The Affordable Care Act’s (ACA) individual shared responsibility provision, also known as the “individual mandate,” requires most Americans to have healthcare benefits that qualify as minimum essential coverage.1 Those who fail to obtain it may owe a tax penalty known as the individual shared responsibility payment.
In the meantime, the tax penalty still applies to and will be enforced for coverage year 2018. That means you can still be penalized for going without minimum essential coverage for part or all of 2018.
There are two ways you can avoid paying the tax penalty:
- Qualify for an exemption, or
- Enroll in minimum essential coverage.
If you do neither, you will owe the penalty when you file your 2018 federal income taxes. Let’s look at these options, how they work, whether or not they apply to you, and what you may want to do if you find yourself without minimum essential coverage (exempt or not).
Can you get an Obamacare exemption for 2018?
Under some circumstances, you may be exempt from the ACA’s individual mandate and thereby the tax penalty. There are a number of different exemptions, and examples include but are not limited to the following circumstances3:
- Your gross income is below the return filing threshold for your filing status
- The employer-sponsored health plan available to you is more than a certain percentage of your annual household income
- You are a U.S. citizen living abroad
- You are a member of a federally recognized Indian tribe
- You are incarcerated
- You live in a state that did not expand Medicaid
How are exemptions granted? Some exemptions must be obtained through HealthCare.gov or state-based health insurance exchanges via an application process, while others must be claimed on your federal tax return.4
Getting minimum essential coverage
If you don’t qualify for an exemption, the only way to avoid the shared responsibility payment for coverage year 2018 is to enroll in a health plan that qualifies as minimum essential coverage.
There are many coverage types that qualify; they which include, but are not limited to5:
- Employer-sponsored health plans
- Private health plans purchased from health insurance companies
- Private health plans purchased from a state-based or federally facilitated exchange
- Medicare Part A
- Medicare Advantage
- Most Medicaid coverage
What are the Obamacare penalty amounts for 2018?
When you file your taxes, you will be required to check the full-year coverage box on Form 1040, 1040A or 1040EZ; submit Form 8965, Health Coverage Exemptions, claiming a coverage exemption; or report a shared responsibility payment on your tax return.6
If you do go without minimum essential coverage for more than a single period of up to three months in 2018, you may owe a tax penalty. How much you will be required to pay depends on the year and how long you were uninsured. The shared responsibility payment increases annually, and for every month you are uninsured and not exempt, you will owe 1/12th of the annual payment.7
The 2018 penalty amount is the greater of either as follows8:
- 2.5% of your annual household income above the tax filing threshold to a cap of the national average bronze plan premium
- $695 per adult and $347.50 per child under 18 to a maximum penalty of $2,085 per family
Accordingly, the 2018 penalty is paid when you file your 2018 taxes in 2019.
Alternative health insurance options
Qualifying for an exemption shields you from the tax penalty, but not from costs you might incur should you require medical care. It may be wise to obtain alternative health insurance coverage until you can secure minimum essential coverage either through a special enrollment period or the next year’s open enrollment period.
Two alternative health insurance options you may consider include:
Hospital indemnity insurance – These policies pay a fixed benefit amount in the event of a covered injury or illness that requires hospital treatment or a hospital stay.
Short term health insurance – Short term insurance policies provide temporary coverage for as few as 30 days (and up to 364 days in some states), with benefits for unexpected medical care and treatment.
Hospital indemnity insurance and short term health insurance are not ACA-compliant health insurance options, and you can be denied coverage based on your health history. You could still owe a tax penalty for coverage year 2018 if you have alternative health insurance instead of minimum essential coverage.
However, if you qualify, you can enroll in hospital indemnity and short term health insurance policies year-round and may want to consider them as a means to obtain some level of healthcare benefits for unexpected medical expenses.
For coverage year 2019 and beyond, you will not owe a tax penalty if you have an alternative health insurance policy or policies instead of major medical insurance or other minimum essential coverage. Though, you will want to weigh your decision carefully to ensure it meets your coverage needs.
Summary + next steps
The ACA tax penalty still applies for coverage year 2018, but it will be lifted starting Jan., 2019. You may still be able to avoid it if you qualify for an exemption, as noted above, or have minimum essential coverage.
Alternative health insurance options including short term health insurance and hospital indemnity insurance are available now, though you could still owe a tax penalty if you have these types of policies and are not exempt from the individual mandate in 2018.
Beginning with coverage year 2019, you will not be penalized for choosing this coverage instead of a major medical insurance or other minimum essential coverage. Determine whether hospital indemnity insurance and/or short term health insurance might be right for you.
If you have tax-related questions, contact a tax professional.
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