Health Care Reform, Part 4: Mandated Health Insurance Begins in 2014

Starting in 2014 individuals will be required to purchase "minimum essential" health insurance coverage for each month or else pay a penalty.  Individuals covered by Medicare or Medicaid (and certain other exceptions) are exempt from the mandate.  The amount of the penalty is computed using a formula that takes into account the person's household income and a flat dollar amount.  In 2014 the monthly penalty is 1/12 of the greater of $95 or 1% of income for the year.  In 2015 the penalty increases to the greater of $325 or 2% of income.  In 2016 the penalty increases to the greater of $695 or 2.5% of income.  The penalty is computed upon each household member age 18 or older.  The penalty for those under age 18 is one-half the adult amount.  An upper cap on the penalty limits the total amount of penalty assessed upon a household to a flat dollar cap of $285 in 2014, $975 in 2015, and $2,085 in 2016.  In addition, the household penalty may not exceed the national average annual premium for the "bronze" level of coverage through the coming insurance exchange.  The calculation of the penalty is so complex that it is to be administered by the IRS and collected on the individual's income tax return!  Even though assessment and collection of the penalty is through the income tax system, non-payment of the penalty does not result in additional interest or penalty.  The IRS is also prohibited from filing liens and levies against property, and may not criminally prosecute those who do not pay the penalty.

Also starting in 2014, employers with an average of 50 full-time employees (FTEs) not offering "minimum essential" health insurance coverage to its FTEs must pay a penalty.  The penalty is an "excise tax" equal to the number of FTEs over a 30-FTE threshold during any month, times 1/12 of $2,000 (adjusted for inflation).  In addition, if the employer offers health insurance and an employee whose household income falls below certain thresholds instead enrolls in a health insurance exchange for which the employee receives a premium tax credit or cost-sharing reduction, then the employer must pay a penalty equal to $3,000 times 1/12 for each month the employee is so enrolled.  An upper-cap to the penalty applies.  This second penalty does not apply if the employer provides such employee a "free choice voucher."  The voucher obligates the employer to pay to the insurance exchange an amount that the employer would have paid in providing coverage to the employee under the plan offered by the employer.

These are complicated provisions for which the IRS will need to issue guidance as to implementation.  Individuals and employers are in this together.  Indeed, the health care law calls these penalties "shared responsibility" penalties.