Despite the increase in the penalty for not purchasing health insurance, nearly three in four uninsured consumers who used TurboTax filed an exemption in January.
The passage of the Affordable Care Act requires that all consumers purchase health insurance or face a penalty of either $325 or 2% of their household income, whichever was greater in 2015. The data from TurboTax, the San Diego-based tax preparation software company, revealed that 70% of uninsured or partially uninsured TurboTax users claimed an exemption from the tax penalty through January 31. This figure is “in line with last year’s overall tax season data," said Debra Hammer, TurboTax’s ACA spokesperson. The two most common reasons were the lack of affordability through their employer or geographic region.
Consumers who faced financial difficulties qualify for the health care exemption and do not have to pay the tax penalty, including people with extremely low income where filing a federal tax return is not required, the lowest-priced coverage available either through a marketplace or job-based plan would cost more than 8.05% of their household income or hardships such as being evicted or facing foreclosure, filing for bankruptcy or receiving a shut-off notice from a utility company.
The data from TurboTax are “consistent with what we see among health insurance shoppers who don’t qualify for Obamacare subsidies,” said Nate Purpura, vice president of consumer affairs at eHealth.com, a health insurance exchange based in Mountain View, Calif.
The cost of health insurance has risen across the board for consumers. Between 2013, the year before the ACA mandates came into effect and 2015, the average monthly health insurance premiums for an unsubsidized, single adult increased by 45% or from $197 to $286, he said.
“Since $286 is more than the average car payment, I’m not surprised that some people are having a hard time paying for coverage and applying for exemptions,” Purpura said.
One of the exemptions that applies to some consumers is if the coverage is not deemed to be affordable, which can be determined by calculating if it costs more than 8.05% of a person's income -- $286 a month for someone making $42,624 a year, he said.
“If you use the car analogy, I drive my car every day,” Purpura said. “Last year only 47% of people used their health plan at all. That’s a lot of money for something you never use."
The number of short-term insurance plans which are purchased have risen and sales increased by 130% between 2013 and 2014 at eHealth, he said.
“That is not to say people don’t like or want health insurance,” Purpura said. “They do, but at a price they can afford.”
Short-term health insurance plans are gaining popularity, because they cost 62% less than a major medical plan. In 2014, a short-term plan cost $110 a month on average compared to $286 for a major medical plan. These plans usually do not include coverage for preventive care like an annual physical or pre-existing medical conditions or prescription drugs, but they can be an option to limit the amount of your expenses in case you are injured or wind up sick.
Buying short-term, accident or critical illness insurance will not meet the requirement for health insurance coverage under the ACA and consumers are still subject to the tax penalty for being uninsured for two consecutive months or longer, but these plans will put a cap on your financial liabilities, said Purpura.
Avoiding the PenaltyHealth insurance companies are "pleading" with the government to enforce the individual mandate penalty and special enrollment criteria on a stricter basis to make sure consumers are being honest, said Jack Hooper, CEO of Take Command Health, an online health insurance exchange based in Dallas.
Some consumers have “figured out it’s easy to avoid the penalty because there’s no real enforcement” and do not purchase a health insurance plan, he said. Abusing the system can lead to higher rates and premiums overall.
“When individuals can effectively choose when they want to have insurance and when they don’t, you run the risk of creating an insurance ‘death spiral,’” he said. “If they get sick or injured, they will sign up, use the insurance and then drop it again.”
Exemptions which are determined to be false or if consumers report that they have health insurance coverage, but did not actually purchase a plan could result in the IRS adding the tax penalty to future tax returns, said Noah Lang, CEO of Stride Health, the San Francisco health insurance exchange company.
“If the IRS does inquire about the accuracy of an individual's tax return, we recommend that you respond immediately,” he said. “The bottom line is to know the exemptions and be prepared.”