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IRS Issues Final Rules on Individual Mandate Penalties

Filed under: Health Care Reform

Beginning in 2014, the Affordable Care Act (ACA) requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty. This rule is often referred to as the "individual mandate." Individuals may be eligible for an exemption from the penalty in certain circumstances.

On Aug. 27, 2013, the Internal Revenue Service (IRS) issued final regulations on the individual mandate penalties. These regulations generally finalize the proposed standards without significant changes.


The penalty for not obtaining acceptable health insurance coverage will be phased in over a three-year period, and is the greater of two amounts — the "flat dollar amount" and "percentage of income amount."

The penalty amount will be the greater of:

  • $95 or 1 percent of income in 2014;
  • $325 or 2 percent of income in 2015; and
  • $695 or 2.5 percent of income in 2016 and beyond.

Income for this purpose is the taxpayer's household income minus the taxpayer's exemption (or exemptions for a married couple) and standard deductions.


The penalty will be assessed against an individual for any month during which he or she does not maintain "minimum essential coverage" (MEC), beginning in 2014 (unless an exemption applies). The final regulations provide that an individual will be treated as having MEC for a month if the individual is enrolled in and entitled to receive benefits under a program or plan for at least one day during the month.

MEC includes an employer-sponsored plan, government-sponsored coverage, individual coverage, grandfathered coverage and other coverage HHS defines as MEC. MEC does not include specialized coverage, such as coverage only for vision or dental care, workers' compensation, disability policies or coverage only for a specific disease or condition.

The final regulations provide some further clarification on whether certain specific types of coverage constitute MEC. A number of government programs do not provide full coverage for medical expenses, and thus do not qualify as MEC (for example, Medicaid coverage for pregnant women or Medicaid programs that only cover family planning services, tuberculosis-related services or emergency medical conditions).

The IRS stated that it anticipates issuing guidance providing transition relief for some of these issues, which is expected to excuse covered individuals from the penalty for months of coverage in 2014.

Notably, the final regulations specifically decline to address whether arrangements in which employers provide pre-tax dollars to employees to purchase coverage in the individual market qualify as MEC. Although earlier guidance seemed to eliminate these arrangements, the final regulations provide that future guidance will address this issue.


Liability for a dependent's lack of MEC falls on the taxpayer who may claim the individual as a dependent, regardless of whether the taxpayer actually claims the qualifying individual as a dependent for the taxable year. For this purpose, a dependent includes a taxpayer's qualifying children and qualifying relatives.

The final regulations clarify that this liability may not be assigned to another taxpayer, even if the other taxpayer has a legal obligation to provide the child's health care. However, Exchanges may grant a hardship exemption to the custodial parent for a child in this situation, if the child is ineligible for coverage under Medicaid or CHIP.

Special rules apply for adopted and foster children. If a taxpayer legally adopts a child and is entitled to claim the child as a dependent for the taxable year when the adoption occurs, the taxpayer is not liable for a penalty with respect to that child for the month of the adoption and any preceding month. Conversely, if a taxpayer who is entitled to claim a child as a dependent for the taxable year places the child for adoption during the year, the taxpayer is not liable for a penalty with respect to that child for the month of the adoption and any following month.


The ACA provides the following nine categories of individuals who are exempt from the penalty:

  • Individuals who cannot afford coverage;
  • Taxpayers with income below the filing threshold;
  • Members of American Indian tribes;
  • Individuals who experience a hardship;
  • Individuals who experience short coverage gaps;
  • Religious conscience objectors;
  • Members of a health care sharing ministry;
  • Incarcerated individuals; and
  • Individuals who are not lawfully present.

The final regulations implement the proposed standards with respect to these exemptions, including eligibility rules and the process for claiming the exemptions.

Starting in early 2015, individuals will indicate on their 2014 tax return which members of their family (including themselves) are exempt. For family members who are not exempt, the taxpayer will indicate whether they had insurance coverage. The taxpayer will owe a penalty for each non-exempt family member who doesn't have coverage.

This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

© 2013 Zywave, Inc. All rights reserved.

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