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Understanding the shared responsibility payment

by Tony Novak, CPA, MBA, MT

General Information

Beginning April 1, 2014, unless covered by an exemption described below, U.S. taxpayers are subject to a tax penalty imposed by Section 500A of the Patient Protection and Affordable Care Act of 2010 unless covered by a specific type of health insurance coverage that contains provision known as minimum essential coverage for themselves and all dependents. Failure to maintain minimum essential coverage trigger a shared responsibility payment, also known as a tax penalty that is calculated on a monthly basis.

Individual mandate

It is the requirement to maintain coverage or pay a penalty that has generally come to be called the "individual mandate." The penalty is called a "shared responsibility payment".

Penalty Amount

The maximum amount of the penalty is the lesser of: (i) the greater of a flat dollar amount ($95 individual or $285 maximum per household) or a percentage of your household income above a threshold (1% above $12,000 for a single taxpayer in 2014), or (ii) the national average premium for the lowest-level plan providing minimum essential coverage. In 2014 the flat dollar amount of the penalty is $95 for individuals and $285 for households. Most individuals who fail to maintain coverage will pay this amount.

When payment is due

The shared responsibility payment is due when you file your federal income tax return. This means that the first penalties will be due April 15, 2015. Joint Liability Married individuals who file a joint return for a tax year are jointly liable for any shared responsibility payment.

IRS Collection Method

IRS is not permitted to levy or file a notice of lien with respect to any property of a taxpayer by reason of any failure to pay the shared responsibility payment. The IRS may offset any liability for the shared responsibility payment against any overpayment due the taxpayer. If a taxpayer on whom the penalty is imposed is owed a tax refund, the IRS is allowed to reduce the amount of the refund it pays to the taxpayer by the amount of the penalty. But since the IRS isn't allowed to go after the penalty using the collection methods that are otherwise authorized for the collection of taxes, offsetting refunds and credits may be the only practical way for it to collect the penalty.

Satisfying the individual mandate

Now, you can satisfy the minimum essential coverage standard (and not be subject to a penalty) if you and your dependents are enrolled in a qualified health plan offered by: 1) an Exchange, 2) a qualified employer-sponsored plan (including a government plan), 3) a government plan, such Medicare, Medicaid or CHIP (Children's Health Insurance Program), 4) or any other health coverage plan recognized as affording minimum essential coverage. Minimum essential coverage does not include workers compensation insurance, disability insurance, dental or vision benefits, long-term care benefits, Medigap or Medicare Supplement insurance.

Exempt individuals

If you are an exempt individual, such as a non-U.S. citizen, incarcerated individual, member of certain religious sects or health care sharing ministries or a member of an Indian tribe you will not be subject to the individual mandate. More information is available IRS Notice 2013-42. The exemption is not affected by any supplemental employer-provided health plan that is not a minimal essential coverage or any supplemental insurance that may cover the individual.

Low income individuals

Low income taxpayers for whom basic coverage is unaffordable are not required to maintain minimum essential coverage. These individuals may qualify for subsidized coverage or may purchase mini-med policies that have lower deductibles and cover minimal common medical expenses.

Hardship exemptions

Taxpayers who qualify under a hardship exemption are not required to maintain minimum essential coverage. If subsidized coverage is not available, individuals may purchase a mini-med policy that has lower deductibles and covers minimal common medical expenses.

Cancellation of prior coverage

The hardship exemption also includes all individuals whose medical insurance was cancelled for 2014 because it did not meet the minimum requirements of the new law.

Short term insurance gaps

 An individual who fails to maintain the minimum essential coverage for a period of less than three consecutive months will not be subject to the penalty. This exemption from penalties applies whether the individual is covered by temporary short term medical insurance or no coverage at all.

More information

See the IRS Web site and the Federal Register for more information.