Despite the hullabaloo about the Affordable Care Act’s mandate that nearly everyone puchase heath insurance in 2014–or pay a penalty–the Congressional Budget Office estimates that only 1.4 percent of Americans will wind up paying the tax.
That is because the vast majority of us either have health insurance, or are exempted from the mandate for any one of a number of reasons. For example, at the end of 2014 you will owe no tax if:
- your income is low enough that your share of premiums (after federal subsidies and employer contributions) would total more than 8 percent of your income;
- your income is below the income tax filing threshold, and so you’re not required to file taxes;
- you were uninsured for less than three months of the year (If over three, the penalty is pro-rated);
As a result the Urban Institute estimates that just 6 percent of the population (roughly 18 million Americans) will even have to consider the question: “Should I purchase health insurance, or pay a tax?” That’s right: a whopping 94 percent of the population will have no reason to worry about paying a penalty.
And 11 million of that 18 million will be low-income or middle-income Americans who are eligible for a government subsidy to help cover the cost of their premiums. Chances are, most of them will take the government up on its offer.
That still leaves about 7 million Americans who are uninsured today and won’t qualify for a subsidy. But many of them lack coverage because they suffer from a pre-existing condition. As a result, most insurers won’t sell them a policy, and those who will cover them demand sky-high premiums. Under the ACA, insurers will no longer be able to shun the sick; nor will they be able to charge them more.
If You Decide to Gamble, And Go Without Insurance, How Much Will You Pay?
Inevitably, some people will decide not to buy comprehensive insurance because they’re healthy and wealthy enough that they feel they can cover their own medical expenses. Others wil refuse to purchase a policy as a matter of principle: some Americans just don’t like the insurance industry, and resent being told they should buy their products.
The size of the tax they pay will depend on how many people are in their household, and how much they earn.In 2014 an individual who earns $35,000 and chooses to opt out will owe just $95– though if he earns $250,000, he’ll wind up paying $2,500 or roughly 1% of adjusted gross income above $9,500. (The tax applies only to income above and beyond the filing threshhold; in 2011 that was $9,5000 for most singles and $19,000 for most married couples. )
Over the next two years, the penalty rises. In 2016, a middle-income family of four earning $60,000 would owe about $2,085 – still far less than the tax a more affluent family would pay. (For example, a household reporting adjusted gross income of $200,000 would owe roughly $4,300. In other words, this is a progressive tax
But there is a cap on how much any household will owe: according to the law the tax cannot exceed the national average premium for “bronze level” health plans offered through exchanges. These bronze plans will cover 60 percent of medical expenses, and the Congressional Budget Office (CBO) estimates that in 2016 the average premium would be about $4,750 for single policies and $12,250 for family policies. (This sounds expensive, but keep in mind that middle-class Americans who don’t have employer-based insurance will receive subsidies from government to help cover the cost. For example, a family of three earning $54,930 would end up paying just $5,218 for a “silver” plan that covered 70% of the family’s medical expenses.
Why is the penalty so high? Because if a healthy wealthy person decides to opt out–and then later becomes sick– he will be able to change his mind and buy insurance. The point of the Affordable Care Act is to make sure that everyone has access to healthcare; no one will be barred from the system. At the same time, it’s not fair to let someone wait until they are sick before entering the insurance pool while others have been paying into that pool for years. So those who choose not to buy coverage will pay penalties in lieu of premiums –and those taxes will keep our heatlh care system afloat.
I’ve written a more detailed post for null.com describing exactly how the penalty works, and answering some “frequently asked questions” about the tax. I have also helped healthinsurace.org develop a penalty calculator. If you type in a few facts about yourself and your household, the calcualtor will tell you how much you would owe in 2014, in 2015 and in 2016.