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Which is More: Individual Mandate Penalty or Coverage?


Still fighting electronic obstacles trying to apply for your state’s exchange? Exhausted by the government and would rather not comply with the health care law? Well, you have choices for coverage, and fighting the system may be more expensive than you might have anticipated.

The individual mandate ensures every uninsured American will pay the greater of $95 or 1% of income in 2015 as a penalty, which seems a far less costly deal than a major medical health plan at first glance. And, if you’re not part of the sick, uninsured population who has been waiting anxiously for Jan. 1, 2014 to finally get coverage, you could even consider buying something like short-term coverage that doesn’t help you avoid the tax.

Specifically, young and healthy people have the freedom to buy any kind of coverage they want, with more options than most Americans — like the bare-bones Obamacare plans. Naturally, this group is the least likely to want to purchase health insurance, as they may feel it an unnecessary expense.

Especially because the health insurance law requires a fine rather than jail time, plenty of younger people living in a time of historic national debt and a recession that never really ended are expected to choose the penalty. But as with most tax-related programs in this country, the government doesn’t make anything easy unless you’re severely impoverished.

Another group expected to opt for the penalty is the Republican purist population, thriving in Texas and other red states. Many conservatives and Tea Party devotees have long advertised their willingness to pay the cost to prove party allegiance by not complying with the law, whether that means not utilizing the exchanges or not buying coverage at all.

While millions of Americans earn income below the poverty line, even those who live at poverty level — currently $11,490 per year for an individual and $23,550 for a family of four — are required to pay up for not taking advantage of federally subsidized health insurance. In order to pay a mere $95 penalty, you must earn less than $9,500 annually.

For everyone else, that 1% of income could result in a several hundred, or even thousand (though at that point affording health insurance shouldn’t be a question), irritating dollars wasted on 2014 income taxes. If you earn $60,000 in taxable income per year, that means you’ll see $600 disappear for the year.

Still, one payment of $600 to defy a law is significantly less than $3,000 per year to purchase a bronze-level plan on the exchange.

Being uninsured is not criminal, so it won’t go on your permanent record, you’ll just have to pay a little extra or sacrifice a chunk of your tax return. Actually, for certain earners a federal tax return may even pay for the penalty in full. However, if you get sick at some point during the year, a quick trip to the ER could cost a lot more than $3,000.


Penalty for Being Uninsured or Having Inadequate Coverage

(includes short-term plans and coverage without essential health benefits)

“If someone who can afford health insurance doesn’t have coverage in 2014, they may have to pay a fee. They also have to pay for all of their health care,” says Healthcare.gov.

Here’s a refresher on the individual mandate tax and how it’s set up to work over the coming years. In 2014 and 2015, the penalty gets phased in gradually, then starting in 2016 and going forward, it remains the same but increases with the cost-of-living adjustment.

What Coverage Meets ACA Requirements?

Minimum essential coverage is what the health care law refers to as a health plan that meets Obamacare standards, therefore avoiding the penalty tax. This includes government-sponsored coverage like Medicaid, TRICARE, Medicare and CHIP, as well as group health plans provided by your employer.

Grandfathered health plans — those that were issued before March 23, 2010 — are also acceptable. A more vague group, specified as any other coverage recognized by the HHS Secretary such as a state risk pool, are exempt from the penalty, as well.

Policies on the individual market, including plans on and off the exchange, also qualify as minimum essential coverage and will not cause you to pay a penalty. However, there are plans that won’t qualify, like short-term health insurance, workers compensation, stand-alone vision or dental plans, discount plans and coverage only for a specific health problem.

It’s also important to keep in mind the deadline for getting covered in order to avoid the fine.

Because you are only losing money when you choose to pay the penalty, not gaining a product or service, it makes less sense to willingly opt into a fine. It’s like driving 20 miles over through a speed trap just because you object to traffic laws, in a way.

Yes, the dollar amount of coverage is more than that of the tax, but if you go without coverage, your potential medical spending is much higher than being insured.

At least when you purchase a health plan, you obtain a valuable service while avoiding an extra tax that’s not as cheap as many expect. Though having a law in place to reinforce this responsibility may seem a forceful marketing tool for the exchanges, when its time to pay your medical bills, you’ll be much happier with a copay than outstanding debt and financial assistance.


The Short-Term Alternative

While temporary coverage doesn’t meet the Obamacare law’s criteria to avoid the penalty, having inexpensive coverage from a short-term health plan and paying the penalty is actually cost-effective. Health Insurance Innovations‘ CEO Mike Kosloske was recently interviewed on Fox News, discussing how young people in particular will benefit from these budget-friendly plans that cover emergencies while still being cheaper than a major medical health plan.

Kosloske forecasted a 300 percent increase in short-term plans during 2014, due to the fact that small businesses with less than 50 workers do not have to include coverage as a benefit. It’s possible that many of these businesses will stop covering workers so they can shop on the exchanges and receive tax credits. However, this will result in a larger number of people shopping for coverage and experiencing a waiting period when they enroll.

Short-term medical plans are much less expensive than regular health insurance, and can last up to 11 months depending on the carrier. Health Insurance Innovations offers plans with a variety of deductibles and the choice between a 6-month or 11-month coverage period. This type of plan helps consumers maintain coverage during waiting periods, which is especially pertinent in the next few months as exchange plans aren’t effective until January at the earliest.

With this type of plan, policyholders can stay covered for almost a full year while waiting for other coverage to become available to them either through exchanges or an employer. At least in 2014, the penalty for being uninsured (or choosing a short-term plan) is minimal compared to future years, and still less than buying coverage on the individual market.

Temporary health plans cannot be renewed after your 6 or 11-month period has ended, however. Therefore, those who purchase these plans will have to search for a more permanent policy to both stay covered and avoid the penalty after the plan ends.

B. Somers

B. Somers is a contributor to Health Insurance News, focusing on medical coverage, carriers, public programs and Obamacare. Writing for East Coast Health Insurance since 2012, she got started with healthcare and insurance news at its most exciting time in U.S. history.