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PPACA FAQ: How much are penalties for non-compliance with the ACA's mandate, and how do they work?

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Let us begin our wonderful journey of discovery to find out how the PPACA (Patient Protection and Affordable Care act, commonly known as ObamaCare) is going to work out for you and me and people like us.*

* * *

Q: How much are penalties for non-compliance with the ACA's mandate, and how do they work?

A: You pay whichever is less: (1) The national average of the Bronze plan, or (2) a penalty.

For the penalty, you pay whichever is greater: (a) A dollar amount or (b) a percentage of income, pro-rated by the number of months you were not covered. (So, if the dollar amount were $95 -- as it sometimes will be -- and you were not covered for six months, the pro-rated penalty for the non-compliant half-year would be $95 / 2 = $37.50. Details below.)

The dollar amount and the percentage of income are both phased in, starting with the Federal taxes you pay for 2014, in 2015. (The dollar amount, at least next year, is almost certainly less than the Bronze plan, even if we don't have a Bronze plan to look at.) After phase-in, the dollar amount is adjusted for COLA. You pay the penalty at tax time. However, the IRS can't put a lien or levy on you if you don't pay the penalty.

This a little more complicated than the story you read in the press, and may cost you more money than you think. Spoiler alert: You could end up paying more than $95, which is the figure everybody quotes. I'm going to focus mostly on what happens next year, before the complete structure of penalties for non-compliance phases in.

* * *

Let's start with the dollar amount. Here's an example from The Hill:

In 2014, people who choose not to buy insurance and don't quality for an exemption from the mandate will have to pay a fine of $95. The penalty increases to $695 by 2016, and then rises annually based on a pre-determined formula.

And that's the figure that stuck in my mind (and possibly chosen for that purpose): $95. Now, The Hill isn't a bad publication, but specialist publications are more careful. Consumer Reports:

Penalty. If you don’t have health insurance, you’ll have to pay a tax penalty, starting at $95 per individual, $285 per family, or 1 percent of income, whichever is greater, for 2014. (That rises to $695 per individual, $2,085 per family, or 2.5 percent of income in 2016.)

So first off, note that "greater." If I'm making (say) $35,000 (I wish), that would be -- let me check my calculator, just to demonstrate I can work with numbers -- $350, which is -- dittoez -- 368% of $95, or, in the vernacular, "almost four times as much." Now, I'm lucky enough that neither figure would break me, but what the "pay a fine of $95" talking point, which is everywhere, does show is that most news coverage of the PPACA is written by and for people to whom the difference between two and three-figure sums of money is inconsequential, so keep that in mind as you study and learn more.

Second, I read this in US News, and had some concerns:**

In 2014, the annual penalty will be $95 per adult and $47.50 per child, up to a family maximum of $285 or 1 percent of family income, whichever is greater.

So far so good, but:

"Most people think of it as an annual penalty," notes Larry Levitt, a senior vice president at Kaiser. "But it is in fact a monthly thing, and you would pay a penalty for any month that you are uncovered." However, a person may be without coverage for up to three months without triggering the penalty.

Kaiser's a reasonably good source, and I do tend to assume the worst, so I considered the possibility that the penalty was $95 per month, and after looking at a lot of sources, I couldn't get a clear answer. So that was pretty frightening.

Fortunately, I was able to find the text of the actual law, so I could read what it says. Here it is, 26 USC § 5000A. I'm going to add a few comments in brackets. All emphasis is mine:

§5000A. Requirement to maintain minimum essential coverage

(a) Requirement to maintain minimum essential coverage

An applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.

(b) Shared responsibility payment [penalty for non-compliance]

(1) In general

If a taxpayer who is an applicable individual [there are exceptions for religious groups, foreign nationals, those in jail, though not, as far as I can tell, for expats, which might be a subject for a different FAQ], or an applicable individual for whom the taxpayer is liable under paragraph (3) [see below], fails to meet the requirement of subsection (a) for 1 or more months, then, except as provided in subsection (e), there is hereby imposed on the [non-compliant] taxpayer a penalty with respect to such failures in the amount determined under subsection (c).

(2) Inclusion with return

Any penalty imposed by this section with respect to any month shall be included with a taxpayer's return under chapter 1 for the taxable year which includes such month [that is, with your 1040 or whatever].

(3) Payment of penalty

If an individual with respect to whom a penalty is imposed by this section for any month—

(A) is a dependent (as defined in section 152) of another taxpayer for the other taxpayer's taxable year including such month, such other taxpayer shall be liable for such penalty, or

(B) files a joint return for the taxable year including such month, such individual and the spouse of such individual shall be jointly liable for such penalty.

(c) Amount of penalty

(1) In general

The amount of the penalty imposed by this section on any taxpayer for any taxable year with respect to failures described in subsection (b)(1) shall be equal to the lesser of—

(A) the sum of the monthly penalty amounts determined under paragraph (2) for months in the taxable year during which 1 or more such failures occurred, or

Now comes the penalty option that Consumer Reports missed. You can't really blame them, since nobody has seen a Bronze plan yet.

(B) an amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.

(2) Monthly penalty amounts

For purposes of paragraph (1)(A ["the sum of the monthly penalty amounts"]), the monthly penalty amount with respect to any taxpayer for any month during which any failure described in subsection (b)(1) occurred ["applicable individual" doesn't "maintain" "minimum essential coverage"] is an amount equal to 1/12 of the greater of the following amounts:

"[T]he monthly penalty amount... equal to 1/12" means that, yes indeed, the penalties are pro-rated, since there are 12 months in a year.

(A) Flat dollar amount

An amount equal to the lesser of—

(i) the sum of the applicable dollar amounts for all individuals with respect to whom such failure occurred during such month, or

(ii) 300 percent of the applicable dollar amount (determined without regard to paragraph (3)(C)) for the calendar year with or within which the taxable year ends.

I can't find a worked example of (A)(i) vs. (A)(ii) just above. I think it means that if the applicable dollar amount (penalty) were equal to $95 * 1 = $95, then I would (or might decide to) pay $95. On the other hand, if I were filing for four dependents (all over 18), which (i) would be $95 * 4 = $380, that would be more than (ii) $95 * 300% ($285), and so I would pay the $285.

(B) Percentage of income

An amount equal to the following percentage of the excess of the taxpayer's household income for the taxable year over the amount of gross income specified in section 6012(a)(1) with respect to the taxpayer for the taxable year:

(i) 1.0 percent for taxable years beginning in 2014.

(ii) 2.0 percent for taxable years beginning in 2015.

(iii) 2.5 percent for taxable years beginning after 2015.

Remember that you pay the greater of the (A) flat dollar amount vs. (B) the percentage of income.

(3) Applicable dollar amount

For purposes of paragraph (1)—

(A) In general

Except as provided in subparagraphs (B) and (C), the applicable dollar amount is $695.

(B) Phase in

The applicable dollar amount is $95 for 2014 [source of the $95 figure] and $325 for 2015.

(C) Special rule for individuals under age 18

If an applicable individual has not attained the age of 18 as of the beginning of a month, the applicable dollar amount with respect to such individual for the month shall be equal to one-half of the applicable dollar amount for the calendar year in which the month occurs.

(D) Indexing of amount

In the case of any calendar year beginning after 2016, the applicable dollar amount shall be equal to $695, increased by an amount equal to—

(i) $695, multiplied by

(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting “calendar year 2015” for “calendar year 1992” in subparagraph (B) thereof.

So, easy peasy!

Finally, here's a tidbit from the IRS FAQ on ObamaCare:

24. What happens if I do not have minimum essential coverage, and I cannot afford to make the payment with my tax return?

The IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The law prohibits the IRS from using liens or levies to collect any payment you owe related to the individual responsibility provision, if you, your spouse or a dependent included on your tax return does not have minimum essential coverage.

]Leaving open, I suppose, what the IRS is not prohibited from doing. I guess we have yet to find that out.

NOTE * If you're are not or do not have to be worried about how PPACA will work, you are not, in important ways, like me and probably not like us -- at least in the ways that trigger the various forms of PPACA eligibility and penalty determinations; primarily employment and income, but also location, and age.

NOTE ** Translation: Nearly had a heart attack.

NOTE I welcome feedback. Please let me know of errors or corrections I need to make, and I'll adjust.

EDITORIAL COMMENT Obviously, this is just ridiculously complex. H&R Block and the rest of the tax preparers must be salivating at what they're going to charge people to figure this stuff out. A much simpler approach would be to lower the age of eligibility for Medicare from 65 to zero. Single payer Medicare for All would save at least $400 billion dollars a year and prevent a lot of suffering, because we wouldn't be paying health insurance companies to profit by denying people care, which is basic human right.

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Rainbow Girl's picture
Submitted by Rainbow Girl on

So is the $95 number (or its related income-percentage number) an annual or a monthly figure?

katiebird's picture
Submitted by katiebird on

(2) Monthly penalty amounts
For purposes of paragraph (1)(A ["the sum of the monthly penalty amounts"]), the monthly penalty amount with respect to any taxpayer for any month during which any failure described in subsection (b)(1) occurred ["applicable individual" doesn't "maintain" "minimum essential coverage"] is an amount equal to 1/12 of the greater of the following amounts:

"[T]he monthly penalty amount... equal to 1/12" means that, yes indeed, the penalties are pro-rated, since there are 12 months in a year.

So, divide 95 by 12 and multiply by number of months without insurance.

I guess.

Submitted by lambert on

I thought is was clear it was annual, pro-rated monthly, though I had to straighten out some ambiguous reporting.

UPDATE I added this in paragraph 4: (So, if the dollar amount were $95 -- as it sometimes will be -- and you were not covered for three months, the penalty would be $95 / 3 = $31.)

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Rainbow Girl's picture
Submitted by Rainbow Girl on

... re-format this FAQ into a series of scenarios it might be more accessible. Example:

In [YEAR 1, 2014] if you are an/a [INDIVIDUAL/FAMILY] then if you do not have mandated coverage you pay the greater of [$95 for the year or a pro-rated amount for the months that you don't have mandated coverage] or [$xxxx, a number derived from (incomprehensible formula that only Lambert can figure out!!)]

Ine [YEAR 2, 2015] if you are ..... etc. etc.

Otherwise the FAQ could seem as complex and indecipherable as its subject :)

katiebird's picture
Submitted by katiebird on

What a mess.

The HR Block thing brings up a good question. How will all this be addressed on Tax Forms?

Supposedly +80% get insurance through employers? Do they have to mess with Reporting Insurance Info on their taxes?

Remembering ... All this will now be on W2 Forms, I think I read. So, they must be adding a new section to even the short forms.

The whole thing makes my stomach hurt.

letsgetitdone's picture
Submitted by letsgetitdone on

For the penalty, you pay whichever is greater: (a) A dollar amount or (b) a percentage of income, pro-rated by the number of months you were not covered. (So, if the dollar amount were $95 -- as it sometimes will be -- and you were not covered for three months, the penalty would be $95 / 3 = $31.)

Is this right? Say I make 75,000 and am single and 27, and want to go without insurance. Then isn't the calculation ($95 / 12) X 12 = 95. And (for 2014) 75,000 X .01 = $750. So, I'd owe $750, and would be pretty pissed off at any Congressperson or Senator of mine who voted for this. I'd then be doubly pissed off at having to pay $1500 in 2015, and probably triply pissed off at this going up to $1875 in 2016.

On the other hand, I might just decide not to pay this since the IRS can't enforce this with levies and liens. What would they do; try to ruin my private sector credit rating? Dun me every month with a computer generated letter. That's going to go over really big, getting people angry ever single month by reminding them of the silly health care mandate, they really can't enforce.

So, here's the situation. You have a penalty that's supposed to get people to buy insurance, and drive down costs by expanding the pool of people ensured by crappy bronze plans. If, despite the inability to enforce it, the mandate's successful in fooling people to buy the crappy insurance, then if and when they sick, they'll be pissed because they're still left with big bills even after buying a product they never wanted to buy. On the other hand, if they don't get sick, then they'll be pissed that they had to pay what will be billed as an unnecessary tax. On the third hand, if the people aren't fooled and just tell the IRS to go fuck off, then they'll get dunned every month with that crazy letter, or worse they'll get computer-generated calls from some contractor threatening them with Court judgments in favor of big government.

There are no other hands! The Democrats were being stupid, evil or both when they passed this clusterfuck! They've passed a bill that will cost them at the polls for years to come.

Submitted by lambert on

the dollar amount or the percentage of income.

We will get into income subsequently; suffice it say it's not the same as your 1040!!!!

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Rainbow Girl's picture
Submitted by Rainbow Girl on

For those of us who don't follow to well when it's a sequence of mathematical operations? :) :)

Letsgetidone: if you could unpack how you come up with your "strings" (don't know what else to call them) of calcs that would be helpful (to me) in understanding your post, which seems really on point!

Submitted by lambert on

Can you give a link to an example of what you want?

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Rainbow Girl's picture
Submitted by Rainbow Girl on

... or I could have done a better job of explaining myself :)

Maybe what I mean is that in addition to the "essay" explanation (which is great), you could distill the penalty amounts into a short bullet point list for quick reference. It's just that reading the first time I was in suspense waiting to see the answer to whether the $95 (or the other formula) was per year or per month, and a sentence that briefly summarized: This $ amount is the penalty for 2014, This $ amount is the penalty for 2015, etc.

Submitted by hipparchia on

So first off, note that "greater." If I'm making (say) $35,000 (I wish), that would be -- let me check my calculator, just to demonstrate I can work with numbers -- $350,

you can work with numbers, but what i'm seeing is that you'll only pay 1% of any income over the filing threshold (the irs defines filing threshold here).

for 2012, the filing threshold for a single person with no dependents would be the exemption ($3800) plus the standard deduction ($5950)...

doing the math:
- filing threshold for this person would be $3800+$5950=$9750
- income that is subject to the 1% penalty would be $35000-$9750=$25250
- 1% of that would be $252.50

congressional research service (scroll down to "penalty," page 5): http://www.fas.org/sgp/crs/misc/R41331.pdf

blue cross blue shield rhode island (see "penalty," page 2): https://www.bcbsri.com/BCBSRIWeb/pdf/Individual_Mandate_Fact_Sheet.pdf

Alexa's picture
Submitted by Alexa on

standard "AGI" (Adjusted Gross Income).

Here's an excerpt:

Your annual gross income determines which FPL you’re in. For example, based on 2012 FPL Guidelines, an individual with an annual income of $33,510 is at 300 percent FPL; a family of 4 with an annual income of $69,150 is at 300 percent FPL. To see where you’re at, try the handy calculator at this link. FPL Guidelines are revised every January, so the 2013 edition should be up soon. http://www.safetyweb.org/fpl.php

The ACA requires use of MODIFIED ADJUSTED GROSS INCOME (MAGI) instead of Adjusted Gross Income for all determinations made by an Exchange including eligibility for Medicaid except in certain cases.
So, in this lesson, we’ll refer to annual income as MAGI.

Modified Adjusted Gross Income (MAGI) is defined as Adjusted Gross Income PLUS
a) all tax exempt interest accrued or received in the taxable year;
b) the non-taxable portion of Social Security benefits provided under Title II of the Social Security Act which includes old-age benefits, disability benefits, spousal benefits, child benefits, survivor benefits and parental benefits;
c) tier 1 Railroad Retirement benefits that are not includible in gross income; and
d) the exclusion from gross income for citizens or residents living abroad.

The adoption of MAGI, created by the ACA, is defined in a new section of the IRS code.

Alexa

“If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

[Avatar Photo Credit: Conflagrate, jurvetson's photostream, flickr]

Submitted by hipparchia on

you didn't link to the source of your information on magi, but i'm assuming it's this: http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8194.pdf

so, magi is used to determine your eligibility for Medicaid or chip or subsidies in the exchange.

I spent some time researching on the web and reading though large portions of the entire aca and nowhere did I find anything that says that magi is used to calculate the penalty you pay if you decide to defy the law and go uninsured.

The adoption of MAGI, created by the ACA, is defined in a new section of the IRS code.

do you have a link to that particular section of the irs code?

Alexa's picture
Submitted by Alexa on

since if you've researched it and found that "two measures" applied in the two different instances--you are probably right, LOL!

I apologize for the 'investigative sloppiness.' :-)

Here's a link below to an article that we've already discussed here, and may not be authoritative enough to use as a reference, anyway.

ObamaCare: A Deception

I copied and pasted verbatim from it. This excerpt is only several pages into the 30-plus page article (CounterPunch).

I've got the 'backstory' on the 'MAGI' documented, which I planned to share, but it will have to wait for quite a while ('til we return) for my to get around to posting.

Sorry, OT.

Anyway, I did what one should never do, I suppose. I "assumed" that is that measure was to be applied for both purposes--qualifying for various programs and/or subsidies, and for figuring one's "fine or penalty."

I should have checked that out.

So, please, disregard my comment. I'm glad to hear that the "lower" figure (for income) will be the one used for this purpose.

It is disgusting enough that they changed the law (one year after the Act was signed, BTW) in order to "fleece" us even more.

I did want to point out the change in tax law, because I got the feeling that many folks think that their federal income tax "AGI" is the correct figure to use on the Health Exchange calculators.

And, if I read the excerpt from the CounterPunch piece correctly, that would not be the case.

Unless I misunderstood that, too. Thanks again for catching my error.

Alexa

“If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

[Avatar Photo Credit: Conflagrate, jurvetson's photostream, flickr]

Submitted by hipparchia on

it's not investigative sloppiness on the part of anyone here, it's the complexity of the law and the myriad associated regulations. but links are always nice to have.

So, please, disregard my comment. I'm glad to hear that the "lower" figure (for income) will be the one used for this purpose.

well, we don't know yet that we can disregard your comment.

also, the lower income amount in this case probably isn't good news, as it probably means your penalty would be higher.

It is disgusting enough that they changed the law (one year after the Act was signed, BTW) in order to "fleece" us even more.

argh, yes! otoh, if they can change the law one year after they pass it, they just proven they can keep changing it if they want to, so we'll just have to keep changing it until we get medicare for all.

Rainbow Girl's picture
Submitted by Rainbow Girl on

... does it seem accurate that we have two different definitions of "income" so far:

(1) one for the penalty, which is the IRS "filing thresshold," and
(2) another for eligibility, which is Modified Adjusted Gross Income ("MAGI")

Thank you for the specific citations on these key issues, Hipparchia.

katiebird's picture
Submitted by katiebird on

I'm so upset. I spend hours clarifying (as best I can at this point in my knowledge) the facts in that AP Story and as far as I could tell, it's perfectly accurate and not sensational (at least in tone) at all.

Yet Think Progress posts this fact-free story today as a rebuttal to the AP story mentioned in my post:

This Article is Everything that's Wrong With Sensationalistic ObamaCare Stories

Employers will struggle to comply with the new health care mandates, drop insurance coverage, increase costs, and lay off workers! Low-income employees will be subject to sky high premiums, a health care mandate they can’t afford, or go uninsured altogether!

Those are just some of the wild-eyed claims buzzing around the Affordable Care Act and its implementation. Consider this lede from Friday’s Associated Press: “It’s called the Affordable Care Act, but President Barack Obama’s health care law may turn out to be unaffordable for many low-wage workers, including employees at big chain restaurants, retail stores and hotels.” The article argues that several “wrinkles” in the law could hurt the very Americans it intended to help

(Please Excuse the interruption)

Submitted by lambert on

The ObamaCare rollout is a political campaign. Think Progress is part of the D apparatus, so this is what you would expect.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Alexa's picture
Submitted by Alexa on

take CAP with a grain of salt. Considering that it is basically a "DLC" institution.

They naturally would defend this corporatist/insurance-friendly piece of crap.

I would never use them as a serious source, because they are totally biased toward "market-based solutions" and corporatist "public-private" garbage.

I would stick (like you have) with actual 'reporting.' Of course, most major (mainstream) American news reporting bureaus or agencies are owned by the One Percent, and reflect their views. Still, I'd trust their reporting over any Democratic Party apparatus--especially DLC-types.

When you think about it--THEY GOT TO BE SWEATING BULLETS!

Forget the Obama Administration's legacy--any and all Democratic Party candidates from here on will be saddled with this atrocity. Frankly, I think that they'll be hard pressed to get a top Dem to run for office in 2016. UNLESS, somehow (and I don't see it) they manage to turn this ship around, big time.

But to do that--they'd need to do a rewrite of the entire ACA--and we all know that it won't happen.

Alexa

“If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

[Avatar Photo Credit: Conflagrate, jurvetson's photostream, flickr]