Financial Friday: Calculate Your Penalty

If you have been listening to news out of congress the past few days, you would have heard that some in congress are trying to delay the “individual mandate” until 2015.  The argument is that since the mandate for businesses has been delayed, the individual mandate should also be delayed to be fair.  The other side of the argument is that businesses would incur a much larger administration cost trying to comply with the reporting requirements and the reporting requirements were still a moving target.  I am not taking sides in this blog, but I wanted to give a little background.  In short, the individual mandate is where the topic of penalties is coming from.

With the Individual Mandate, everyone must have ACA compliant health insurance or pay a penalty.  Yes, there are exceptions.  I will go through that a bit later.  What is ACA compliant?  It is defined by the Actuarial Value (AV) as defined by the government.  The minimum AV is 60%, the Bronze plan, unless you are eligible for the Catastrophic plan (see my blog post on Wednesday).  So, if you elect not to have ACA compliant coverage, what will your penalty be?

ACA Penalties
Year Adult Child Family Max % of household income
2014  $95  $48  $285 1.0%
2015  $325  $163  $975 2.0%
2016+  $695  $348  $2,085 2.5%

There are 2 ways to calculate the penalty and the greater of the 2 will apply.  The first is to add up the amount for each member of the family up to the family maximum.  The second way is to take a percentage of household income (shown above) but only the amount over the tax filing threshold, shown below.

Tax Filing Threshold (2012)
Family (joint return)  $19,750
Single  $9,750

So, let’s take an example and calculate the penalty for 2014.  A Family of 4 with 2 children under the age of 18 (children are those in the family under 18) with a MAGI (Modified Adjusted Gross Income) of $70,000.  With the first calculation, it comes to the family max of $285.  With the second calculation, let’s round the filing threshold to $20,000 for easy math and considering the filing threshhold will probably be above $20,000 for 2014.  We need to calculate the difference between the MAGI and subtract the filing threshold and then multiply by the penalty percentage for 2014.  The difference is $50,000.  So, if we multiply that by 1%, we come up with a penalty of $500.  This is the larger of the 2 so this would be the penalty for not having ACA compliant coverage.  In 2016, this penalty would be $1250 not calculating any change in the filing threshold.  Everyone’s income will be different so everyone’s calculation will be different.  Hopefully this example will help you calculate your own penalty.  But wait, that’s not all…

Are you even subject to a penalty?  Since this is Financial Friday, I am only going to cover the financial “out” from the penalty.  The magic number is 8%.  If the your portion of the premium cost of Bronze coverage is greater than 8% of your income (calculated as your MAGI), then you do not have to pay a penalty.  Ok, so what does that mean?  If you are eligible for a subsidy, you will most likely have to pay a penalty if you elect not to have ACA compliant coverage.  If you are between 400% to 500% of the FPL (federal poverty level), there is a good chance you will not have to pay a penalty as you are not eligible for a subsidy.  At this point, the best way to estimate if you will have to pay a penalty is to use the KFF, Kaiser Family Foundation, subsidy calculator.  It is great for estimating your insurance costs but will also calculate the percentage for you.  Here is the link:

http://kff.org/interactive/subsidy-calculator/

At this point, everything is subject to change as we won’t know exactly what the premiums will be until the Exchanges open on October 1.  Until that point, the best estimates we have are the KFF estimates.

As always, more to come…  Have a great weekend.

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