Understanding the Health Care Exemption Form

Health insurance is a safety net that many people can't afford to live without. But should American citizens actually be penalized for not buying health coverage? That's one of the most controversial provisions included in the Patient Protection and Affordable Care Act (ACA), signed into law by President Barack Obama in 2010.

The ACA is designed to expand health insurance coverage to a greater number of Americans:

The bill allows young people to stay on their parents' insurance policy until they are 26 years old instead of 19.
It improves health care options for people with pre-existing conditions, particularly children.
And through a system of tax credits, it aims to make insurance premiums more affordable for lower-income families.

To help people find and purchase affordable health care coverage, the ACA called for the federal government — and individual states, if they wanted — to launch an online health insurancemarketplace.

But all of the benefits of the ACA come at a cost. For the system to work, healthy people must also sign up for health insurance. It's the only way for insurance companies to balance out the risk of taking on policies for people with pre-existing conditions. To achieve this balance, the ACA includes a controversial provision called the individual mandate.

The individual mandate requires all Americans — adults and children — to have "minimal essential coverage" or pay a penalty in the form of a tax. Health care coverage can come through an employer's health plan, a private insurance policy or through a government-sponsored program like Medicare, Medicaid, Children's Insurance Program (CHIP) or Veterans Affairs.

For the 2014 tax year, the penalty for not having health insurance coverage is the greater of two calculations [source: IRS]:

1 percent of your household income that is above the minimum threshold for your filing status; or
$95 per adult in your family, plus $47.50 per child up to a maximum payment of $285

By tying the penalty to household income, the individual mandate provides a financial incentive for Americans who can afford health care coverage to buy it. But the law also recognizes that there are many people who simply can't afford health insurance (even with tax credits) or have other reasons — like religious objections — for not complying with the individual mandate. For those individuals and families, the ACA offers a number of financial, religious and hardship exemptions from the penalty.

Applying for an exemption to the individual mandate penalty isn't difficult, but you need to know which forms to fill out and what information you will need to gather beforehand. Keep reading to learn which exemptions require an application and which are automatic.

Who Needs to Apply for an Exemption?

Since the individual mandate is such a cornerstone of the Affordable Care Act (ACA), the federal government has strict criteria for exemptions from the penalty. To qualify for most exemptions, you need to fill out a paper application and mail it into the health insurance marketplace for approval. If your application is approved, you will receive an exemption certificate number that must be included on your tax return. In some cases, though, the exemption is granted without an application.

Here are some categories of people who don't need to apply for an exemption [source: Healthcare.gov]:

Low-income households are exempt from the penalty if they earn less than the filing threshold for their tax status. In the 2014 tax year, for example, the filing threshold for a married couple both under 65 filing jointly is $20,300 [source: IRS]. If a couple earns less than that amount, they don't have to file taxes, and they are automatically exempt from the requirement to buy health insurance.
People who are uninsured during the tax for less than three months are also exempt from the penalty. Small gaps in coverage are allowed under the ACA law.
People who are not "lawfully present" in the U.S. — meaning undocumented residents — are exempt from the penalty because they cannot buy health insurance through the marketplace. (Yes, undocumented workers are supposed to file taxes, too.)

Taxpayers who don't have to apply for these "automatic" exemptions still need to claim them on their tax returns. The 2014 federal income tax return (Form 1040) contains a new line 61 called "health care." If you have coverage for the whole year, you check the "full-year coverage" box and move on. However, if you want to claim an exemption from the penalty — for low income or a gap in coverage — you need to attach a Form 8965.

A paper application is required to claim all other exemptions from the individual mandate penalty. Separate applications exist for the following individuals and situations [source: Healthcare.gov]:

People who have suffered a hardship (such as death or illness of family member, fire or theft, or homelessness)
People who cannot afford any of the plans available through the online health insurance marketplace. "Unaffordable" plans amount to more than 8 percent of the household gross income
Members of a recognized Native American or Alaskan tribe who receive services through an Indian health care provider
Members of religious groups whose members object to insurance
Members of a health care sharing ministry
People who are incarcerated

Let's start by looking at the forms and required documentation for people who are claiming a hardship exemption

Applying for a Hardship Exemption

Hardship exemptions are granted in cases where personal or financial setbacks made it difficult or impossible to obtain health insurance coverage during the tax year. The Affordable Care Act officially recognizes 14 different categories of hardships, including [source: Healthcare.gov]:

Death or prolonged illness of a family member
Domestic violence
Substantial debt from unpaid medical expenses
Eviction, foreclosure or homelessness
Bankruptcy or shut-off notices from utilities
Fire, flood or other disaster

There is a single application form for all hardship exemptions and it's called the Application for Exemption from the Shared Responsibility Payment for Individuals Who Experience Hardships. Each category of hardship is assigned a number from 1 to 14. Most categories require additional documentation to verify the hardship. For example:

To claim a hardship exemption because of an eviction in the past six months, you need to include a copy of the eviction notice.
To claim a hardship exemption because of unpaid medical expenses over the past 24 months, the marketplace wants to see copies of the medical bills.
If you're claiming a hardship exemption because a family member died, you'll need to attach a copy of the death certificate or the obituary from the newspaper.

There is no additional documentation needed in cases of homelessness or domestic violence.

The exemption application itself is pretty straightforward. First, the application asks for information about one adult in the house who will act as the main contact. Then it asks basic information about other people in the household, including Social Security numbers and filing statuses for tax purposes.

Then the application gets to the information about the hardship itself. There's a small box to enter the category number of the hardship, followed by a paragraph-sized box in which to explain how the hardship prevented you from getting health coverage. You are further asked to enter the start and end dates of the hardship (If it's ongoing, there's a box for that, too). If you are applying for more than one hardship exemption, you make multiple copies of the application page.

If you need help completing the application, you can have an "authorized representative" — a friend or a professional health care counselor — complete and sign the application for you. All you have to do is sign and include the form marked "Appendix A: Assistance with completing this application" with the application.

Now let's look at the application forms for non-hardship exemptions for things like financial and religious reasons.

Applying for a Non-Hardship Exemption

There are five additional exemptions to the individual mandate penalty that are recognized by the Affordable Care Act (ACA), and each has its own application form.

Let's focus on the most common exemption, the one that's granted to households who can't find an affordable health insurance plan. To qualify for this exemption, you need to prove that the cheapest health insurance policy available costs more than 8 percent of your household annual income [source: Healthcare.gov].

When the ACA became law, individual states had the option of using the federal online health insurance marketplace (Healthcare.gov) or creating their own state-run exchanges. As of late 2014, 14 states manage their own exchanges [source: Kaiser Family Foundation].

We bring this up because there are two separate exemption applications for households that can't find an affordable health insurance policy: one for states that use the federal marketplace and one for those that use their own exchanges. Consult the list of states on the exemption application instructions to figure out which application is right for you.

In either case, these applications are chiefly concerned with finding out how much income your household earns annually. You should be prepared to answer questions about your employer, other sources of income, and whether or not you or a family member receives health coverage through work or a government-sponsored program. If you live in a state with its own health insurance exchange, you will need to send additional documentation along with your application, either [source: Health Insurance Marketplace]:

a copy of the eligibility notice from your state's exchange showing how many tax credits you are receiving, if any; or
a printout of the screen from your online exchange showing the cheapest policy available in your area

Most of the other exemptions concern membership or affiliation with a religious or ethnic group. If you are a member of a recognized Native American or Alaskan tribe and are eligible for health care through the Indian Health Service (IHS), you are required to submit documentation of your membership (copies of tribal enrollment or membership documents, birth certificate of you or your family members, or a letter from IHS).

If you are a member of a religious sect that objects to insurance or medical care — some Amish and Christian Science practitioners, for example — you can apply for exemption from the individual mandate penalty without any additional documentation, just a statement of your membership in a recognized sect. The same is true for members of a health care sharing ministry.

Lastly, if you or any member of your household was incarcerated (in prison) for any portion of the tax year, you can apply for an exemption from the individual mandate penalty. The application asks for the time frame of the incarceration(s) and the names of the prison facilities.

For lots more information about tax exemptions and facts about the Affordable Care Act, check out the related HowStuffWorks links on the next page.

Lots More Information

Author's Note: Understanding the Health Care Exemption Form

The launch of Healthcare.gov back in 2013 was a technological fiasco. The government's servers collapsed under the weight of a flood of applicants. I was one of many health insurance shoppers waiting for weeks to access the site and look for plans. The 2014 open enrollment period launched a few days ago, and while the technological glitches are gone, there is still much that can be improved in the way that health insurance is sold in America. My chief complaint is with the abundance of confusing terminology: copayments vs. coinsurance, in-network vs. out-of-network. bronze vs. gold vs. platinum. I consider myself a moderately intelligent person, but the only thing I can reasonably understand are the premiums, which appear to be going up this year. How far of a drive is Canada?

Sources

Health Insurance Marketplace. "Application for Exemption from the Shared Responsibility Payment for Individuals who are Unable to afford Coverage and are in Certain States with a State Based Marketplace" (Nov. 19, 2014) https://marketplace.cms.gov/applications-and-forms/affordability-sbm-exemption.pdf
Healthcare.gov. "Exemptions from the fee for not having health insurance" (Nov. 19, 2014) https://www.healthcare.gov/fees-exemptions/exemptions-from-the-fee/
Healthcare.gov. "Hardship exemptions from the fee for not having health coverage" (Nov. 19, 2014) https://www.healthcare.gov/fees-exemptions/hardship-exemptions/
Healthcare.gov. "How to apply for an exemption?" (Nov. 19, 2014) https://www.healthcare.gov/fees-exemptions/apply-for-exemption/
IRS. "The Individual Shared Responsibility Provision" (Nov. 19, 2014) http://www.irs.gov/uac/Individual-Shared-Responsibility-Provision
IRS. "Individual Shared Responsibility Provision – Calculating the Payment" (Nov. 19, 2014) http://www.irs.gov/uac/ACA-Individual-Shared-Responsibility-Provision-Calculating-the-Payment
Kaiser Family Foundation. "State Health Insurance Marketplace Types, 2015" (Nov. 19, 2014) http://kff.org/health-reform/state-indicator/state-health-insurance-marketplace-types/