What Is the Penalty for Not Having a Health Insurance Plan?

Editors Note: Effective October 2, 2018, the federal penalty for not having an ACA-mandated health insurance plan was eliminated beginning January 1, 2019. In addition, the administration rolled back coverage duration limitations, allowing individuals to purchase short term health insurance plans for up to 364-days of coverage. However, coverage duration periods can be limited to shorter periods of time based on state-specific laws.

Do I have to pay a fine if I don’t have health insurance?
The answer to the question is “maybe.”

The Internal Revenue Service estimates that 8.1 million Americans paid a tax penalty for not having coverage in 2014, the last year that actual numbers are available.

Not Buying an Individual Health Insurance Plan and Paying the Penalty

How do 8.1 million people get penalized in just one year? There are several ways people can skip buying health insurance:

1. They purchased a more affordable health insurance plan, like temporary health insurance, paid the tax penalty and still came out ahead financially at the end of the year.

2. Since the Affordable Care Act had recently been made law, they didn’t know about the penalty until they filed their income taxes.

3. They forgot to buy individual insurance after a life event that changed their individual insurance coverage circumstances.

In 2014, the penalty for not having a qualified health insurance plan as required by the Affordable Care Act was the greater of $95 or 1% of your income. In 2016, the penalty for not carrying individual health insurance is the greater of 2.5% of your income or $695 for each adult that could be covered in your household plus $347.50 for each dependent child that could be covered. Even so, for some, paying the penalty is still more affordable than paying for an individual health insurance plan.

Benefits of Short Term Health Insurance

Short term insurance, also known as temporary health insurance, is an affordable way to maintain health care coverage for yourself and your family, even though it is not recognized by the government as a “qualified” health insurance plan. Many have compared an individual health care insurance policy against short term health insurance and found that they still save money on their monthly costs, even after paying a tax penalty.

If you have chronic medical conditions or see a doctor frequently, short-term health insurance might not be right for you. When shopping for an individual health insurance plan, calculate how much medical care you use during the year before buying on price alone.

Legal Ways to Forgo Buying Health Care Insurance

Tax penalty aside, are you required to buy a qualified health insurance plan (a plan offered through Obamacare)? Not necessarily.

About three million Americans claimed an exemption from buying individual insurance plans in 2015, the last year data is available. There are many reasons for being exempt from coverage, including:

  • Being a member of a Native American tribe
  • Being in a Christian health-sharing ministry
  • Having a one-time financial distress, such as a bankruptcy
  • Moving to a new location or starting a new job
  • Being the victim of domestic abuse
  • The price of the lowest cost insurance plan on the Exchange is more than 8.13% of your household income

The number of Americans who claim an exemption has been about three million per year, but government officials have attempted to limit the exemptions. For example, if you move to a new home you now have to report the details of your move, and prove that your current coverage would not be adequate in your new location.

But because the cost of affordable health insurance plans is far outpacing the increase in wages, more and more Americans can choose not to buy coverage because it exceeds 8.13% of their income.

Example of When You Qualify for Health Insurance Penalty Exemption

Here is an example of being eligible for an exemption to the Obamacare tax penalty based on the cost of insurance being too high:

Bill, age 58, is self-employed. He makes $50,000 a year of taxable income, which means he makes more than the $46,300 taxable income level to be subsidy-eligible because Obamacare health insurance, on average, has increased 25% for 2017.

Bill is not able to find a plan for less than $4,000 a year. The cheapest plan he can find is $5,000 annually. He has a choice to make. He can go without an individual health insurance plan and pay no penalty (because there isn’t an option that is less than 8.13% of his income), he could buy short-term health insurance, or buy a catastrophic plan that has reduced coverage overall. Let’s suppose either of these choices would cost about $2,000 less than an Obamacare health insurance plan. He could still buy either short-term insurance or catastrophic insurance and not have to pay a penalty.

Deciding Between Buying an Alternative Health Care Insurance Plan or Paying the Penalty

While the Affordable Care Act was meant to drive down costs of insurance for lower- and middle-class America, the reality is many individuals and families can’t afford to use their insurance plan once they have coverage because the medical deductible is so high that they have to spend thousands more to seek treatment. For those in the middle class who make too much to qualify for a subsidy and too little to pay for health care services, they can wind up spending 10% or more of their income on health care.

What is the smart move to make if you think you can’t afford coverage? It depends on your individual circumstances. If you are in reasonably good health, you may qualify for a short-term medical plan. But remember: The coverage is less comprehensive and the plan will end in six to 12 months (depending on your state) if you apply before December 31, 2016. Or you could buy a plan that offers a fixed amount for each accident or illness (which is usually far less than the actual amount but offers some cash protection). The answer depends on your health status and your risk tolerance. For many people, the best option still might be an Obamacare health insurance plan, even if it stretches your budget, especially if you are incurring costs for ongoing medical treatment.

Remember: You can deduct the cost of medical expenses AND health insurance if it exceeds 10% of your income.If you are self-employed, you might be able to deduct 100% of the health care insurance premium. Talk to your tax professional about what deductions you might be eligible for.

Before you make any decisions about buying an individual health insurance plan or a short term health insurance plan, understand the penalty. Do the math based on your circumstances and your comfort level with rolling the dice about not needing large amounts of expensive medical care. Finally, seek expert advice – either from an agent, a navigator, resources like HealthCare.com or healthinsurance.org which provide many useful articles. And don’t forget to check out the federal or state marketplaces for useful advice and enrollment.