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Tax and Financial News for April 2015

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The Obamacare Tax: What Happens When You Don't Pay?

Recently, the Obama administration announced that approximately three to six million households likely face a penalty for failing to obtain minimum essential healthcare coverage in compliance with the Affordable Care Act (ACA).

This number might sound smaller than it should be because many of the 20 to 37.5 million people still without health insurance are exempt from the penalty because they have obtained a waiver for religious reasons, due to their citizenship status, or because they are in jail.

The Penalties

Those without a legitimate exemption will face a penalty. The question is what type of penalty and how much it will be relative to their income.

For the 2014 tax year, noncompliant taxpayers will be assessed one percent, or a minimum of $95 per adult ($47.50 for each minor), of their income above their respective filing threshold figure. The penalty increases in 2015 for noncompliant taxpayers to two percent or $325 per adult, and in 2016 to 2.5 percent or $695 per adult.

Based on financial estimates from the Congressional Budget Office, by 2016 approximately six million noncompliant taxpayers are projected to owe an average of $1,200. However, there is some question as to just how many taxpayers will actually be fined.  

With more and more Obamacare-compliant policy purchases reported by private and public organizations, it is unclear how many taxpayers will be found noncompliant. Additionally, despite the well-known penalty structure for the next few years, the crux of the matter is how much money will be accumulated in fines and how will these fines be collected.

ACA Enforcement Discussions

Much like the law’s movement through Congress and the U.S. Supreme Court, few people knew how the law would end up once it was passed. Similarly, enforcing the penalty is still up in the air. So, what does the law say in regard to criminal or civil penalties if the financial penalty is not paid?

Based on a plain reading of the law, some experts question what types of enforcement actually exist. Specifically, failure to pay the penalty will not result in jail time for the taxpayer, nor will it result in a levy or lien against the taxpayer’s property.

Even when it comes to tax refunds, there is room for interpretation. Depending on how one reads the Federal regulations related to ACA, the IRS is ambiguous as to whether or not tax refunds can be used to satisfy fines for noncompliance with the healthcare law. The IRS has indicated that section 6402(a) and related regulations do not expressly prohibit satisfying this penalty with refund proceeds, nor do they prioritize a tax refund as a means to settle the penalty.        

Real-World Consequences

While individuals required to carry adequate health insurance can’t predict the future and how fines will be enforced, many experts predict increased pontification on the topic by bureaucrats. When it comes down to what actually happens, taxpayer refunds might be one source to pay for the penalty but this is not settled. Beyond that, many experts don’t see many other options available to the government to enforce this provision, so only time will tell what actually happens to noncompliant individuals.

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