The Ins and Outs of the Individual Shared Responsibility Payment

Among the many provisions of the Affordable Care Act is what’s known as the “individual shared responsibility payment.” It applies primarily to individuals who don’t purchase qualifying health insurance, yet aren’t exempt from the requirement to purchase coverage. As a result, the provision likely will apply to just a sliver of the population.

Background

In 2012, the Congressional Budget Office estimated that about 6 million people — less than 2% of Americans — would have to make the individual shared responsibility payment. That’s because many taxpayers have qualifying health insurance coverage through an employer, the Health Insurance Marketplace, Medicaid or some parts of Medicare, as well as other plans. The individual shared responsibility payment likely won’t apply to them.

In addition, some taxpayers are exempt from the coverage requirement. This may be the case, for instance, for those who lack affordable coverage options, have a gap in their coverage of less than three months, or whose income falls below the minimum threshold for filing a tax return.

If none of the exemptions apply, however, individuals who lack coverage will have to make an individual shared responsibility payment for each month they go without coverage. The payment is intended to prevent taxpayers from willfully going without health insurance that they can afford, only to try to obtain coverage if they become sick or are injured.

Moreover, children are included. If a child lacks coverage and doesn’t qualify for an exemption, the adult(s) who claim him or her as a dependent generally will have to make a shared responsibility payment for the child.

Calculating the Payment

The requirement went into effect on Jan. 1, 2014. But, because the payment is made when filing a tax return, the 2014 payment won’t be due until the 2014 return is filed in 2015.

Generally, the payment amount is calculated in one of two ways. For 2014, it’s the greater of two figures: 1% of household income above the tax return threshold for the taxpayer’s filing status, or a flat dollar amount.

For 2014, the flat amount is $95 per adult and $47.50 per child, to a maximum of $285 per filer. The payment also is capped at the cost of the national average premium for the bronze level health plan available through the Insurance Marketplace.

Here’s an example showing how this calculation might work: For 2014, an individual under age 65 must file a tax return once his or her gross income exceeds $10,150. So, if an individual earns $30,000, doesn’t purchase health insurance, and doesn’t have an exemption, the following calculation would come into play: $30,000 less the $10,150 threshold, multiplied by 1%, or ($30,000 – $10,150) × .01 = $198.50.

Of course, this is more than $95, so the individual would pay $198.50, or $16.54 for each month he or she goes without insurance.

It’s important to note that the individual shared responsibility payment levels are scheduled to rise each year (and rather dramatically). In 2015, for instance, the flat dollar amount jumps to $325 per adult, while the income-based penalty rises to 2% of household income above the filing threshold.