Does it Make Sense to Pay the Obamacare Penalty Tax on the Individual Mandate?

Update: as a result of the Tax Cuts and Jobs Act, signed in 2017, starting with the 2019 plan year (for which you’ll file taxes in April 2020), the individual mandate fee no longer applies. If you don’t have coverage during 2019 or later, you don’t need an exemption in order to avoid the penalty.




One of the biggest structural components of the Affordable Care Act, aka “Obamacare”, is that it forcefully nudges individuals to have some level of health insurance coverage. This has been referred to as the “individual mandate“.

If you do not purchase health insurance (through an employer, COBRA, one of the upcoming health care exchanges, or individual plan purchased elsewhere) or aren’t covered by a public program (i.e. Medicare or Medicaid), you are penalized by having to pay a tax to the IRS for not having health insurance.

The tax is created as a disincentive to opt out of being covered by health insurance. The entire Affordable Care Act was built on the promise that tens of millions of Americans, many of them with low health care costs, will enter the insurance pool. Approximately 57 million people under age 65 do not have health insurance. One of the biggest pools of uninsured are the young “invincibles” (or so they think) – those who are young, healthy, and don’t have any pre-existing conditions to speak of. Adding them to the pool of insured, theoretically, is what will offset or lower the costs of adding millions of Americans with pre-existing health conditions (who previously had no insurance or extremely high insurance premiums) to the pool at the same time.

In other words, the ACA NEEDS healthy people to get insured (or to collect tax penalties to help pay for subsidies), or else costs will increase significantly for everyone else.

Obamacare penalty tax

The Obamacare Penalty:

The IRS individual mandate penalty for failure to be covered by health insurance will be fully phased in over the next few years, and works as such:




  • 2016 (and beyond) penalty: $695 per adult or 2.5% of family income (whichever is greater)

That’s a pretty big disincentive – particularly if you have a high income.

Does it Make Sense to Pay the Obamacare Penalty?

But as with anything, there will be defectors. And I’ve recently been reading some accounts and hearing some people say that they are going to completely forgo health insurance altogether as a sign of protest. Others never had insurance in the first place, as they feel like they would not use or don’t need it, and aren’t going to start paying for it now.

For the former group, while you certainly have every right to opt out and pay the penalty, it’s kind of like cutting off your nose (your health?) to spite your face. You see, you will still be able to purchase individual health insurance plans, just like you always have. Will the prices be higher, be lower – it’s hard to say (as you’ll see later on, they are still very cheap at the moment on private exchanges). But if you were purchasing health insurance pre-ACA – there is no reason to stop now. In fact, you may just be eligible for a subsidy to cut your costs for a public exchange plan. And the new “bronze” plans and catastrophic plans (available to those under age 30) are similar to HDHP’s in that they are designed to keep monthly premiums low, with higher out-of-pocket costs for rare health care needs.

For the latter group, go ahead and crunch the numbers.




You can see what your penalty would be, as highlighted above.

Then you can see what your state’s health insurance exchange is offering for a similar plan.

Remember, that the ACA offers subsidies for monthly premiums on the health care exchanges for households with income up to 400% of the US poverty line. And you can calculate your subsidy via calculators on your state’s exchange website or via this subsidy calculator.

If you’re young and healthy, you’ll probably still be able to find affordable health insurance through a HDHP on a private exchange (note: you are only eligible through subsidies if you buy insurance on a publicly run exchange). I’ve recently looked in to the cost of these plans and found two that cost less than $100 per month combined for two healthy 30-ish adults (1 male, 1 female). If you’re not young and healthy, you may be able to afford health insurance for the first time through a public exchange.

And after all of the number crunching is over, think about this: you don’t know you need insurance until it’s too late. Same goes for home insurance or life insurance. Would you not pay for home insurance just because your own house has never been burned to the ground or chewed up by a tornado? To do so is a huge financial gamble, and the stakes for losing could be years and years of debt and financial hardship. Why make the same gamble with your health?

Here’s a guide to healthcare.gov plans for more information.

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4 Comments

  1. Colby

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