One of the main goals of the Affordable Care Act is for most Americans to have health insurance. As a provision of the ACA, if you fail to obtain health care coverage, you may be required to make a “shared responsibility payment.” These payments will function similarly to an additional taxation, because they will be paid to the IRS. Will these payments be a concern for you? That depends…
Shared Responsibility Payment
There are a number of reasons that people can be exempt from shared responsibility payment requirement. The most common exemptions are those that depend on an individual’s income. If you earn so little that you aren’t required to file an income tax return, you won’t need to obtain health care coverage. Additionally, if you can’t afford coverage, which is defined as having to pay more than about 8% of your household income for insurance, you’ll be exempt.
For example, Jerry and Sue make $50,000/year between themselves, which means 8% of their income is $4,000. In order for them to get a qualifying health insurance policy, they would need to pay $400/month, which is $4,800/year. That is 9.6% of their household income, which means they would be exempt from requiring health insurance, and won’t be expected to pay a shared responsibility payment.
Most preexisting insurance plans qualify as sufficient coverage according to the new law. Qualifying programs and policies include Medicare, Medicaid, employer-sponsored health plans, retiree health benefits, and COBRA coverage for individuals who leave plans provided by employers. Lastly, if you already have an individual or family policy that’s available to the public, that also qualifies.
If you work for a company that employs at least 50 full-time employees, your employer is required to offer a health insurance plan that will cover any of your dependents under age 26. However, the plan that your employer offers does not have to cover your spouse, and if your spouse doesn’t have his/her own insurance coverage, he/she may be liable for the shared responsibility payment.
For example, Bob and Sally have two children, and both work for companies that offer health insurance plans. Sally’s job offers her the option to purchase a family insurance plan, which would provide health care coverage for herself and her children. Although it’s called a “family” plan, the employer-provided policy does not cover any spouse who works at another company that provides health insurance. Therefore, Bob isn’t able to be covered under Sally’s insurance policy, and would have to get his own through his employer.
Employer-Sponsored Health Plans
For Bob and Sally, they have a few options as far as obtaining health care coverage goes. Either way, Bob will not be able to receive health insurance through Sally’s employer-sponsored policy. Bob can get a policy through his own employer, but if he’s not interested in the plans they offer, he can get an individual policy from a different health insurer. If Bob doesn’t get his own policy, it’s likely that he will owe a penalty, unless he qualifies for an exemption. Bob will probably not be entitled to an income-based exemption, considering his employer does provide an insurance plan, and according to the structure of the ACA, employer-sponsored health plans must be deemed “affordable” (costing individuals less than 8% of their household income).
Although Americans who do not meet the requirements of the new health care mandate established by the ACA will be subject to the shared responsibility payment, many are coming to find that the penalties are cheaper than obtaining coverage.
For example, Alison is a freelance journalist who’s generally healthy. She just turned 26, which meant she lost her health care coverage on her dad’s insurance policy. She looks into the different options available to her for an individual policy, and discovers that a qualifying insurance plan would cost her $2,500/year.
Alison typically only visits her doctor for an annual checkup, so she’s not really sure that $2,500 is a worthwhile expense. If she decides to forego health insurance, the shared responsibility payment fee she’ll face is either $95 or 1% of her taxable income, whichever is greater. After assessing her records, she estimates that her taxable income this year will be about $35,000, which means she would owe a penalty of $350. Another stipulation of the Affordable Care Act is that Americans cannot be turned down for health insurance due to preexisting medical conditions. Therefore, if Alison chooses not to obtain health coverage now, because she’d rather pay the $350 fine than the $2,500 for insurance, she will still be able to get a health care policy later if she decides she wants one (or develops a need for one). In 2016, the penalty will rise to 2.5% of taxable income or $695, whichever is greater, at which point Alison may decide that she’d prefer to purchase an insurance policy.
Even though opting to pay a penalty instead of obtaining health insurance coverage may seem like a viable option now, you should put a lot of thought into the decision. Healthy people are still susceptible to accidental injuries, which can be extremely costly. Tripping and falling on pavement and breaking your arm, or slicing your hand open while cooking, will require a trip to the hospital, resulting in crazy medical bills. Without health insurance, that financial hit could be devastating.
Additionally, although insurers cannot deny you health coverage due to a preexisting condition, upon developing a need for insurance, you may not be able to buy into a policy quickly. After the initial enrollment period ends on March 31st, 2014, new health insurance policies can only be purchased during the annual enrollment window, from October 15th to December 7th, which could leave you uncovered for a fairly long time.
Choosing to forego health insurance is not an easy decision, and before you decide to make the shared responsibility payment and skip buying into a health care policy, it’s important to seriously weigh your options and the potential consequences you may face.