Since the Individual Mandate statute of the Affordable Care Act was enacted in January 2014, every American is accountable for an Individual Shared Responsibility* payment every year. Meaning, if you do not have health insurance, you will face penalties. While you may not see an actual summons, or pay a fine, the federal government enforces this law by withholding money from your tax return. While many people already have insurance, whether with a parent, through an employer, or a Market Place plan, a significant portion of the population still does not. According to The Commonwealth Fund, as of 2014 still 10.7% (33 million) of Americans are still uninsured, and many will face penalties.

When you reach the age of 26, you are automatically dropped from a parent’s insurance and responsible for finding your own. So whether you are shopping for new insurance, or turning 26, knowing the tax withholdings for being uninsured is crucial to your decision making. Since we do not know the filing threshold for 2016, or the average cost of a Bronze plan in 2016, all payments discussed will be in terms of 2015. This is where it may get confusing to some; there are many different income tax filing thresholds for the IRS, but the most common are “Single” and “Jointly.” As a single adult, you must make more than $10,300/ year to meet the filing threshold for the IRS. This condition is important because in order to calculate your shared responsibility payment, you must take your yearly income, subtract $10,300, then multiply the difference by 0.02. The 0.02 represents 2% of your income AFTER subtracting the filing threshold.

To demonstrate: Jane makes $75,000/yr, just turned 26, and her employer does not offer health coverage. She wants to make sure she makes the right choice in coverage and is curious as to what her withholdings would be if she didn’t purchase insurance. Here’s what her formula would look like.

(income filed with IRS – minimum filing threshold) * 0.02

($75,000-$10,300) * 0.02= $1294

This means $1,294 will be withheld from her next tax return, if she decides to remain uninsured. This is not a concrete formula. There is a withholding limit which is the Bronze Plan average yearly premium, and in 2015 it was $2,484. For instance, if Jane made $750,000 a year, the formula says her withholdings should be $14,794, but it is capped at $2,484. Since there is a maximum, there has to be a minimum, which is $325 and known as Flat Dollar Amount.  Anyone above the filing threshold that fell below $325 when calculating a payment will most likely qualify for public assistance through programs like Medicaid. 2016 is where the minimum has more of an impact when it jumps to $695 per adult and a maximum penalty of 2.5% of income. Depending on what the filing threshold will be in 2016, it means anyone uninsured making less than approximately $38,000 will be required to pay a minimum of $695.

Remember, our demonstration was if Jane filed by herself, and not jointly. If Jane were filing with a spouse, the filing threshold doubles, and their incomes become one. The formula remains the same, except the minimum threshold doubles from $10,300 to $20,600, and there are new minimum and maximum penalties. Jane is filing jointly, her and her partner’s minimum payment will be $650 ($325*2). If there are any children that are dependents, it is an additional $162.50 per child. To determine their shared responsibility, you take the greater between $650 or 2% of their income after subtracting $20,600. For example, if their combined income is $125,000, their shared responsibility is $2,088 because it is greater than $650 and less than $4968 (avg 2015 Bronze Plan per person: $2484*2).  If they had 2 children their minimum withholding would be $975 ($650 for 2 adults and $325 for 2 children) and their max would be $9936 ($2484 x 4). The amount of children just changes your minimum and maximum payment, and won’t affect your shared responsibility cost, unless you have so many kids that the minimum exceeds 2% of your income. For instance, if Jane and her spouse maintain their $125,000 income, in order to exceed the calculated $2,088 they would have to have 9 child dependents, which the fixed rate would come out to $2,112.50.

This may seem overwhelming to some, but it is essential to fully understand your shared responsibility. Everyone has a different Individual Shared Responsibility, and understanding if and when the federal government is going to withhold money from you is something people should be keenly aware of. Of course there are many ways to avoid the withholding, which can be found here, but you cannot avoid being uninsured forever without having money withheld and/or needing care. Going uninsured is a massive risk because you would be responsible for your Individual Shared Responsibility payment and any other medical expenses you incur throughout the year. Many argue about the Mandate and whether or not it is Constitutional, because it eliminates a person’s freedom to choose if they need health insurance, and leaves it up to the government. Whether you believe that or not, the reality is that it is here and we have to live with it. Knowing how it affects your personal finances is essential to minimizing your cost and maximizing your benefits.

*whenever “shared responsibility” is referenced, it is in terms of “Individual Shared Responsibility” NOT “Employer Shared Responsibility”