How Hardship Exemption Works

Several factors spurred the development of the Affordable Care Act: rising health care costs and ballooning insurance premiums, as well as hundreds of thousands of Americans annually being denied insurance due to pre-existing conditions [source: Waxman]. The ACA imposes limits and price caps on insurance companies and requires them to accept all people who seek health insurance, even those with high-risk pre-existing conditions.

The ACA led to an online marketplace that was created to allow people to compare plans and purchase insurance easily. The law permits each state to create its own marketplace or join other states to form a joint marketplace. The website Healthcare.gov acts as a portal and takes you to the appropriate marketplace for your state.

Getting rid of pre-existing condition clauses creates a loophole, though. You could simply choose not to sign up for health insurance until you had a medical problem, then get coverage and have the insurance company pay your medical bills. To close this loophole, the ACA requires everyone to maintain health insurance. This mandate is probably the most controversial aspect of the legislation, because the responsibility to maintain health insurance comes with a fee if you don't have a minimal level of insurance coverage at any point during the year. This is known as the shared responsibility provision. While this fee may affect anyone who chooses not to obtain health insurance, it isn't meant to penalize someone who is unable to get health insurance for reasons beyond their control. Hardship exemption arose to give people who were unable to meet the individual mandate a way to avoid the shared responsibility fee.

Next, we'll talk about what qualifies as minimum health care coverage and the actual amounts of the shared responsibility penalty.

At this point, you're probably wondering what counts as minimum health care coverage. The IRS provides a full list, but essentially it includes the following:

Insurance that offers only limited coverage, like dental only, workers' comp, disability insurance and certain limited Medicaid programs, does not count as minimum coverage under the Affordable Care Act.

If you don't have minimum coverage for a certain period of time, and you don't meet any of the exemptions (which we'll discuss in more detail shortly), you'll have to submit payment when you file your federal income tax return in April. Calculating the exact amount of the fee requires a little math, but it's not too complicated.

When filing your 2014 return, the amount is either 1 percent of your annual income above the filing threshold for your age and family (that is, the minimum amount of money you have to make to be required to file a federal tax return), or a flat rate of $95 per adult and $47.50 per child, limited to $285 for a single family (no matter how many kids). Whichever is higher, the 1 percent or the flat rate, is the amount used.

To calculate, take your income for the year and subtract your filing threshold. For example, the 2014 filing threshold for a single person under age 65 is $10,150. So if you made $45,000 that year, the relevant amount would be $34,850. Calculate 1 percent of that amount – in our example, $348.50. That's higher than the flat rate of $95 for a single adult, so that's the number we're working with. Finally, divide that number by 12, which in this case is $29.04. That's the fee for each month you didn't have minimum coverage. If you didn't have coverage for the entire year, the fee would be $348.50. If you didn't have coverage for five months, the fee would be $145.20.

For families, it's the same but your calculation is based on household income, and the flat rate is a little higher, as we just described. The final fee (1/12 of either your 1 percent of above threshold income or the flat rate) covers your whole family for each month the family is uninsured. Let's say your family qualifies for the flat rate of $285, and you all were uninsured for six months, you'd owe $142.50.

The Affordable Care Act also incorporated an overall cap for fees. According to the IRS, that cap is based on "the cost of the national average premium for a bronze level health plan available through the Marketplace," but that cap is so high you'd have to be making a lot of money but somehow also not have health insurance for it to be relevant.

Up next, exemptions from the shared responsibility payment.

There are a few basic exemptions from the shared responsibility provision that don't involve hardship. You can have a religious objection to health insurance, be a member of a Native American tribe or have low enough income that you're below the threshold of having to file a federal tax return. You're also exempt if you were in jail or were not a U.S. citizen. Finally, if the time you didn't have coverage was less than three consecutive months, that counts as a short gap and won't trigger the shared responsibility fee.

Those are all distinct from the hardship exemption, however. The hardship exemption is unique in that it isn't a clear-cut rule the way the other exemption circumstances are. It's fairly subjective. In this case, it's best to quote the Department of Health and Human Services memo that outlines the hardship exemption guidelines. Someone should be granted a hardship exemption from the shared responsibility requirement under the following circumstances:

The memo gives numerous examples of circumstances that could lead to a hardship exemption, including dealing with the death of a family member, becoming homeless, experiencing a disaster, filing for bankruptcy or incurring significant medical expenses. In addition, if the health insurance marketplace makes a policy change that affects someone's eligibility for an exemption, there's a special enrollment period that gives them some leeway as they transition from exempt to nonexempt.

Most people will obtain hardship exemptions by applying for an exemption certificate through Healthcare.gov. The first step is downloading the appropriate application. It's titled "Application for Exemption from the Shared Responsibility Payment for Individuals who Experience Hardships." Along with a completed application you'll need the Social Security number of anyone applying for a hardship exemption in the tax household. You may need to round up some supporting documentation that will depend on the hardship experienced. For example, if you were evicted, you'll need a copy of that notice. If a close family member died, you need to submit a death certificate or other official death notice.

Once you submit your completed application and supported documentation (if any), you mail it in (the application lists the exact address). The health insurance marketplace will follow up with you with one to two weeks of receiving it and request more information if necessary. If the marketplace grants you an exemption, they'll send you an exemption certificate number (ECN) that you'll need to include on your federal income tax return. Given that timeline, you'll want to apply for a hardship exemption well ahead of filing your taxes. If you're turned down, you can appeal, but that'll take time, too.

Of course, you can apply for some categories of exemption (those involving lack of affordable coverage, financial hardship or incarceration) as part of filing a federal tax return. Others, such as having a religious objection or being eligible for services under an Indian health care provider, will require you to apply for an exemption certification number. When in doubt, check Healthcare.gov.

The Affordable Care Act is a pretty complicated law, but the hardship exemption should help people who have endured some kind of personal tribulation and make sure they don't have to pay a financial penalty because they weren't able to find and purchase health insurance during hard times.