Penalties For Not Purchasing Health Insurance

We've discussed the "carrot" for purchasing health insurance Jan 1st, 2014 and after but we haven't mentioned the "stick" and there most definitely will be one.   For most US citizens who do not receive health insurance through a company, they will be assessed a penalty if they do not secure their own health insurance.  For people that make up to 400% of poverty and do not have group health insurance, it will make little financial sense to forego the sizable health subsidy but also incur a separate penalty.  Let's look at the health reform penalty and determine if it has teeth.

Health Penalty To Ramp Up Over First Few Years

The penalty for not purchasing health insurance was designed to ramp up over the course of a few years starting Jan 1st, 2014.  Let's look at the scheduled approach:

2014   For the calendar year 2014, the penalty will be $95 per family member or 1% of annual income, whichever is greater. 

2015   For calendar year 2015, the penalty will be $325 per family member or 2% of annual income, whichever is greater.

2016   For Calendar year 2016, the penalty will be $695 per family member or 2.5% of annual income, whichever is greater.

Let's look at an example of the health penalty in action

In 2014, let's say you make $50K for a single individual who is required to purchase health insurance.  the penalty for that person would be $500 since the 1% of annual income is greater.  That's still quite a bit lower than what that individual will probably pay for individual health insurance but it was designed to "tip the scale" for those on the fence about purchasing health insurance after health reform kicks in.  Our estimates for the Bronze health plan out of the Exchange (which will likely be the most popular option by far people who do not qualify for a health subsidy) is about $3K annually or about $250 monthly depending on age and area.  Essentially this person is comparing no insurance and penalty of $500 or purchasing health insurance for $3K.  It will be interesting to see how people analyze this trade-off.  You can see the out-year health penalty starts to sting and push the needle more towards purchasing health insurance with penalties of $1250 for the same person above.

What about some one who is under 400% of the Federal Poverty Level?

If you make under 400% of the Federal Poverty Level and qualify for a health subsidy, the numbers in our example above really start to change.   Let's look at a person who makes $25K annually.  The assessed penalty might be $250 in 2014.  The premium, however, for the Silver Exchange plan with health subsidy accounted for could be closer to $2K (see Health Subsidy Calculator for estimate) annually for much richer coverage.  The expected premium with a health subsidy is not suppose to exceed 9.5% of income so for the person above who makes $2000/monthly, that's about $200/premium.  We just reduced the premium by 33% with the health subsidy!  The 9.5% rule can fluctuate downwards depending on a person's income but never exceed 9.5%.   By year 2016, the penalty might be $750 annually versus $2400 in premium (at the most).  When considering the penalty, it's hard to justify not purchasing health insurance if you are eligible for a subsidy.   




Los Angeles, Family of 4
making $60K.

Iowa, Single Adult making $30K

*Based on age, expected costs, and other assumptions according to Kaiser Calculator.  Actual subsidies will vary and official subsidy amounts will be available Oct 1st, 2013. 

Health Subsidy Calculator



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