If you go without Obamacare-compliant health insurance for more than two consecutive months during the year, you may be subject to a significant tax penalty when you prepare your federal tax return. The penalty for 2016 (paid when you file 2016’s taxes in 2017) is $695 per adult or 2.5% of your taxable income – whichever is greater!
Since the Affordable Care Act (the “ACA” or “Obamacare”) became law, a lot of people have learned about the uninsured tax penalty the hard way – by paying it. If you want to avoid paying the Obamacare tax penalty when you file your taxes in 2017, you need to know which kinds of health insurance will protect you from it – and which won’t.
Health insurance that WILL PROTECT YOU from a tax penalty under Obamacare
First, let’s look at some of the different kinds of health insurance plans that will protect you from having to pay a tax penalty under Obamacare.
Individually purchased health insurance – Whether you buy it through a licensed agent, a private online marketplace, a government-run exchange, or directly from the insurance company, Obamacare-compliant major medical individual and family health insurance plans will protect you against the Obamacare tax penalty. All major medical health insurance plans (that is, all traditional health insurance plans) are now Obamacare-compliant and will provide you with the coverage required under the law. So long as you don’t have gaps in your Obamacare-compliant coverage beyond two consecutive months in a year, you will not be subject to the tax penalty.
Health insurance bought with government subsidies – Under Obamacare, people with a taxable income of up to 400% of the federal poverty level (that is, about $47,500 for a single person or $97,000 for a family of four in the contiguous US) may qualify for government subsidies when they purchase health insurance. With subsidies, you’re still getting Obamacare-compliant major medical health insurance – but you’re also getting help paying for it. So long as you avoid gaps in your coverage beyond two consecutive months in a year, you should not need to worry about the Obamacare tax penalty in this case.
Employer-based health insurance – Most employer-based health insurance plans are major medical health insurance plans and will also protect you from the Obamacare tax penalty, so long as you avoid gaps in your coverage beyond two consecutive months in a year.
Medicare or Medicaid – If you’re enrolled in Medicare or Medicaid, you should not need to worry about the tax penalty for going uninsured. Medicare and Medicaid provide you with coverage that’s compliant with Obamacare so long as you don’t have any gaps in your coverage beyond two consecutive months in a year.
Other government-sponsored health insurance – If you are covered under U.S. military health insurance or CHIP or other government health insurance programs, you will not need to worry about the Obamacare tax penalty so long as you avoid serious gaps in your coverage beyond two consecutive months in a year.
Insurance products that WILL NOT protect you from the tax penalty
Now let’s look at some of the insurance products that definitely will not save you from paying a tax penalty for 2017. These include:
Short-term health insurance – Short-term health insurance plans do just what the name suggests – they provide you with a measure of protection against unexpected medical costs for a limited period of time. Some people find short-term plans attractive because they tend to cost less than a major medical health insurance plan and you can enroll in a short-term plan year-round (something not true of Obamacare-compliant plans; see below). However, short-term health insurance plans do not comply with the minimum essential coverage requirements of Obamacare. They generally do not provide you with coverage for things like preventive care, pre-existing medical conditions, or maternity care. In addition, they may not cover pre-existing medical conditions. Short-term plans can be particularly valuable if you’re between the coverage periods for different major medical health plans – but short-term plans do not meet your coverage requirements under the law, so they do not count as coverage under Obamacare, and they will not protect you from the Obamacare tax penalty.
Accident or critical illness insurance – These are not traditional health insurance plans. Instead, these are insurance plans that pay you a defined amount of money in case of a specific injury or qualifying medical diagnosis. They do not provide the minimum essential coverage required by Obamacare, and they should not be considered as a substitute for health insurance. Accident and critical illness insurance plans can be a valuable addition to a major medical health insurance plan, but they are not health insurance and they will not protect you from a tax penalty under Obamacare.
Life insurance – Some people imagine that a life insurance policy is all they need under Obamacare. In fact, life insurance plans are not health insurance plans and do not meet the coverage requirements of the Affordable Care Act. A life insurance policy is not health insurance and will not protect you from a tax penalty under the Affordable Care Act.
Dental and vision insurance – Dental and vision insurance can be great to have. On their own, however, they are not health insurance and they will not protect you from paying a tax penalty under Obamacare.
A note about Obamacare’s open enrollment period
As mentioned above, you may not be able to purchase Obamacare-compliant health insurance coverage at just any time of year. Generally speaking, you’ll need to enroll in coverage during the annual open enrollment period, or when you have a qualifying life event.
The Obamacare open enrollment period for 2017 health insurance plans is scheduled to begin on November 1, 2016 and continue through January 31, 2017. Generally speaking, your coverage under any new plan selected during this open enrollment can begin no sooner than January 1, 2017.
Outside of open enrollment, you may trigger a special enrollment period for yourself when you experience a qualifying life event. These events include marriage, divorce, the birth or adoption of a child, a permanent move to a new coverage area, or the loss of qualifying coverage, etc. When you experience a qualifying life event, you generally have 60 days to enroll in a new Obamacare-compliant health insurance plan. You generally need to provide proof of the qualifying event and otherwise meet the specific conditions that apply to your qualifying life event.