Just Married: Health Insurance and Taxes

Two things that many people would rather not deal with — taxes and health insurance — are appearing together this tax season thanks to the ACA.

This tax season, the news isn’t good for up to six million Americans who in 2014 lacked health coverage that government income guidelines said they could afford. They must pay the greater of 1% of their income or $95 as a tax penalty. We won’t know until later this year how many people are affected and to what degree, but an early report from H&R Block said that customers affected by the penalty paid an average of $172, considerably more than the flat rate minimum of $95.(1)

The penalty comes as a shock to a lot of people, according to the Urban Institute’s Health Reform Monitoring Survey. Among uninsured people at or above the poverty level, nearly half knew little or nothing about the tax penalty, and many were unfamiliar with the insurance marketplace or the open enrollment deadline established under the Affordable Care Act (ACA). Many others likely find themselves confused.

There is more bad news for taxpayers who remain uninsured throughout 2015. They face a much larger penalty next tax season — the greater of 2% of income or $325. Those who only discovered this after the close of the open enrollment period on February 15 were out of luck — it would already have been too late for them to avoid next year’s penalty.

In response to this issue, the Centers for Medicare & Medicaid Services (CMS) established a special enrollment period from March 15 to April 30, 2015, to enable people in the 37 states that use the HealthCare.gov insurance marketplace to buy coverage and reduce their penalty for the 2015 tax year. Among the state-run marketplaces, California and all but three others are doing likewise. (People who enroll during the special enrollment period still must pay the penalty for going without insurance in 2014, as well as for the months in 2015 when they weren’t covered.)

Some advocates have suggested that insurance enrollment periods should be synced up with the tax preparation season every year, because of the close relationship between health insurance and tax status under the ACA — especially for taxpayers who receive advanced premium tax credits (APTC) to reduce their monthly premiums. CHCF funded an Urban Institute research project led by Stan Dorn to weigh the pros and cons of revising the enrollment calendar by examining purchasing patterns and other factors.

Dorn argued that “penalties for going without coverage would likely prompt more uninsured to enroll when the previous year’s penalties are fresh in their minds — immediately after they have filed tax returns and lost their tax refunds. If the uninsured must instead wait until October to enroll, behavioral economics research suggests that a more distant memory of loss will motivate fewer to act.”

While syncing health insurance enrollment with tax preparation has some advantages, there would be complications in moving to a coverage year that doesn’t align with the calendar year. Regardless of the decision on timing, CHCF is committed to easing barriers to signing up for health coverage, and has recently funded research into the potential of expanding the role of tax preparers to help consumers with the process.

The Takeaway

Two things that many people would rather not deal with — taxes and health insurance — are making a joint appearance this tax season. For better or for worse, the ACA marries the two systems. The question is how to use this linkage to consumers’ advantage.


1. H&R Block also found that, among insured customers, a majority (52%) had to pay back a portion of the Advance Premium Tax Credit they received for 2014 because their incomes had increased. The amount paid back averaged $530, reducing refunds by 17%. These figures are not far from those estimated by the Kaiser Family Foundation in a March 24 issue brief.

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