The requirement for everyone to purchase health insurance, also called the individual mandate, is one of the Affordable Care Act’s (ACA) most significant and controversial provisions.

Anyone who doesn’t buy insurance for themselves and their minor children and isn’t exempt from the mandate will pay a penalty: either $695 in 2016, rising with inflation in later years, or 2.5 percent of household income – whichever is greater.  Penalties in both cases are subject to a cap.

The penalty will be paid as a federal tax liability on income tax returns and will be enforced by the IRS. Individuals that fail to pay the penalty will not be subject to criminal penalties or liens, but the IRS may withhold tax refunds, impose interest, collect when homes are sold, and use a range of other tactics to collect the ACA penalty.

Recently, the CBO raised its estimate of how many people would pay penalties in 2016 for not having health insurance, to 6 million people paying a total $6.9 billion. That estimate adds 2 million more people and $3 billion more per year to CBO’s previous estimate in April 2010. Eighty-five percent of the increase in penalty payers comes from the impact of legislation enacted since 2010 and from the CBO’s updated economic estimates, which predicts higher unemployment and lower income than previous reports did.

Only 15 percent of the new penalty payers are people who would have been enrolled in Medicaid but who live in states that do not expand the program to 138 percent of federal poverty level (FPL). The Supreme Court’s decision in NFIB v. Sebelius gave states that option.  This is the same SCOTUS ruling that held that the ACA individual mandate was a tax and therefore Constitutional.

Almost 70 percent of the people who the CBO expects to pay penalties have incomes below 400 percent of the federal poverty level – people who will be eligible either for Medicaid or for subsidies through health insurance exchanges (HIX). Yet two thirds of the $6.9 billion in penalties will come from people with incomes of more than 400 percent of federal poverty level.

Exemptions from the Mandate
Although the CBO expects 30 million people to be uninsured in 2016, most will receive an exemption from the penalty. Exemptions under the health reform law include:

  • financial hardship, as defined by the Secretary of Health and Human Services (HHS), currently Kathleen Sebelius.  In states that opt out of the ACA Medicaid eligibility expansion, HHS is expected to grant hardship waivers for low-income individuals who would have been Medicaid eligible had the state expanded Medicaid.
  • income low enough not to file income tax returns with the Internal Revenue Service (IRS). In 2011, the IRS filing requirement threshold was $9,500 gross income for a single person under 65 years old.
  • membership in certain religious sects, as defined in Internal Revenue Code section 1402(g)(1).
  • membership in an Native American/ American Indian tribe.
  • unaffordable coverage, where person’s required contribution, often the premium, is more than 8 percent of household income.
  • undocumented immigrant status.

The mandate’s penalties are intended to give healthy people an extra incentive to buy insurance, whose premiums could be more expensive than the penalties. The CBO’s estimate is not broken down by age or family type. But a recent Milliman report did, finding, among other things, that penalties for young people will be a smaller percentage of premiums than for other groups. Penalties that are cheaper than premiums could undercut insurance participation rates of young adults, who are relatively healthy.