The ACA Tax Penalty

The ACA's individual mandate penalty, which used to be collected by the IRS on federal tax returns, was reduced to $0 after the end of 2018. In most states, people who have been uninsured since 2019 are no longer assessed a penalty.

But there are some areas of the country where penalties still apply if a person is uninsured and not eligible for an exemption. This article will explain the basics of the ACA's individual mandate, and where residents are still potentially subject to a tax penalty if they go without health insurance.

More than a decade after it was enacted, most parts of the Affordable Care Act (ACA) (aka Obamacare) are supported by the majority of Americans. This includes guaranteed-issue coverage regardless of pre-existing conditions, premium tax credits (subsidies) that make coverage more affordable, coverage for essential health benefits, the elimination of annual and lifetime benefit maximums, and the expansion of Medicaid.

But the individual shared responsibility penalty, aka the individual mandate penalty, was always an unpopular provision of the law. The mandate went into effect in 2014, requiring almost all Americans to maintain health insurance coverage unless they are eligible for an exemption.

From 2014 through 2018, there was a penalty assessed by the IRS on people who didn't maintain coverage and who weren't eligible for an exemption. The individual mandate itself still exists (and qualifying for an exemption from the mandate still allows a person to buy a catastrophic health plan even if they're 30 or older). But there is no longer a federal penalty for non-compliance.

Why is There a Tax Penalty?

The ACA's individual mandate penalty was never popular, but rates would have been lower in 2019 if the individual mandate had not been eliminated. And that continues to be baked into the rates that insurers use in subsequent years.

Prior to 2014, there was no mandate, but insurance companies in most states could decline applications or charge additional premiums based on applicants' medical history.

Once coverage became guaranteed-issue (meaning insurers could no longer consider applicants' medical history), it became necessary to impose some sort of measure to ensure that people maintain coverage year-round.

Otherwise, people would be more likely to go without coverage when they're healthy, and only sign up for coverage when they're in need of health care, which would result in higher premiums (the limited enrollment periods are the other part of the incentive to ensure that people maintain coverage year-round).

But as we've seen in the years since the individual mandate penalty was eliminated, enrollment in plans through the exchanges has remained quite steady, thanks to the ACA's premium subsidies, combined with limited enrollment opportunities (i.e., you cannot just purchase coverage whenever you like; it has to be during open enrollment or a special enrollment period; this applies outside the exchanges as well).

Individual Mandate Repealed

Former President Trump campaigned on a promise to repeal the ACA and replace it with something else. Republicans in the House passed the American Health Care Act (AHCA) in 2017 but the legislation failed in the Senate, despite repeated attempts by GOP Senators to pass it.

Ultimately, Republican lawmakers passed the Tax Cuts and Jobs Act and President Trump signed it into law in December 2017. Although the tax bill left the rest of the ACA intact, it repealed the individual mandate penalty, as of 2019 (other provisions of the tax bill took effect in 2018, but the individual mandate repeal was delayed by a year).

States That Still Have an Individual Mandate

With the elimination of the federal individual mandate penalty, some states have implemented their own mandates and penalties:

• The District of Columbia also implemented an individual mandate and associated penalty as of 2019.
• California created an individual mandate and associated penalty as of 2020.
• Massachusetts already had a mandate and penalty, which has been in place since 2006. The state had not been assessing the penalty on people for whom the federal penalty applied, but started assessing the penalty again as of 2019.
• New Jersey implemented an individual mandate and an associated penalty starting in 2019.
• Rhode Island created an individual mandate and associated penalty as of 2020.
• Vermont enacted legislation to create an individual mandate as of 2020, but lawmakers failed to agree on a penalty for non-compliance, so although the mandate took effect in 2020, there is not much of a plenty involved.

Most of the states with individual mandates have modeled their penalties on the federal penalty that was used in 2018, which is $695 per uninsured adult (half that amount per child), up to $2,085 per family, or 2.5% of household income above the tax filing threshold, although there are some state-to-state variations.