options and, if necessary, calculate their shared-responsibility payment.

By Debra M. Johnson, CPA, J.D., LL.M. (djohnson@msubillings.edu), associate professor, Montana State University–Billings.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.