The Patient Protection and Affordable Care Act made sweeping changes to the U.S. health care system. Signed into law in 2010, its intent is to increase the number of insured people in the country by making health insurance more accessible and less expensive while reducing overall health care costs. This complex legislation affects almost every aspect of health care in the U.S., but when we break it down and look at the provisions that make up the law, we can see how they fit together and function.
One of the goals of the Affordable Care Act is to prevent insurance companies from denying people coverage for pre-existing medical conditions, including the following:
- Congenital diseases like asthma and some forms of diabetes
- Illnesses such as emphysema contracted during an uninsured period
- Injuries, like a back injury or a torn knee ligament, suffered during an uninsured period
That goal is a big deal because such denials traditionally have burdened uninsured people who'd lost a job or had other financial problems. Medical problems that occurred during an uninsured period could leave them with crushing medical bills for the rest of their lives.
But the reason you're reading this article is to find out about hardship exemption, or the provision under the Affordable Care Act that lets people who were unable to obtain health insurance avoid the individual shared responsibility payment they would otherwise be required to submit with their tax return. Without the exemption, individuals and families whose lives were disrupted or who had suffered serious financial hardship would have another penalty piled onto their troubles because they didn't maintain minimal health care coverage.
In this article, we'll learn not only about the hardship exemption, but also about the health care legislation and why it requires the shared responsibility payment in the first place.
Understanding the Affordable Care Act
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.
Minimum Health Care Coverage and Penalties
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:
- Any insurance you get from your employer (or your spouse's employer), including COBRA or retiree coverage
- Any private health insurance you purchase yourself
- Most government health coverage programs, including Medicare Part A, Medicare Advantage plans, veterans' health plans, many types of Medicaid and several other programs
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.
Hardship and Other Exemptions
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:
- He or she experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she had a significant, unexpected increase in essential expenses that prevented him or her from obtaining coverage under a qualified health plan;
- The expense of purchasing a qualified health plan would have caused him or her to experience serious deprivation of food, shelter, clothing, or other necessities;
- He or she experienced other circumstances that prevented him or her from obtaining coverage under a qualified health plan.
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.
Author's Note: How Hardship Exemption Works
I appreciate how the Affordable Care Act has brought down medical costs for millions of Americans. Once you peer into its inner workings though, you start to see what a half-measure it is, a cobbled patch job on a horribly dysfunctional system. It's frustrating seeing people saddled with massive medical debt or desperately raising funds for a critical procedure (and fearing that it could happen to me), despite the improvements the ACA has made.
- Cohen, Gary. "Guidance on Hardship Exemption Criteria and Special Enrollment Periods." Department of Health and Human Services, June 26, 2013. (Oct. 28, 2014) http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/exemptions-guidance-6-26-2013.pdf
- Internal Revenue Service. "Individual Shared Responsibility Provision – Calculating the Payment." July 25, 2014 (Oct. 28, 2014) http://www.irs.gov/uac/ACA-Individual-Shared-Responsibility-Provision-Calculating-the-Payment
- Internal Revenue Service. "Individual Shared Responsibility Provision - Minimum Essential Coverage." April 2, 2014. (Oct. 28, 2014) http://www.irs.gov/uac/ACA-Individual-Shared-Responsibility-Provision-Minimum-Essential-Coverage
- Internal Revenue Service. "Questions and Answers on the Individual Shared Responsibility Provision." Oct. 1, 2014 (Oct. 28, 2014) http://www.irs.gov/uac/Questions-and-Answers-on-the-Individual-Shared-Responsibility-Provision
- Waxman, Henry A. "Coverage Denials for Pre-Existing Conditions in the Individual Health Insurance Market." Oct. 12, 2010 (Oct. 30, 2014). http://democrats.energycommerce.house.gov/Press_111/20101012/Memo.Pre-existing.Condition.Denials.Individual.Market.2010.10.12.pdf