Pay Premiums or Pay a Penalty

 In Insurance

As of 2014, most Americans must have health insurance. If you don’t, you may have to make what the law calls a “shared responsibility payment.” Such payments will be made to the IRS, so they will look and feel like additional taxes on uncovered individuals.

Should you be concerned? That depends on many factors.

Multiple exemptions

The new law contains several exemptions. Those exempted include members of Indian tribes and members of religious groups recognized by the federal government as being opposed to government insurance benefits and receive an exemption certification.

The exemptions likely to affect most people are income-based. For example, people with income so low that they don’t have to file an income tax return are not required to have health insurance. The same is true for people who can’t afford coverage; those who would have to pay more than approximately 8% of their household income for the least expensive available policy are exempt.
Example 1: Bob and Carol Anderson have household income of $50,000 in 2014. To obtain acceptable health insurance, the Andersons would have to pay $400 a month, or $4,800 a year. That would be 9.6% of their income, so the Andersons are exempt from the health insurance mandate.

Unless you qualify for these or other exemptions (one is for people in jail, for instance), you must have health insurance, and all of your dependents also must have coverage. Qualifying coverage The good news is that you probably have qualifying coverage already. Medicare and Medicaid qualify; so do most employer sponsored health plans, including retiree health benefits and COBRA coverage for people who leave employer plans. Individual and family coverage also qualifies, if you purchase a policy that’s offered to the public. You should be aware that large companies (those with at least 50 full-time employees or full-time employee equivalents) are required to offer health insurance that covers employees’ dependents under age 26, but not employees’ spouses. An uncovered spouse may owe a penalty.

Example 2: Dan and Ellie Franklin both work at companies with health plans. Dan’s employer offers family coverage, so Dan can buy health insurance for himself and for the couple’s children. However, Dan’s employer structures its group health plan so that it will not cover spouses who can obtain employer sponsored health insurance. Thus, Dan’s family health plan excludes Ellie.
In this situation, Ellie must carry her own health insurance. She can enroll in her company plan or, if that plan is unappealing, she can buy coverage from a health insurer. If Ellie does not comply, and she does not qualify for any exemption, she’ll owe a penalty.

Paying the price
Individuals who are covered by the health insurance mandate will owe a penalty if they don’t follow the rules. The penalty appears to be modest.

Example 3: Carrie Nelson, age 27, is a freelance Web designer in good health. She has been covered by her father’s group health insurance, but that’s no longer the case. After investigating her options, Carrie finds that she would pay at least $2,500 a year for acceptable health insurance. If Carrie, who typically sees a doctor once every year for a checkup, goes without health insurance, she’ll owe a fine of $95 or 1% of her taxable income, whichever is greater. Carrie believes her taxable income in 2014 will be around $35,000, so she would owe a $350 penalty. Paying a $350 penalty rather than $2,500 for unwanted health insurance seems like a rational choice, especially considering that the Affordable Care Act says Carrie can’t be turned down for health insurance in the future, even if she develops a medical condition. That will still be the case in 2016, when the penalty will reach 2.5% of taxable income or $695 per person, whichever is greater.

Look before leaping
Nevertheless, forgoing health insurance might not be a wise choice, even for a healthy person with a modest income. Healthy individuals can sprain an ankle in karate class or get an eye abrasion that leads to a trip to the emergency room. That could mean a bill that runs into thousands of dollars, far more than the savings from going without health insurance.

Moreover, it might not be so simple to get health insurance if and when a medical condition appears. Once the initial enrollment period ends next March 31, you will be able to purchase a qualified health insurance policy only during each year’s enrollment window, from October 15 to December 7 which may mean waiting uncovered in the interim.

The bottom line is that coverage versus no coverage might not be a simple decision. If you (or your adult children) are thinking about skipping health insurance and paying the fine, you should do so only after carefully weighing all the consequences.