Now that we’ve been informed that the Affordable Care Act’s penalty for not purchasing health insurance is a tax rather than a real penalty, I thought it informative to see how much this tax might be and what the consequences of opting to pay it rather than purchasing medical insurance are. I’ll go through the weeds below; but briefly the take away message is that an uninsured person whose income is above the Medicaid limit will now pay a tax for not having medical insurance. Formerly, there was no tax for not having insurance. This tax is much lower than the cost of the cheapest insurance policy required by the act – the so called “bronze” plan. But there’s a reward for paying the tax; a reward that I haven’t seen anyone comment on. Because the ACA mandates insurance coverage irrespective of pre-existing conditions an uninsured person can buy medical insurance after he gets sick. Obviously, this is what most people who can add will do.

Here are the details. The minimum tax for an individual without insurance will be $695 dollars in 2016 when the tax is fully phased in. The minimum tax per family is capped at no more than three times the individual rate regardless of how large the family, ie $2085.  For higher earners, the tax will be 2.5% of income that exceeds the threshold for filing a tax return – $9,500 for a single person and $19,500 for a couple filing a joint tax return. But the minimum tax will still apply. After 2017 the minimum tax will be adjusted for inflation.

Let’s take a family of four with a combined income of $100,00. If they choose not to buy a medical insurance policy their tax would be $100,00 minus $19,000 times 0.025 or $2,025, but that would be adjusted up to the minimum of $2085. The cost of a “bronze” plan in 2016 is not known but the Congressional Budget Office estimated in 2011 that it would be at least $12,000. So why would this family buy such a policy until it needed it? The tax is assessed on a month by month basis. Thus if you bought insurance in February you would only pay 1/12 the yearly amount.

The tax is to be collected by the Internal Revenue Service, but the IRS is prohibited from using its usual enforcement tools. It can’t put someone who refuses to pay the tax in jail. Neither can it seize his property or file a tax lien against anything the delinquent owns, ie bank accounts, homes, wages, etc. So how will the IRS collect the tax? They will likely have to take the person to court where the IRS can ask the court to double the tax. Why did the congress hamstring the IRS? Probably because they didn’t want anyone to think that the penalty for not buying health insurance was a tax only to have the Supremes declare it to be a tax. Go figure.

How many people will pay this tax? The CBO did not give a number, but the amount of money they think will be collected implies about 6 million people.

Again, the take away message is that many Americans will find it cheaper to pay the tax than buy medical insurance especially as they can always get it later if they want it. To read more about this subject go here.

As for employers, if they have less than 50 employees they are not required to provide health insurance. If they have more than 50 workers and don’t provide health insurance, the penalty (or is it a tax?) is $2,000 a year for every employee, past the first 30, which is much less than the cost of the cheapest policy mandated by the law.