Opting Out Of The Obamacare Tax: What Happens If You Don't Pay?
Kelly Phillips Erb
Last month, the Obama administration announced that between three and six million households – about 2 to 4 % of taxpayers – would be faced with a penalty (or is it a tax?) at tax time for failing to secure “minimum essential coverage” to comply with the Affordable Care Act (ACA), sometimes referred to as Obamacare.
Under Obamacare, you’re considered covered if you have insurance through the government, including Medicare, Medicaid, CHIP, retiree coverage, TRICARE, or VA health coverage; private insurance that you purchased on your own including COBRA coverage and coverage obtained through the Health Insurance Marketplace; or provided by your employer (even if you didn’t pay anything for the coverage). You’ll report coverage on your tax return (find out how here). Most taxpayers – about 130 million or so – will report coverage.
Of those that don’t have coverage (estimates range from 20 million to 37.5 million), most will avoid being subject to the penalty based on a waiver or exemption. Exemptions exist based on income or filing status, immigration status and religious affiliation – as well as the much-talked about incarceration exemption. A number of hardship exemptions are also available. (For more on exemptions and waivers, click here.)
Those taxpayers who can’t demonstrate essential minimum coverage and aren’t otherwise exempt are subject to a penalty – the shared individual responsibility payment – equal to 1% of income above the “filing threshold” or $95 per adult and $47.50 per child (up to $285 for a family), whichever is higher. That amount is figured and reported on the taxpayer’s 2014 tax return, payable by April 15, 2015.
For the 2015 tax year, the amount of the penalty increases to 2% of income or $325 per adult; in 2016, it jumps up again to 2.5% of income or $695 per person.
In terms of dollars, the CBO had initially estimated that by 2016, nearly six million taxpayers would be subject to an average penalty of $1,200. The overwhelmingly majority (80%) of those estimated to be at risk to the penalty were those in the middle class with incomes between $55,850 and $115,250.
Since that time, the numbers have been adjusted downward, based largely on the perceived success of policies purchased through the Marketplace and the increased number of taxpayers exempt under the rules. Those estimates – between three and six million households – are still just guesses. But the dollars associated with those numbers are the real mystery. You see, buried in the language of the 2010 law creating the Affordable Health Care Act (you remember, the “big f*cking deal”) is a bit of an out: There are practically no real consequences for not paying the penalty.
I mentioned this to Maggie McGrath, personal finance reporter for Forbes, while shooting video about the Health Care Act earlier this month. “Shouldn’t that be the real story?” she asked.
She’s right, of course. It should but oddly enough, nobody is really talking about it.
Why so quiet? Here’s my guess: nobody has a clue what’s really going to happen. You see, when the Act became news in 2010, rumors were flying about what would happen if you didn’t pay the penalty. It was politically tricky. The consequences needed to be enough to make you want to conform with the Act but not so onerous that Congress would be loathe to vote for it.
The final language in the Act declared that the penalty “shall be paid upon notice and demand” which sounds really intimidating. The language went on to note that the penalty would be “collected in the same manner as an assessable penalty under subchapter B of chapter 68″ which also sounds pretty serious – especially since subchapter B references some pretty nasty penalties for otherwise not complying with other sections of the Tax Code.
So what would the penalty for noncompliance be? Jail time? Nope. The language in the Act specifically rules out jail time, saying at Section 500A(g)(2)(A):
In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.
So, no jail time.
But that means that the IRS will chase you and lien your property if you don’t pay, right?
Nope. That’s not allowed under the Act. At 500A(g)(2)(B)(i), the Treasury cannot “file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section.”
So, no liens.
Then, clearly there will be levies or seizures on your wages and account, right?
Nope. Not that either. Under 500A(g)(2)(B)(ii), the Treasury cannot “levy on any such property with respect to such failure.”
To recap then, by law, you have to pay the penalty. But if you don’t, you won’t go to jail, you won’t be liened and you won’t be levied for collection.
Is there anything that could happen to you if you choose not to pay? With no jail, no liens and no levies, it doesn’t leave the IRS a lot of room to work when it comes to collections. Congress actually managed to create, as I wrote in 2012 and in in 2013, an incredibly complex and burdensome law without any teeth.
Well, maybe some teeth. Baby teeth. The IRS might seize any part or all of your refund in order to satisfy your obligation. Might. IRS hasn’t come right out and said that it absolutely will offset your refund if you owe a penalty for failure to pay. However, in the Final Regulations issued on this matter, IRS noted that “[n]othing in this section prohibits the Secretary from offsetting any liability for the shared responsibility payment against any overpayment due the taxpayer, in accordance with section 6402(a) and its corresponding regulations.” That’s sufficiently passive aggressive, right? You’re on notice that the IRS doesn’t think that it’s barred from taking your refund. They’re not saying they will (for certain) but they’re not saying they won’t either.
So is there anything you can expect for sure? You can definitely expect a lot of letter writing and virtual shaking of the government’s fist at you. Maybe even some blustering, for good measure.
But real consequences? Other than that potential refund seizure and a guilty conscience, there’s nothing to keep taxpayers from opting out of paying. Will they? We’ll have to wait and see.