CRS Discusses ACA Individual Healthcare Mandate

Beginning in 2014, ACA requires most individuals to maintain health insurance coverage or otherwise pay a penalty. Specifically, most individuals will be required to maintain minimum essential coverage, which is a term defined in ACA and its implementing regulations and includes most private and public coverage (e.g., employer-sponsored coverage, individual coverage, Medicare, and Medicaid, among others). Some individuals will be exempt from the mandate and the penalty, while others may receive financial assistance to help them pay for the cost of health insurance coverage and the costs associated with using health care services.

Individuals who do not maintain minimum essential coverage and are not exempt from the mandate will have to pay a penalty for each month of noncompliance with the mandate. The penalty is the greater of a flat dollar amount or a percentage of applicable income. In 2014, the annual penalty is the greater of $95 or 1% of applicable income; the penalty increases in 2015 and 2016 and is adjusted for inflation thereafter. The penalty will be collected through federal income tax returns. The Internal Revenue Service (IRS) can attempt to collect any owed penalties by reducing the amount of an individual's tax refund; however, individuals who fail to pay the penalty will not be subject to any criminal prosecution or penalty for such failure. The Secretary of the Treasury cannot file notice of lien or file a levy on any property for a taxpayer who does not pay the penalty.

Certain individuals will be exempt from the individual mandate and the penalty. For example, individuals with qualifying religious exemptions and those whose household income is below the filing threshold for federal income taxes will not be subject to the penalty. ACA allows the Secretary of Health and Human Services (HHS) to grant hardship exemptions from the penalty to anyone determined to have suffered a hardship with respect to the capability to obtain coverage. The Secretary of HHS has identified a number of different circumstances that would allow individuals to receive a hardship exemption, including an individual not being eligible for Medicaid based on a state's decision not to carryout the ACA expansion and financial or domestic circumstances that prevent an individual from obtaining coverage (e.g., eviction or recent experience of domestic violence).

ACA includes several reporting requirements designed, in part, to assist individuals in providing evidence of having met the mandate. Every person (including employers, insurers, and government programs) that provides minimum essential coverage to any individual must provide a return to the IRS that includes information about the individual's health insurance coverage.

                               Contents

Individual Mandate

Beginning in 2014, ACA requires most individuals to have health insurance coverage or potentially pay a penalty for noncompliance.² Individuals will be required to maintain minimum essential coverage for themselves and their dependents. Some individuals will be exempt from the mandate and the penalty, while others may receive financial assistance to help them pay for the cost of health insurance coverage and the costs associated with using health care services.

Minimum Essential Coverage

In general, individuals who are not exempt from the mandate must maintain minimum essential coverage to avoid the penalty. Minimum essential coverage is defined broadly in statute and is further defined in regulations; the definition includes most types of government-sponsored coverage (e.g., Medicare) as well as most types of private insurance (e.g., employer-sponsored insurance). Table A-1 in Appendix A provides detailed information about how different types of health insurance coverage relate to the definition of minimum essential coverage and the penalty. Minimum essential coverage does not include health insurance coverage consisting of excepted benefits, such as dental-only coverage.

Penalty

With some exceptions, individuals will be required to maintain minimum essential coverage for themselves and their dependents.³ Those who do not meet the mandate may be required to pay a penalty for each month of noncompliance. The penalty will be calculated as the greater of either:

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  1. a percentage of the "applicable income," defined as the amount by which an individual's household income exceeds the applicable filing threshold for the applicable tax year.⁴ The filing threshold comprises the personal exemption amount (doubled for those married filing jointly) plus the standard deduction amount,⁵

• the percentage will be 1.0% in 2014, 2.0% in 2015, and 2.5% thereafter, or

• 2. a flat dollar amount assessed on each taxpayer and any dependents (e.g., family)

• the annual flat dollar amount phased in -- $95 in 2014, $325 in 2015, and $695 in 2016 and beyond (adjusted for inflation),⁶ assessed for each taxpayer and any dependents;

• the amount is reduced by one-half for dependents under the age of 18;

• the total family penalty is capped at 300% of the annual flat dollar amount.

Illustrative Individual Mandate Penalties

The following examples illustrate the penalty for a single individual and for a family of four. Penalty amounts are shown for 2014, 2015, and 2016.To summarize the penalty (as described above) for those individuals whose household income is above the filing threshold amount for federal income tax, the penalty is the greater of a flat dollar amount or a percentage of applicable income (income above the filing threshold). Individuals below the filing threshold for federal income tax will not pay a penalty.

In these examples, the 2013 filing threshold was used, which is $10,000 for a single individual under age 65 with no dependents (single filing status) and $20,000 for a married couple filing jointly. The filing thresholds are linked to an inflation adjustment based on the CPI-U,⁸ and therefore will likely be higher when implemented in 2014 and in subsequent years (thus exempting people with slightly higher income) than shown here. As a result, the numbers below are meant for illustrative purposes only. These examples are best used to show the relative scope of the penalties and the relationship between the various components of the formulas for calculating the penalty.

Illustrative individual mandate penalties for a single individual with no dependents:

• In 2014, those with income above the filing threshold ($10,000 in 2013) but at or below $19,500 will pay the $95 flat amount, those with income above $19,500 and below the cap at the national average premium for bronze-level coverage will pay 1% of applicable income;

• In 2015, those with income above the filing threshold ($10,000 in 2013) but at or below $26,250 will pay the $325 flat amount, and those with income above $26,250 and below the cap at the national average premium for bronze-level coverage will pay 2% of applicable income;

• In 2016, those with income above the filing threshold ($10,000 in 2013) but at or below $37,800 will pay the $695 flat amount, and those with income above $37,800 and below the cap at the national average premium for bronze-level coverage will pay 2.5% of applicable income.

Illustrative individual mandate penalties for a family of four (married couple with two children under age 18):

• In 2014, those with income above the filing threshold ($20,000 in 2013) but at or below $48,500 will pay the $285 flat dollar amount, those with income above $48,500 and below the cap at the national average premium for bronze-level family coverage will pay 1% of applicable income;

• In 2015, those with income above the filing threshold ($20,000 in 2013) but at or below $68,750 will pay the $975 flat dollar amount, those with income above $68,750 and below the cap at the national average premium for bronze-level family coverage will pay 2% of applicable income;

• In 2016, those with income above the filing threshold ($20,000 in 2013) but at or below $103,400 will pay the $2,085 flat dollar amount, those with income above $103,400 and below the cap at the national average premium for bronze-level family coverage will pay 2.5% of applicable income.

Certain individuals (and their dependents) may be exempt from the penalty. These individuals include those whose household income is less than the filing threshold for federal income taxes for the applicable tax year (filing threshold exemption), as well as those whose required contribution for self-only coverage⁹ for a calendar year exceeds 8% of household income (affordability exemption).¹⁰ After 2014, this percentage will be adjusted to reflect the excess rate of premium growth above the rate of income growth for the period.

Certain categories of individuals will be exempt from the individual mandate, including those with qualifying religious exemptions,¹¹ those in a health care sharing ministry,¹² individuals not lawfully present in the United States, and incarcerated individuals (except those pending the disposition of charges). No penalty will be imposed on those without coverage for less than three months¹³ or members of Indian tribes.¹⁴ Qualifying individuals who would otherwise be subject to the mandate, but who live abroad for at least 330 days within a 12-month period, as well as bona fide residents of any possession of the United States will be considered to have minimum essential coverage and therefore not be subject to the penalty. Any individual whom the Secretary of Health and Human Services (HHS) determines to have suffered a hardship with respect to the capability to obtain coverage under a qualified health plan will be exempt (see the text box for more information about the hardship exemption).

The Internal Revenue Service (IRS) issued guidance that provides "transitional relief" from the penalty for individuals (and any dependents) who were eligible for non-calendar year employer-sponsored insurance plans in 2013.¹⁵ For example, consider an individual who was eligible to enroll in his/her employer's health plan, whose plan year began on September 1, 2013 and ends on August 31, 2014. Under the transitional relief, the individual is not liable for the individual mandate penalty for January 2014 through August 2014, as the individual would have had to enroll in the employer-sponsored plan in 2013 in order to be covered by the plan in those months of 2014.

Additionally, the IRS has issued guidance that provides that individuals enrolled in certain types of coverage that are not considered minimum essential coverage will not be liable for a penalty.¹⁶ For example, women who only receive pregnancy-related services under Medicaid do not have minimum essential coverage, but IRS indicates that these women will not be liable for a penalty in 2014. These "exemptions" from the penalty are not discussed in the "Claiming an Exemption" section of this report; however, they are identified in Table A-1 in the Appendix of this report.

Individuals can be exempt from the mandate and the penalty based on an individual's characteristics, financial status, or affiliations (e.g., religious affiliations). Some individuals who are exempt will not be expected to take any actions to claim the exemption; others will have to either obtain a certification of exemption from a health insurance exchange or claim the exemption through the tax filing process.

Individuals who live abroad for more than 330 days in a 12-month period and those who are bona fide residents of a U.S. possession do not have to take any action to claim the exemption. Those claiming the short coverage gap, unlawfully present, filing threshold, or affordability exemptions may only do so on their federal income tax return. In order to claim a religious exemption an individual must obtain an exemption certification issued by the exchange serving the area in which the individual resides. Some types of hardship exemptions can be claimed by receiving a certification from an exchange, while other types can only be claimed through the tax filing process.²² All other exemptions may be certified by an exchange or may be claimed on the filer's federal income tax return.²³

Regulations provide that most exemptions be applicable retrospectively (with an exception for a specific hardship definition) and be recertified annually; only the religious and Indian tribe exemptions are eligible for prospective or retrospective applicability and continuous certification. Table 1 outlines the basic features of the nine exemption categories.

                Table 1. Individual Mandate Exemptions under ACA

Taxpayers who are required to pay a penalty but fail to do so will receive a notice from IRS stating that they owe the penalty. If they still do not pay the penalty, the IRS can attempt to collect the funds by reducing the amount of their tax refund for that year or future years. However, individuals who fail to pay the penalty will not be subject to any criminal prosecution or penalty for such failure. The Secretary of the Treasury cannot file notice of lien or file a levy on any property for a taxpayer who does not pay the penalty.

Potential Financial Assistance

While ACA requires most individuals to maintain minimum essential coverage, it provides financial assistance to some individuals to help them meet the requirement. Under the ACA Medicaid expansion, some states have expanded their Medicaid programs to include all nonelderly, non-pregnant individuals with income below 133% of the federal poverty level (FPL), which is expected to significantly increase Medicaid enrollment.²⁴ Beginning in 2014, some individuals who do not qualify for Medicaid coverage, but who meet other ACA requirements, will be provided with subsidies to help pay for the premiums and cost-sharing requirements of health plans offered through an exchange.²⁵

Reporting Minimum Essential Coverage

ACA requires that information be provided to the IRS and to individuals, in part to ensure that they have both knowledge and proof of meeting the individual mandate. Every person (including employers, insurers, and government programs) that provides minimum essential coverage to any individual must provide a return to the IRS (as described below).²⁶ That person must also provide this information to each primary insured person along with contact information.

The return must include:

• the name, address, and tax identification number of the primary insured and others covered under the policy;

• the period for which each individual was provided with coverage;

• whether or not the coverage is a qualified health plan offered through an exchange and, if so, the amount of any advance payment of any cost-sharing reduction or any premium tax credit;

• for coverage provided through the group plan of an employer, the portion of the premium, if any, paid by the employer; and

• other information required by the Secretary of the Treasury.

      Table A-1. Types of Health Insurance Coverage as they Relate

Janemarie Mulvey, former CRS Specialist in Health Care Financing, and Manon Scales, former CRS Research Associate, contributed to previous versions of this report.

² § 1501(b) as amended by § 10106 (b) of P.L. 111-148 and by § 1002 of P.L. 111-152 adds Chapter 49, Maintenance of Essential Coverage, to Subtitle D of the Internal Revenue Code of 1986.

³ In the final rule on maintaining minimum essential coverage (78 FR 53646, August 30, 2013), IRS provides that a taxpayer is liable for an individual mandate penalty for his/her dependents regardless of whether the taxpayer claims the dependents for the taxable year. For the purposes of this provision, "dependent" is defined in § 152 of the Internal Revenue Code (IRC) and includes qualifying children and qualifying relatives.

⁴ Household income is defined as the modified adjusted gross income (MAGI) of the taxpayer, plus the aggregate MAGI of all other individuals for whom the taxpayer is allowed a deduction for personal exemptions for the taxable year. Modified adjusted gross income is defined as adjusted gross income increased by foreign earned income (§ 911 of the IRC) and any amount of tax-exempt interest received or accrued by the taxpayer during the taxable year.

⁵ IRS has not released the filing threshold for tax year 2014; the filing threshold for tax year 2013 is the most recent available. In 2013, the standard deduction was $6,100 and the personal exemption was $3,900, so that generally, the filing thresholds for individuals under age 65 were $10,000 for a single filing status and $20,000 for a married couple filing jointly. The filing threshold is linked to an inflation adjustment based on the CPI-U, and therefore it may be higher in 2014 and subsequent years.

⁶ The inflation adjustment will be based on the cost-of-living adjustment (CPI-U), for the calendar year, with any increase that is not a multiple of $50 rounded to the next lowest multiple of $50.

⁷ As of the date of this report, no information has been released as to the national average premiums of bronze-level plans offered through exchanges.

⁸ The Consumer Price Index for all Urban Consumers (CPI-U) is a measure of inflation published by the U.S. Bureau of Labor Statistics. One way in which it is used is to calculate annual inflation adjustments to personal income tax brackets.

⁹ Required contribution is defined as (1) in the case of an individual eligible to purchase minimum essential coverage through an employer (other than through the exchange), the portion of the annual premium that is paid by the individual for self-only coverage, or (2) for individuals not included above, the annual premium for the lowest cost bronze plan available in the individual market through the exchange in the state in which the individual resides, reduced by the amount of the premium credit for the taxable year.

¹⁰ Household income is defined as the modified adjusted gross income (MAGI) of the taxpayer, plus the aggregate MAGI of all other individuals for whom the taxpayer is allowed a deduction for personal exemptions for the taxable year. Modified adjusted gross income is defined as adjusted gross income increased by foreign earned income (Section 911 of the IRC) and any amount of tax-exempt interest received or accrued by the taxpayer during the taxable year.

¹¹ In order to qualify for the religious exemption, an individual must be a member of a recognized religious sect or division (as described in 1402(g)(1) of the Internal Revenue Code of 1986) by reason of which he or she is conscientiously opposed to acceptance of the benefits of any private or public insurance that makes payments in the event of death, disability, old-age, or retirement or makes payments toward the cost of, or provides services for, medical care (including the benefits of any insurance system established by the Social Security Act, such as Social Security benefits and Medicare). Such sect or division must have been in existence at all times since December 31, 1950. There is no list of specific religious groups that qualify for the exemption. For more information, see CRS Report RL34708, Religious Exemptions for Mandatory Health Care Programs: A Legal Analysis, by Cynthia Brougher.

¹² A health care sharing ministry is defined as an organization described in Section 501(c) of the IRC (including corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, or testing for public safety) and is exempt from taxation under Section 501(a). Members of the ministry share a common set of ethical or religious beliefs and share medical expenses, and retain membership even after they develop a medical condition. The health sharing ministry must have been in existence (and sharing medical expenses) at all time since December 31, 1999, and must conduct an annual audit by an independent certified public accountant, available to the public upon request.

¹³ This exemption only applies to the first short coverage gap in a calendar year.

¹⁴ The term "Indian tribe" means any Indian tribe, band, nation, pueblo, or other organized group or community, including any Alaska Native village, or regional or village corporation, as defined in, or established pursuant to, the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.), that is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians.

¹⁵ IRS Notice 2013-42.

¹⁶ IRS Notice 2014-10.

¹⁷ 45 CFR § 155.605(g) and the guidance noted.

¹⁸ HHS provides further guidance on these circumstances in "Guidance on Hardship Exemption Criteria and Special Enrollment Periods" published June 26, 2013, available at http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/exemptions-guidance-6-26-2013.pdf.

¹⁹ This circumstance is not described in regulations; it is described in "Shared Responsibility Provision Question and Answer" published October 28, 2013, available at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/enrollment-period-faq-10-28-2013.pdf.

²⁰ This circumstance is not described in regulations; it is described in "Options Available for Consumers with Cancelled Policies" published December 19, 2013, available at http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cancellation-consumer-options-12-19-2013.pdf.

²¹ For more information about catastrophic plans, see CRS Report R43233, Private Health Plans Under the ACA: In Brief, by Bernadette Fernandez and Annie L. Mach.

²² Several different types of hardship exemptions are described in regulations and guidance (see the text box in this report); at least three of the types will be provided exclusively through the tax filing process, not through exchanges.

²³ According to regulations (45 CFR § 155.610(h)), exchanges may only certify exemptions for applications made within the calendar year for which the exemption is being sought. Individuals seeking to claim exemptions after December 31^st of the relevant year must do so on their federal tax return.

²⁴ Originally, the assumption was that all states would implement the ACA Medicaid expansion in 2014 as required in statute because implementing the ACA Medicaid expansion was required in order for states to receive any federal Medicaid funding. However, on June 28, 2012, the United States Supreme Court issued its decision in National Federation of Independent Business v. Sebelius, finding that the federal government cannot terminate the federal Medicaid funding states are receiving for their current Medicaid program if a state refuses to implement the ACA Medicaid expansion. This decision effectively made the ACA Medicaid expansion optional for states.

²⁵ For more information on premium credits and cost-sharing subsidies see, CRS Report R41137, Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA), by Bernadette Fernandez.

²⁶ § 1502 of P.L. 111-148, which creates § 6055 of the Internal Revenue Code of 1986.

²⁷ IRS Notice 2013-45.