Individual Shared Responsibility Payment
What you need to know about the penalty for not having health insurance
Since January 1, 2014, individuals are required to purchase health insurance for themselves and their dependents. Individuals who don't have health insurance for one or more months during the year may have to pay an additional tax, called the individual shared responsibility payment. This payment essentially penalizes people for not having health insurance.
The questions to ask:
- Do I have the right type of health insurance? The key term to know is minimum essential coverage.
- How much is the shared responsibility payment and how is it calculated?
- How to pay the shared responsibility payment, and what to do if you cannot afford to pay it in full?
To Which Individuals Does the Shared Responsibility Payment Apply?
The individual shared responsibility payment applies to all individuals who are citizens or resident aliens of the United States. However, there are some notable exceptions. Americans residing in foreign countries or in the American territories, for example, are not required to obtain health insurance. There are 12 exceptions to the shared responsibility payment.
The shared responsibility payment applies when an individual, or any person in his or her shared responsibility family, does not have the required type of health insurance coverage for at least one day during any month of the year, unless an exception applies. The penalty is calculated for each month that a person does not have health insurance coverage.
The phrase "shared responsibility family" means all persons for whom a taxpayer is eligible to claim a personal exemption. This would be the taxpayer him- or herself, plus the taxpayer's spouse (if married and they file jointly), plus any dependents the taxpayer is eligible to claim under the qualifying child or qualifying relative rules.
A person is responsible for paying the shared responsibility payment for a dependent, even if the person chooses not to claim a dependent. A person is responsible for paying the shared responsibility payment for a spouse if they file jointly.
The Required Type of Health Insurance: Minimum Essential Coverage
A person is required to have health insurance that provides minimum essential coverage. The following types of health insurance provide minimum essential coverage. So if you have one of the following types of health insurance, then the shared responsibility payment does not apply to you. However, if a person does not have one of the following types of health insurance, then that person is required either to pay the shared responsibility payment or indicate that an exception applies.
- Children's health insurance program (CHIP)
- COBRA coverage
- Department of Defense Nonappropriated Fund Health Benefits Program
- Group health insurance coverage through your employer
- Health care coverage provided to the Peace Corps volunteers
- Health care coverage through the Department of Veterans Affairs
- Insurance purchased individually
- Insurance through a student health plan at college or university
- Medicaid plans (except limited-coverage plans)
- Medicare Advantage plans
- Medicare Part A
- Refugee Medical Assistance
- Retiree coverage through your former employer
- State high-risk health insurance pools (for 2014 only; we are waiting to see if these programs will qualify for 2015 and later years)
- TRICARE plans (except limited-coverage plans)
The following limited-coverage Medicaid and TRICARE plans are permitted as an exception for 2014 only. Such insurance will not qualify as minimum essential coverage for 2015 or later years:
- Family planning services Medicaid
- Tuberculosis-related services Medicaid
- Pregnancy-related Medicaid
- Emergency medical conditions Medicaid
- Coverage authorized under section 1115 of the Social Security Act
- Medicaid for the medically needy
- TRICARE coverage for space-available care
- TRICARE coverage for limited-benefit line-of-duty care
How the Shared Responsibility Payment is Calculated
Procedurally, the individual shared responsibility payment is calculated as follows:
a. Calculate the applicable dollar amount for each person in the household who did not have health insurance coverage for any month. Calculate the applicable dollar amount for each month for each person, and add them up. This is called the sum of the applicable dollar amounts.
b. Multiply the applicable dollar amount for one adult by three.
c. Whichever number is lower (a or b), is called the flat dollar amount.
d. Calculate the the excess income amount, which is based on a percentage of household income.
e. Whichever number is higher (c or d), is the monthly penalty amount.
f. Look up the national average premium for bronze-level coverage. A chart is below.
g. Whichever number is lower (e or f) is the shared responsibility payment for the year.
Now that we understand the overall procedure, let's dig into how to perform each calculation.
Applicable Dollar Amounts
|Year||Applicable Dollar Amount||Applicable Dollar Amount for Persons under Age 18 |
(half of the adult amount)
|Thereafter||indexed for inflation|
Source: Internal Revenue Code section 5000A.
Applicable dollar amounts are utilized to calculate the flat dollar amount. These are annual amounts, and are converted into monthly amounts when calculating the Monthly Penalty Amounts (see below).
We utilize these applicable dollar amounts in two ways. First, to calculate the sum of the applicable dollar amounts (labeled number a in our list above). We do this by adding applicable dollar amounts for each person who did not have health insurance. If an adult didn't have insurance, we use the full amount. If a child didn't have insurance, we use the child's amount, which is half the adult amount.
Secondly, we multiply the applicable dollar amount by three. (Number b in our list above.) Here we ignore the lower applicable dollar amount for children. We simply multiply $95 by 3, which is $285 (for 2014).
Whichever number is lower (a or b) is the flat dollar amount (labeled c in our list above).
The Flat Dollar Amount
The flat dollar amount is the lower of the following two calculations:
- The sum of the applicable dollar amounts for all individuals included in a person's shared responsibility family, or
- Three times the applicable dollar amounts for the year for one adult.
Now that we have an overview of the applicable dollar amounts and the flat dollar amount, let's see how this works out in an example.
Example. Henry and Jane are married with three dependents: Katie (age 21), Luann (age 15), and Marcus (age 10). Because Katie, Luann and Marcus are dependents of Henry and Jane, all five persons form one shared responsibility family. To calculate their flat dollar amount, we first calculate the applicable dollar amounts for each person in the shared responsibility family, and then add them up to find the total. There are three persons age 18 or older (Henry, Jane and Katie), and two persons under age 18 (Luann and Marcus). For 2014, their applicable dollar amounts would be:
|3 adults||3 × 95||$285|
|2 children||2 × 47.50||$95|
|Sum of the applicable dollar amounts||$380|
So the first calculation, the sum of the applicable dollar amounts, is $380.
The second calculation is to take three times the applicable dollar amount, or 3 × $95 = $285.
We then compare these two numbers. The flat dollar amount is the lower of the two numbers. The lowest number is $285. This is their flat dollar amount for the year. (This example continues below.)
Excess Income Amount
After figuring out the flat dollar amount, we move on to calculate the excess income amount. The excess income amount is calculated as a percentage of household income in excess of the relevant filing threshold amount.
Household income is the modified adjusted gross income for each person in the shared responsibility family who is required to file a tax return. In other words,
(Household income – filing threshold) × Income percentage
Modified adjusted gross income (MAGI) means adjusted gross income (AGI) with the following amounts added back: the foreign earned income exclusion, tax-exempt interest, and the tax-exempt portion of Social Security benefits.
The income percentages vary by year:
|2016 and thereafter||2.5%|
Example, continued. To calculate the excess income amount for Henry and Jane for 2014, we'll need to know their household income and filing threshold. For 2014, the filing threshold for a married couple filing jointly is $20,300. Let's suppose that their dependents (Katie, Luann and Marcus) do not earn enough income to be required to file a tax return. Therefore only the household income for this family includes only Henry and Jane's modified adjusted gross income. Let's suppose they have household income of $100,000. For the year 2014, the income percentage is 1%. We now have all the information needed to calculate their excess income amount:
|Excess income amount|
|(Household income – filing threshold) × Income percentage|
|= ($100,000 – $20,300) × 1%|
|= 79,700 × 1%|
Henry and Jane have an excess income amount of $797. (Example continues below.)
Monthly Penalty Amount
The monthly penalty amount is one-twelfth (1/12th) of the greater of the flat dollar amount or the excess income amount. These monthly penalty amounts are then multiplied by the number of months for which a person is not covered by health insurance or qualifies for an exception.
Example, continued. Henry and Jane have a flat dollar amount of $285 and an excess income amount of $797. The larger of these two numbers is $797 (the excess income amount). Their monthly penalty amount is one-twelfth of $797, or $66.42. We then multiply this by the number of months for which they did not have health insurance coverage or qualify for an exception. Let's assume no one qualified for an exception, and no one had health insurance during the year. So we multiply the monthly payment amount ($66.42) by 12 months (the number of months without health insurance), which is $797. This is Henry and Jane's sum of the monthly penalty amounts. (Example continues below.)
National Average Premium for Bronze-Level Health Insurance Coverage
The national average premium for bronze-level coverage refers to the annual average premium available through a health care exchange for bronze-level health insurance coverage for the family. Bronze-level coverage is one of the types of health insurance coverage offered through the health insurance exchanges.
|National Average Premium for Bronze Level Plans for 2014|
|$204 per person||$2,448 per person|
|$1,020 per family with five or more members||$12,240 per family with five or more members|
Source: Revenue Procedure 2014-46 (pdf), IRS.gov.
Note: the national average premium for bronze level coverage for 2014 is $204 per person per month. This amount reaches a maximum of $1,020 per month for shared responsibility families with five or more members.
Example, continued. Henry and Jane have a penalty amount of $797, calculated as the monthly penalty amounts multiplied by each month they weren't covered by health insurance or qualify for an exception. To calculate their shared responsibility payment, we compare the sum of their monthly penalty amounts to the national average premium for bronze-level coverage for their family of five; the shared responsibility payment is the lower of these two amounts. For 2014 for a family with five or more members, the annual premium for bronze-level coverage is $12,240. We compare $797 to $12,240, and the lower number is $797. In this example, Henry and Jane have a shared responsibility payment of $797 for the year. This amount is reported on their annual tax return (line 61 of the 2014 version of Form 1040). This amount reduces their tax refund or increases their balance due. (End of Example.)
How to Pay the Shared Responsibility Payment
Shared responsibility payments are due by April 15th following the end of the year. Shared responsibility payments are paid through withholding, estimated payments, payments made with an extension, or remitting payments when the return is filed.
It is certainly possible that a person may have paid in enough tax through withholding, estimates, and refundable tax credits that they would not need to make additional payments specifically for the shared responsibility payment. In this case, the taxpayer will receive a lower refund due the shared responsibility payment being added to their total tax liability.
In some cases, however, the shared responsibility payment can turn what would otherwise be a refund into a balance due, or may increase a balance due. In this situation, the person pays any balance due by the April 15th deadline. The person may also want to review and adjust their withholding or estimated payments for the current year to prevent having a balance due at tax time next year.
If a person does not pay the shared responsibility payment, then the IRS will send out a series of notices to request payment. Interest will accrue on unpaid shared responsibility payments from the due date of the payment. However, the IRS is not permitted to assess late payment penalties, to issue a notice of federal tax lien or to levy a person's wages or bank account for any unpaid shared responsibility payments. The IRS can and will reduce future tax refunds due the taxpayer to pay off the unpaid shared responsibility payment. The IRS has ten years from the date of filing a return to collect any unpaid shared responsibility payments.
If a person cannot afford to pay their shared responsibility payment in full, the best course of action would be to consult with a tax professional or to call the IRS to review what options are available. One option would be to set up a monthly payment plan.
- Instructions for Form 8965 contains worksheets for calculating the shared responsibility payment.
- The shared responsibility payment, if any, is reported on line 61 of the 2014 version of Form 1040
- The Individual Shared Responsibility Payment - An Overview (IRS.gov)
- Questions and Answers on the Individual Shared Responsibility Provision (IRS.gov)
- Publication 5185, Facts about Making a Shared Responsibility Payment (pdf, IRS.gov)
- Internal Revenue Code section 5000A (Legal Information Institute at Cornell University Law School)
- Treasury Regulations sections 1.5000A-1, 1.5000A-2, 1.5000A-3, 1.5000A-4, and 1.5000A-5 (Legal Information Institute at Cornell University Law School)