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5 Things You Should Know About Obamacare's Individual Mandate

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Obamacare's notorious individual mandate—the provision in the Affordable Care Act that requires you to purchase health insurance, or pay a tax—is one of the most important parts of the law to insurance companies and the administration. Here are five things you need to know about the mandate, what Obamacare calls your "Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage."

1. The IRS can't get your penalty money if you don't give it to them

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If you do not purchase "Minimum Essential Coverage" you will owe an additional penalty tax. BUT... you must pre-pay it to them for the the IRS to enforce collection of this penalty tax. In other words, if you do not have a refund coming, the IRS cannot go after you for it.

Section 5000A(g)(2) of the Internal Revenue Code says that the IRS cannot subject taxpayers to "any criminal prosecution or penalty" for refusing to pay the individual mandate penalty. Plus the IRS cannot "file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section."

Bottom line, the only recourse the IRS has to make you pay the fine is to take it out of your withholding or withhold it from your tax refund, if you are owed a refund. So if you don't participate in the withholding process, the IRS has no way to collect the individual mandate fine.

You do realize that if you receive a tax refund, it means that you paid too much in withholding, right? You are loaning the government your money to use - interest free - and when you file your tax return, they give you your own money back - without paying you interest on it. This money that you are kind enough to loan the government is the only place from which they can take your penalty. Once the rebels figure this out, there will be more employees who increase their exemptions.

2. You may be exempt from the mandate altogether

If you must buy insurance on your own:

  • You are exempt from the individual mandate if the lowest cost plan premium is more than 8%  of your household income. 
  • If you do not file a tax return you are exempt.
  • If you are a member of an Indian Tribe, you are exempt.
  • If you are a 'Member of recognized religious sect' you are exempt.

If you add up all of these exemptions, MIT economist and Obamacare architect Jonathan Gruber estimates that 40 percent of people who are presently uninsured are now also exempt from the individual mandate.

3. You are responsible for a penalty on a maximum two dependents

If you claim dependents on your tax return, you are responsible to make sure that each person has "Minimum Essential" coverage, but your penalty is limited to two additional dependents. In 2014, the fine for not carrying minimum essential insurance is the higher of $95 per person or 1.0 percent of taxable income. In 2015, the fine is the higher of $325 per person, or 2.0 percent of taxable income. In 2016, it's $695 per person or 2.5 percent of taxable income. 

4. Almost all employer group plans meet the minimum requirement

Section 5000A(f)(2) of the Internal Revenue Code defines employer-sponsored minimum essential coverage as "a group health plan or group health insurance coverage offered by an employer to the employee which is either a government-sponsored plan or "any other plan or coverage offered in the small or large group market within a State." Therefore, if your employer purchases any plan that is governed by any State Insurance Department, that plan exempts you from the individual mandate, even if that plan only pays $100 per day when in the hospital.ACA group 300

5. Section 105 self-insured ERISA plans do not meet the minimum requirement

But they will allow you to receive your subsidy if you qualify. Under the general preemption clause of ERISA Section 514(a), 29 U.S.C. §1144(a), ERISA preempts any and all State laws which "relate to" any employee benefit plan subject to Title I of ERISA. Section 514(b)(2)(B), referred to as the "deemer clause," makes clear that a State law that "purports to regulate insurance" cannot deem an employee benefit plan to be an insurance company and therefore subject to state insurance laws. These plans are not "plans offered in the small or large group market within a State" under Section 5000A. Although these plans may reimburse health insurance premiums and are, as a practical matter, indirectly affected by State insurance laws (inasmuch as the insurance contracts reimbursed by the plans are subject to State insurance law requirements), the "deemer clause," effectively prevents the direct application of State insurance laws to ERISA-covered employee benefit plans.

Therefore, if your employer offers only a classic 105 ERISA plan you are responsible for purchasing minimum essential coverage or pay the penalty but you are also eligible for an Obamacare tax-subsidy to help pay your premiums, if you qualify based on household income and family size.

In summary, if you must pay it, the mandate tax penalty will usually be cheaper than the cost of health insurance after 2014 unless you can get Uncle Sam to pay your premiums. Many of you rebels out there will simply purchase short-term health insurance or a fixed indemnity policy to get you to the next open enrollment and simply pay the penalty, join the Amish, an Indian Tribe or lower your withholding. The rebel will say to themselves, "If anything happens to me, I can always sign up for an Obamacare policy later. They have to cover any pre-existing conditions, right?"

The threat of the individual mandate tax only works because people tend to follow the rules and they don't like paying money and getting nothing for it. Removing or postponing the mandate would remove the rule. Removing or postponing it would remove the feeling that going without insurance is breaking the rules and as my grandson will tell you, "You can't break the rules!"

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Tony McDougle is Founder and Owner of Assurecor, Inc. and has focused his career on health benefits delivery and administration for over three decades. With visionary leadership he has built three multi-million dollar health care marketing and administration companies from inception. He has served on the field advisory boards of many national insurance companies, and with the creation of the Benefit X-Change, he was named 2012 Charlotte Business Leader of the Year. His expertise in employee benefits – finance, administration and marketing – from executive management of major insurance companies to entrepreneurial business development has made him one of the foremost experts in this field.