The Individual Mandate and Penalties

The most controversial provision of the Affordable Care Act is the adoption of the individual mandate, requiring all Americans to maintain some form of health insurance. Beginning in January 2014 when the mandate takes effect all U.S. residents will be required to maintain minimum essential coverage for health insurance, or pay a penalty. 

What is the ACA's "Minimum Essential Coverage"?

Individuals are covered with minimum essential coverage if they have coverage in any one of the following:

  • Government sponsored health care programs such as Medicare, Medicare, Children's Health Insurance Program, TRICARE, coverage from Veteran's Affairs or Health Care for Peace Corps
  • Employer sponsored health insurance plans and other plans offered in the small or large group markets
  • Individual market plans available on and off state exchanges, as well as grandfathered plans

The penalty for lacking coverage

Beginning in 2014, individuals who do not have essential minimum coverage face a penalty that will be paid as federal tax liability on income tax returns. The penalty will be the greater of either a flat dollar amount or a percentage of the indivduals income in excess of the tax filing threshold. For dependents under the age of 18, the penalty is half the amount. 

  • In 2014: The penalty per individual will be the greater of $95 dollars or 1% of the household's income in excess of the tax filing threshold with a cap on the flat dollar penalty at 3 times the individual flat dollar penalty.
  • In 2015: The penalty per individual will be the greater of $325 dollars or 2% of the household's income in excess of the tax filing threshold with a cap on the flat dollar penalty at 3 times the individual flat dollar penalty.
  • In 2016: The penalty per individual will be the greater of $695 dollars or 2.5% of the household's income in excess of the tax filing threshold with a cap on the flat dollar penalty at 3 times the individual flat dollar penalty.
  • After 2016: The flat dollar penalty will be index for inflation.

The annual penalty for an individual is capped at an amount equal to the national average annual premium for a qualified health Bronze Level health plan available through the state Exchange.

Why Wouldn't I Just Pay The Penalty?

It is certainly true that the cost of insurance will generally be significantly higher than most Americans would be forced to pay. So it is definitely a viable alternative for consumers to choose not to purchase insurance and opt to pay the penalty instead. Realize however that by doing so, you would be forgoing health insurance coverage which may prove to be extremely valuable in cases of unexpected health care needs.