The Affordable Care Act (ACA) requires individuals who are not covered by a health plan that provides “minimum essential coverage” to cough up a so-called shared responsibility payment, which is really just a penalty tax. Unless an exception applies to you, the penalty can be imposed for any month that you do not have said minimum essential coverage.

The good news: for months beginning in 2019 and beyond, the Tax Cuts and Jobs Act (TCJA) repeals the penalty tax.

The bad news: it’s still in force for all of 2017 and 2018. Once the repeal takes effect, however, it will be a permanent change.

So we still have to live with the ACA penalty tax for yet-to-be-filed 2017 returns and for all of 2018. Here’s what you need to know to muddle through until 2019 when the repeal finally kicks in.

ACA penalty tax basics

The ACA’s penalty tax is commonly called the individual mandate. The penalty tax is the cost of noncompliance with the mandate. If you don’t yet have coverage for this year, you may need to quickly sign up for some to avoid getting socked with a significant penalty.

Unless you are exempt, you will owe the penalty if you do not have minimum essential coverage for yourself and your dependents. Minimum essential coverage includes certain government sponsored programs (such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and TRICARE), eligible employer-sponsored plans, plans obtained in the individual marketplace, certain grandfathered group plans, and certain other coverage specified by the Feds. However, if you fit into one of the following categories, you are exempt from the penalty.

* Your household income is below the federal income tax return filing threshold for the year.

* You lack access to affordable minimum essential coverage. For example, coverage under an employer-sponsored plan is considered unaffordable if your required monthly contribution for self-only coverage exceeds 9.56% of household income.

* You suffered a hardship in obtaining coverage. To qualify for this exception, you should obtain a hardship exception certificate issued by the health insurance marketplace that operates in your state.

* You have only a short-term coverage gap.

* You qualify for an exception on religious grounds or have coverage through a healthcare sharing ministry.

* You are not a U.S. citizen or national.

* You are incarcerated.

* You are a member of an Indian tribe.

Key Point: To claim an exemption from the penalty, File Form 8965 (Health Coverage Exemptions) with your Form 1040.

Penalty tax specifics

If you owe the penalty, the tentative amount equals the greater of the following two prongs:

1. The applicable percentage of your household income above the applicable federal income tax return filing threshold or

2. The applicable dollar amount times the number of uninsured individuals in your household, limited to 300% of the applicable dollar amount.

The final penalty amount cannot exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. For 2017, the monthly national average premium for qualified health plans that have a bronze level of coverage was $272 per individual and $1,360 for a family with five or more members. The 2018 national averages for bronze coverage have not yet been released, but they are sure to be significantly higher than the 2017 figures.

Meanwhile, the important thing to know is that a higher-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage. Confusing? You bet. But keep reading. You will soon understand.

Percentage of Income Prong. The applicable percentage of income is 2.5% for 2017 and 2018.

Dollar Amount Prong. For 2017 and 2018, the applicable dollar amount for each uninsured household member is $695. For an under-age-18 household member, the applicable dollar amount is cut by 50%.

As stated earlier, this prong of the penalty cannot exceed 300% of the applicable dollar amount (determined without regard to the 50% cutback for under-age-18 individuals) for the year in question.

Final penalty tax amount

As stated earlier, the tentative penalty amount is the greater of the percentage of income prong or the dollar amount prong. But the final penalty amount is limited to the national average cost of bronze coverage. If you have minimum essential coverage for only part of the year, the penalty is calculated on a monthly basis using pro-rated annual figures.

Some examples

As you can see, the penalty tax rules are pretty complicated. The following examples illustrate how to calculate the penalty for 2017 (because we don’t yet have the cost of bronze coverage for 2018) in the two simplest situations.

Example 1: One-person household with no coverage for entire year

Say you are unmarried and live alone. During all of 2017, you have no minimum essential coverage. Your income for the year is $100,000. Your tax return filing threshold for the year is $10,400. The monthly national average premium for bronze coverage for one person is $272 for 2017, which amounts to $3,264 for the entire year (12 x $272).

The percentage of income prong is $2,240 [($100,000-$10,400) x 2.5%].

The dollar amount prong is $695.

The tentative penalty amount is $2,240 (greater of $2,240 or $695).

As stated, the annual national average cost of bronze coverage is $3,264 for one person who is uncovered for all of 2017.

Therefore, your final penalty amount for failing to comply with the individual mandate is $2,240 (lesser of $2,240 or $3,264).

Example 2: Family of five with no coverage for entire year

Say you are a married joint filer with three under-age-19 kids. During all of 2017, no member of your family has minimum essential coverage. Your household income for the year is $100,000. Your tax return filing threshold for the year is $20,800. The 2017 national average premium for bronze coverage for a family of five is $1,360 per month, or $16,320 if you have no coverage for the entire year.

The percentage of income penalty prong is $1,980 [($100,000-$20,800) x 2.5%].

The dollar amount penalty prong is $2,085, which is the lesser of: (1) [($695 x 2 for the adults) + ($695/2 x 3 for the kids) = $2,433] or (2) ($695 x 300% = $2,085).

The tentative penalty amount is $2,085 (greater of $1,980 or $2,085).

The final penalty amount is $2,085 (lesser of $2,085 or the $16,320 cost of bronze coverage).

Penalty Tax Enforcement is weak

You are supposed to pay any ACA penalty tax that is owed with your Form 1040 for the year. So the penalty tax for 2017 would be reported on your 2017 return, which you’ve already filed or will file later this year (by October 15 if you got an extension). However, the only enforcement mechanism is that the government can subtract any unpaid penalty tax from your federal income tax refund. So if you are not owed a refund for 2017 or any later years, there will never be any consequences for not paying the penalty tax. Strange but true!

The bottom line

Failure to have minimum essential health coverage for 2017 and 2018 can be an expensive proposition due to the ACA penalty tax. However, for all you ACA scofflaws out there, the offsetting consideration is the weak enforcement mechanism for actually collecting the penalty. And the really good news is the penalty goes away after this year. We won’t miss it!

Finally, if you decide to forgo ACA-compliant coverage for the rest of this year, you might want to investigate so-called short-term health plans which the Trump Administration is encouraging. These plans can cover you for at least one year and maybe up to three years at a much lower cost than ACA-compliant coverage. However, they usually do not cover pre-existing conditions, and they may have a lifetime limit on benefits.

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