Benefits and Compensation

IRS Caps Individual Penalties at National Bronze-level Premium

A single individual who failed to get health insurance will face a tax penalty of no more than $204 for each month he or she lacked coverage in 2014, the IRS announced on July 25. The maximum amount for a family with five or more members is $1,020 in 2014, the agency says in Rev. Proc. 2014-46.

Under the Affordable Care Act, penalties for failing to get health insurance cannot exceed the national average premium for bronze level of coverage offered through exchanges, the health care reform law says. Penalties may vary depending on the number of uncovered dependents (and spouse) in the taxpayer’s household.

In the revenue procedure, the IRS announced the figure and some of the methods it used in calculating that national average.

Variation Based on Family Size

Every American must get covered by minimum essential coverage for themselves and their dependents or pay an “individual shared responsibility” penalty. The penalties are levied for each month that an individual failed to have coverage, but the figures below are for a whole year.

The penalty will be either based on flat-dollar amount based on a count of household members or a percentage of salary, whichever is greater.

  1. The flat dollar amount, which is the sum of the applicable dollar amounts for which the taxpayer is liable; that is, the full amount for each adult, plus half the amount for each dependent under 18 years old.
  2. A percentage of the amount by which the family’s income exceeds its tax filing threshold.

In 2014, the penalty is $95 for each uncovered adult family member (plus $47.50 for each dependent under 18) or 1 percent of the amount by which income exceeds the filing threshold.

In 2015, the penalty is $325 per uncovered adult family member (plus $162.50 for each dependent under 18) or 2 percent of income (beyond the threshold) in 2015.

In 2016 and beyond, the penalty is $695 for each uncovered adult family member (indexed for inflation starting 2017) (plus $347.50 for each dependent under 18) or 2.5 percent of income (beyond the threshold) in 2016 and thereafter.

There are two ways penalties are capped. They cannot exceed three times the applicable dollar amount for families with dependents. For example in 2014, the maximum dollar amount is three times the applicable dollar amount of $95, or $285.

Example: A family with two adults and three young children in 2014 would not have to pay the larger amount ($190 + $142.50 = $332.50) but instead would pay just $285, because of the cap.

Penalties are also capped by, and cannot exceed, the cost of bronze level coverage. If the amount for family bronze level coverage is less than the greater of the flat-dollar and percentage-of-income methods, then the penalty would be the cost of bronze-level coverage.

To try to keep the average cost low, the authorities decided to base the figure on the cost of a policy for a 21-year-old non-smoker.

Example: A single person makes $150,000 per year, and his or her filing threshold is $10,000. In 2016, his or her annual liability would be 2.5 percent of $140,000, or $3,500. The annual premium for a bronze plan is 12 times $204, or $2,448. In that case, the penalty would be $2,448.

 

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