Now that the Supreme Court has ruled the health-care reform law (with one exception related to Medicaid expansion) as constitutional, questions on specific provisions will undoubtedly emerge. During the Court’s deliberation, much of the attention focused on the individual mandate to purchase insurance. While a majority of justices concluded that the individual mandate violated terms of the Commerce Clause of the U.S. Constitution, the mandate survived since the Court ruled it represented a valid use of Congressional taxing authority.
How the individual mandate works
The individual mandate to purchase insurance goes into effect in 2014 and is designed to increase the overall pool of Americans who carry health insurance. State health-care exchanges will be created to offer a range of coverage options from a number of different providers on a competitive basis. Those who are not covered currently and choose to forgo coverage in 2014 will face a tax penalty.
There are some exceptions to the individual mandate, including:
- Those already with Medicaid or Medicare coverage
- Certain members of Native American tribes
- Individuals who may opt out based on religious beliefs
The penalty is figured on a monthly basis, and individuals who are uninsured for less than a 90-day period during the year avoid the penalty. The calculation of the tax penalty amount is based on either a flat dollar amount or a percentage of income, whichever is greater. The amount of the penalty cannot exceed a national average of health-care premiums offered through the health-care exchanges.
The Tax Penalty Increases Over Time*
| YEAR | FLAT DOLLAR PENALTY | % OF INCOME PENALTY |
| 2014 | $95 | 1% |
| 2015 | $395 | 2% |
| 2016 & beyond | $695 | 2.5% |
* For dependents under 18 years of age, the flat dollar amount is reduced by one half. The total family penalty is capped at 300% of the annual flat dollar amount (i.e., in 2016, the maximum flat dollar penalty for a family will be $2,085).
Subsidies for those who cannot afford insurance
Through an expansion of the current Medicaid program, low- and moderate-income individuals and families not covered under workplace plans may be eligible for tax benefits in order to purchase health insurance through established health-care exchanges. The eligibility requirements are based on current income as a percentage of the federal poverty level (FPL).† Individuals and families with income of 400% or less of the FPL can qualify for tax benefits. For example, a family of four with less than $92,200 in income would be eligible for some assistance. These benefits will be in the form of a tax credit that is based on the premium amount for one of the coverage options available through the health-care exchanges. The objective of the subsidies is to restrict premium cost to a certain percentage of income.
†The 2012 Federal Poverty Level is $11,170 for an individual and $23,050 for a family of four.
For more information on the health-care reform law, specific provisions, and key timelines, please refer to the Putnam investor education piece, A look at health-care reform and its impact on investors.
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