Our entire office meets on a weekly basis to talk about all things Health Care Reform. We call the meeting our Health Care Reform Extravaganza! Most of the time it does turn out to be quite an extravaganza, especially the last few weeks.

We use the meeting as a chance to get together and talk about the problems, issues and questions we’ve had come up the prior week relating to the Affordable Care Act. This question came up recently and it’s a good one: How is the individual mandate penalty calculated for a married couple filing jointly (with kids) if one person has minimum essential coverage and the rest of the family doesn’t.

Our Scenario

Meet our made up family: The Millers.

Henry and Jane Miller are married and file a joint tax return. They have 3 children: Karen (21), Lauren (15) and Michael (10). Karen is considered an adult because she is over the age of 18.

Jane is currently the only member of the family that has minimum essential coverage in 2014.

Where the Penalty Comes In

The Millers would end up paying an “individual responsibility payment”  — a polite way of saying a penalty — for all the members of the family that don’t have minimum essential coverage in 2014. That would mean Henry, Karen, Lauren and Michael would all be paying a penalty for not having coverage. Jane would be exempt from the penalty since she currently has coverage.

The penalty will vary depending on how long the individuals didn’t have minimum essential coverage. Let’s say Henry, Karen and the kids were uninsured for just a portion of the year, they would end up paying 1/12 of the yearly penalty for each month they were uninsured.

If they remained uninsured for less than 3 months, then no one in the family would end up being assessed a penalty.

How is the Penalty Calculated

The penalty for not having coverage in 2014 is calculated in one of 2 ways and you’ll end up paying whichever amount is greater:

  • 1% of your yearly household income. The maximum penalty you will end up paying is the national average yearly premium for a bronze plan.

  • $95 per person for the year (47.50 per child under 18). The maximum penalty per family using this method is $285.

It’s important to be aware that the penalty does increase every year. In 2015, the penalty is 2% of income or $325 per person. The premise is that as Americans get used to the new system they’ll be held more responsible for obtaining coverage. You can look at 2014 as an initial grace period for adjusting to the changes.

There are exemptions one can use to avoid paying the penalty which you must qualify for. Those can be found here.

Flat Penalty

Without factoring in the Miller’s gross family income, we’ll go ahead and calculate what their flat penalty would be. Remember, the Miller family will end up paying the greater of the two amounts.

2 Adults (Henry and Karen) at $95 per adult = $190

2 Children (Lauren and Michael) at $47.40 per child = $95

Total Penalty = $285

1% Penalty

The flat penalty is great because … well, it’s flat and easy to calculate. Things get a bit more convoluted with the percentage penalty. Keep in mind, I’m not a tax expert and don’t pretend to be one in real life. The following is an example of what a typical family would need to calculate to prepare to pay the penalty.

The Miller family has a gross family income of $75,000. Before calculating what the penalty would be we’ll need to take into account the 2013 standard deduction for married filing jointly ($12,200), $19,500 exemption per person claimed on return ($3,900 per person) and $10,000 assumed 2014 filing threshold.

That leaves the Millers with a $33,300 net family household Income. The penalty would then be 1% of their net family household income – which would be $333 for the year.

Even if four out of the five family members have coverage, the percentage penalty is always calculated based on the household income of the family. That includes the income of dependents, which in this example would be their daughter Karen.

As you can see, the penalty really comes down to how the federal income tax return is filed.

The Verdict

After analyzing the two penalties above it looks like the Miller family would be obligated to pay the 1% penalty of $333, since that was calculated to be the greater of the two.

Penalty ≠ Coverage

This one is a biggie. If you don’t officially have health coverage – whether it’s through your job, healthcare.gov or privately purchased – you are on the hook for 100% of your medical care. The penalty is nothing more than a penalty. Therein lies the motivation to obtain health coverage in some way. If you’re going to end up dishing out money in the first place, it might as well be towards something worthwhile instead of a penalty.

When Are You Required to Pay the Penalty?

You will be responsible for paying your “individual responsibility” penalty when filing your 2014 federal income tax return in 2015. It’s unclear at the moment how that process will work. Most likely you’ll end up having to declare the coverage you held in 2014 and any exemptions that might apply to you. According to the IRS, your insurer will be required to provide you with information that will help you demonstrate the coverage you held in the prior year.

Is Your Head Spinning?

I’ll admit it … my head is spinning just a bit. Tax related topics aren’t most people’s favorite thing to talk about and adding this new responsibility of reporting your health coverage will just add to the fun that tax season brings.

I think the moral of this story is that if you and your family have coverage in 2014, you’ll be able to log this blog post in your distant memory. But, if for any reason you go without coverage for longer than a 3 month period in 2014, you’ll want to bookmark this and work with someone who can help you calculate what your penalty will be (especially if you’re in the 1% category).