The Patient Protection and Affordable Care Act (PPACA), commonly referred to as the Healthcare Reform Bill, has introduced sweeping changes to our healthcare system and how it is funded. While many of its provisions have been in place since 2010, major changes are ahead since the Supreme Court upheld some of its more controversial elements. In this three part series, we will review what lies ahead and how the PPACA will impact individuals and the business community.
Often the most cited portion of the PPACA is the “individual mandate” which requires American taxpayers to either purchase health insurance or pay a penalty. This mandate applies to adults and any dependent children listed on their tax return that do not already have health insurance or qualify for Medicare or Medicaid. There remain a few other exemptions for low-income individuals, religious groups, etc.. A recently published flow chart from the Kaiser Foundation provides detailed analysis of who falls in the individual mandate category.
How it works
There continues to be an ongoing debate regarding whether the penalty for not purchasing health insurance is considered a tax. Generally speaking, the penalty is very similar to a tax with a few exceptions. Similar to federal income taxes, it will be assessed and collected by the Internal Revenue Service (IRS) when you file your annual income tax return. Your health insurance provider is now required to send you and the IRS proof of your health insurance coverage each year around the same time your employer sends your Form W-2. If you lack coverage for more than 3 months in the calendar year, you will be required to report the penalty on your federal income tax return. The major difference between the insurance penalty and your regular income taxes is that failure to pay the penalty cannot result in criminal charges nor is the IRS permitted to levy your accounts or garnish your wages to collect it. Instead, the most common way the IRS will collect delinquent payments is by deducting current or future tax refunds. It is worth mentioning, however, that the language of the health care bill remains quite broad and there is considerable speculation as to how the government will enforce payment of the penalty. As of August 2012, the IRS has yet to issue a final statement on their collection policies.
How much it can cost you
Failure to secure health insurance will become an increasingly expensive proposition over the next three years. The chart below explains how the penalty is gradually phased in. The penalty is the greater of a) a per person dollar amount or b) a percentage of your income earned in excess of the threshold amount that requires you to file a tax return (Any income over $9,350 in 2012). The penalty begins in 2014 and will increase significantly each year until 2016. After that time, the penalty will continue to rise with the cost of living. If you lack coverage for only part of the year (but more than a single gap of up to 90 days) the fee is pro-rated based on the number of months you were uninsured.
Individual Mandate Penalty:
|The greater number between…|
|2014||1% of family income*||$95/adult + $47.50/child (max: $285)|
|2015||2% of family income*||$325/adult + $162.50/child (max: $975)|
|2016||2.5% of family income*||$695/adult + $347.50/child (max: $2,085)|
What are your options
For most Americans already enrolled in a health insurance plan who plan to maintain the same coverage in the coming years, there are no major decisions to be made. Your plan should suffice and has more than likely expanded coverage since the original passing of the bill in 2010. Those who do not have adequate coverage and must purchase insurance individually will need to weigh the costs and benefits of available policies against paying the federal penalty. There are several other incentives in the PPACA to encourage participation including the expansion of Medicaid, tax credits for small businesses, federal subsidies, and the creation of federally-regulated health insurance plans. Part 2 of our series will focus on these and other benefits you may receive from the Patient Protection and Affordable Care Act.