Deadline to Enroll has Passed
The deadline to enroll in minimum essential health insurance passed on March 30, 2014. According to estimates by the Federal Department of Health and Human Services (HHS), it met its goal of at least 7 million persons enrolling for health care via the health insurance market places established by the federal government on behalf of various states. Some states, such as California, established their own insurance marketplaces, and thus it is likely that the 7 million figure has indeed been achieved, if not surpassed.
Did Enough Healthy People Enroll to Pay for The System?
The primary question for the federal government that remains is whether the balance of persons enrolling that are “healthy” individuals who must simply pay the annual premium in 2014 but will not actually take dollars from the medical coverage in 2014, will outweigh the payouts to individuals that will take more from health insurance than they pay in.
But What About the Medicaid Expansion?
Moreover, the Affordable Care Act pushed states to expand the definition of when an individual may be covered by the Medicaid, and thus receive medical care substantively paid for by a combination of the federal and state government. The federal government upfront will provide 90% of a state’s additional medicare cost. The state must shoulder more of this burden in the future though.
How Will This Be Paid For?
How will the federal government pay for its share of the additional medicare costs and for any additional costs associated with this new federally mandated system? Some government officials state that Obama Care is already set up to pay for itself because the medical profession, insurance companies, and taxpayers will pick up the additional costs. Insurance companies will reduce their own administrative costs, the medical profession will offer its services at cheaper prices, and Congress has already raised taxes in the forms of the increased medicare payroll tax and medicare tax on investment income.
The New “Shared Responsibility Payment” Tax, Penalty, Fine
But also, Congress imposed a required payment (some pundits call it a penalty, some call it a tax, others a fine like a parking ticket) on taxpayers who do not obtain and maintain health coverage, that will over time increase. As the required penalty increases over the coming years, in principle at least, it should be cheaper for a taxpayer to simply buy the lowest cost health insurance than to pay this penalty. This assumes that the cost of the lowest quality health insurance in these marketplaces does not sky rocket to over come the penalty.
Congress did not call the penalty a “penalty” in the actual law. Instead, Congress used a more ‘voter friendly’ expression “individual shared responsibility payment”.
An Example Decision Maker Deciding What to do in 2014
Other factors will play a role in this decision process, such as a individual’s appetite to take on catastrophic medical risk (like breaking all their bones in an accident) and weighing the cost of the insurance and the required deductible. If an individual’s annual premium will cost by example approximately $7,200 and the annual deductible is $6,000 (this is an actual example from an insurance policy offered via the 2014 California Marketplace), and the individual thinks that it is extremely unlikely that he or she will spend more than $13,200 in medical costs in 2014, then the individual may opt for the “shared responsibility payment”.
If nothing medically happens during 2014, the taxpayer will only owe the contribution, and thus have saved over $13,000! However, if something catastrophic happens in 2014 requiring substantial medical expenses over $13,200, the taxpayer will have been better off with the insurance. Another economic factor in this economic decision making process includes the amount of co-pay required per type of medical procedure. Another factor in the risk decision making process is the individual’s belief of potentially requiring a certain level of medical expenses, such as perhaps just a stomach virus and the likely out of pocket cost of that care, versus breaking a bone.
How much is the penalty for 2014 if a taxpayer did not have “minimum essential coverage’ by March 30, 2014?
If a taxpayer (or any dependents) do not maintain health care coverage and do not qualify for an exemption, then the taxpayer must make an individual shared responsibility payment with the 2014 tax return. In general, this health care coverage penalty is either a percentage of the taxpayer’s income or a flat dollar amount, whichever is greater. High income taxpayers will pay a higher penalty. A taxpayer will owe 1/12th of this penalty for each month of the taxpayer or taxpayer’s dependents gap in coverage. The annual payment amount for 2014 is the greater of:
- one percent (1%) of the household income that is above the tax return threshold for the taxpayer’s filing status, such as Married Filing Jointly or single, or
- a family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285.
This individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014. The taxpayer will pay the due amount with the 2014 federal income tax return filed in 2015. For example, a single adult under age 65 with household income less than $19,650 (but more than $10,150) would pay the $95 flat rate. However, a single adult under age 65 with household income greater than $19,650 would pay an annual payment based on the one percent rate.
Why greater than $19,650? The filing threshold for a single adult in 2014 is 10,150, subtract that from $19,650, leaving a base amount of $9, 500. Multiply 1% to that base amount and the penalty is $95, the same as the flat rate.
So, from the beginning of this year (January 1, 2014) a taxpayer and the family must either have “qualifying” health insurance coverage throughout the year, qualify for an exemption from coverage, or make the above payment when filing the 2014 federal income tax return in 2015.
What is “Minimum Essential Coverage” Under the Affordable Care Act (“ACA”)?
In Health Care Tax Tip 12, the IRS explained for a taxpayer how to determine if his or her health care coverage qualifies as “minimum essential coverage” to avoid the health care coverage penalty for 2014 that must be paid by April 15, 2015 when filing the tax return.
The Affordable Care Act calls for individuals to have and maintain qualifying health insurance coverage for each month of the year, or have an exemption, or make a shared responsibility payment (pay a ‘penalty’) when filing their federal income tax return next year by April 15, 2015.
Qualifying health insurance coverage, called minimum essential coverage, includes coverage under various, but not all, types of health care coverage plans. The IRS stated that the majority of coverage that people have today counts as minimum essential coverage.
The IRS provided examples of minimum essential coverage:
- Health insurance coverage provided by an employer,
- Health insurance purchased through the Health Insurance Marketplace,
- Coverage provided under a government-sponsored program (including Medicare, Medicaid, and health care programs for veterans), and
- Health insurance purchased directly from an insurance company.
Minimum essential coverage does not include coverage providing only limited benefits, such as:
- Coverage consisting solely of excepted benefits, such as:
- Stand-alone vision and dental insurance
- Workers’ compensation
- Accident or disability income insurance
- Medicaid plans that provide limited coverage such as only family planning services or only treatment of emergency medical conditions.
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