Is it illegal to not have health insurance? Learn what the individual mandate means for you.
Updated June 20, 2019
The Affordable Care Act originally created a requirement for people to have health insurance that meets certain standards, called minimum essential coverage. This requirement to have health insurance is known as the “individual mandate.”
This meant that while not having health insurance wasn’t considered a crime, you may have had to pay a tax penalty – referred to as the shared responsibility penalty – if you did not have minimum essential coverage.
Both houses of Congress decided in 2017 to repeal the shared responsibility penalty, effective in 2019, as a part of the tax reconciliation act.
2018 was the last year that the ACA’s shared responsibility tax penalty had to be paid at the federal level. The 2018 Open Enrollment, during which people bought health insurance to cover them for 2019, was the first time in a couple of years that you wouldn’t have had to worry about getting an ACA-compliant plan with minimal essential coverage, or else face a tax penalty the following year.
Please keep in mind that some states have their own health insurance tax penalties in place. Those living in the states listed below may have to pay a tax if their health insurance does not meet their state’s requirements.
The reasons behind the individual mandate
People buy health insurance for protection against the risk that they may get sick or injured. When you sign on to an insurance plan, your premium is being paid to a health insurance company (also called carrier or provider). These carriers expect some people receive medical treatment worth more than the monthly premiums they paid, while others receive less than what they paid. Or in other words, some people get more out of their insurance plan, because they require more medical care, and therefore cost the insurance company more money.
In order for the insurance company to have enough money to pay for its customers’ claims, there have to be more people on the plan who are healthy than there are people who are unhealthy. If everyone on the plan had major illnesses or injuries and ran up expensive medical bills, the insurance company might not have enough money to pay all the claims.
The problem is that people who are sick are generally more likely to want to buy insurance than people who are young and relatively healthy. Before the Affordable Care Act, insurance companies solved this problem by screening applicants and refusing to insure people who were more likely to have expensive medical issues because they had pre-existing conditions.
In order to avoid leaving sick people with few options, the ACA mandated that insurance companies must accept everyone who applied, even those with pre-existing conditions.
How to offset the cost of covering expensive enrollees with pre-existing conditions?
Since the ACA made it so that health insurance companies couldn’t deny applicants based on pre-existing conditions, the scales needed to be balanced so that health insurance companies could afford to cover people without raising plan prices astronomically.
Unless the Affordable Care Act addressed the problem of people only wanting health insurance when they are sick, the balance between healthy and unhealthy people enrolled in the plans would shift. There would be more people with high medical bills, and fewer relatively healthy people paying premiums but making fewer claims. This dynamic would result in high premiums for those who do enroll in health insurance. That is where the individual mandate came in to bring balance to the system.
The individual mandate was designed by the Affordable Care Act to be a solution to that problem. By requiring that everyone enroll in a health insurance plan with minimum essential coverage (by using avoiding the tax penalty as an incentive) the Affordable Care Act intended to bring a greater number of people into the health insurance system. This was meant to have two major benefits:
- More people would have health insurance
- The health insurance system would be stronger because more people who were relatively healthy would be paying premiums
- Premium rates would drop due to more people paying premiums, including healthy individuals who don’t make many claims
The individual mandate penalty repeal
The video explains how the tax penalties for not having insurance originally worked.
In December 2017, a tax reform bill supported by the Trump administration and Republicans in Congress eliminated the Affordable Care Act’s fine for not buying health insurance.
The new law technically does not repeal the individual mandate itself. The requirement that people buy health insurance remains on the books. However, all penalties for not buying insurance will be repealed, so in effect, it’s as if the individual mandate had been repealed. In other words, when the change goes into effect, the individual mandate will no longer be enforced.
After the 2018 coverage year, the individual mandate penalty repeal went into effect. This means:
You will not have to pay a penalty on the taxes you file from 2020 on, even if you did not have qualifying health insurance in 2019. And so on and so forth assuming that the current law on the individual mandate repeal will still be in effect. However, it is always possible that provisions of the Affordable Care Act, including the individual mandate, might be changed again before the repeal goes into effect.
How much is the individual mandate fine now?
For the tax returns filed in 2019 (to report income earned in 2018), the individual mandate fine was $695 per uninsured adult and $347.50 for uninsured child or 2.5 percent of household income above the tax filing requirement – whichever is higher, according to healthcare.gov.
The fine is prorated if you had qualifying insurance for part of the year. There are some states that have their own health insurance tax penalty. While the individual mandate fine was repealed at the federal level, you may have to pay a fine if you are uninsured or don’t have qualifying insurance if you live in:
- Washington D.C.
- New Jersey
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal adviser instead of relying on this article as tax, accounting, or legal advice