With January 1, 2014 getting closer every day, and the federal Marketplace still not working, people are faced with big decisions about their health care for 2014.  We want to help.  We thought it would be a good time to explain exactly how the individual penalty works.

How to Calculate the Penalty

It’s really hard to jazz this up, folks—it’s mostly math.  The individual penalty is computed as the greater of (1) a flat dollar amount, or (2) a percentage of household income.  Then there’s another cap: the penalty can never exceed the national average Bronze level premium for the applicable family size.  (If the IRS or HHS have published official national average numbers for purposes of establishing this maximum, I can’t find them.)

The individual penalty phases in fairly sharply from 2014 through 2016.  Here are the applicable flat dollar amounts and percentages for 2014, 2015, and 2016, as the law stands today:

Calendar Year

Per-Person Penalty Amount

Percentage of Income










After 2016, the per-person penalty amount will be indexed for inflation.

The flat dollar amount is computed as the number of adults plus ½ the number of minors in the household, multiplied by the per-person penalty amount, up to a maximum of three times the per-person penalty amount.  So, for a single person in 2014, the individual penalty is $95.  Married couple, $190.  Married couple plus one minor child, $237.50.  Married couple plus two, three, four, or more minor children, $285.

The percentage of income calculation is pretty straightforward.  Take your modified adjusted gross income, subtract the sum of personal exemptions and the standard deduction for your filing status, then multiply that by the applicable percentage for the year in question.  For 2014, the personal exemption amount is $3,950, and the standard deduction is $6,200 for a single taxpayer and $12,200 for a married couple filing jointly.

The penalty amount is the greater of the flat dollar amount or the percentage of income amount.  We built an individual penalty calculator (which piggybacks on our homemade individual subsidy calculator) so that we can visualize the penalties over a range of family sizes and incomes.

Individual Penalty Examples & Takeaways

Here are some illustrations for 2014:

And here are the same hypos, but for 2016:

(For illustrative purposes only, we assume that the least expensive Bronze level plans are BlueCross/BlueShield of Alabama “Blue Saver” Bronze plans for zip code 35203, and that the national average premiums for the applicable Bronze level plans are 125% of those premiums.  Also, we use the 2014 personal exemption and standard deduction amounts for all years.)

Here are a couple takeaways from our illustrations.  First, while the individual penalty will be little more than an annoyance for most people in 2014, it will be large enough in 2016 to get the attention of most taxpayers.  (In 2016, the minimum penalty for a non-exempt family of four will be $2,085.)  Young people who are on the fence about signing up in the Marketplace this year may well put it off a year or two.  Second, while the popular belief is that the penalty is only $95 in 2014, that’s actually true only for a single person with low-to-mid income; whether you pay the flat amount or the percentage will depend heavily on your filing status, family size, and income.  In 2014, a single person household earning more than $19,000 will pay the percentage, not the flat fee; for a family of four in 2014, 1% of income exceeds the $285 flat penalty at about $57,000 in gross household income, just a little bit above the U.S. median income.  In 2016, the flat-dollar penalty amounts stretch farther into the household income bell curve, but are still overtaken by the 2.5%-of-income penalty when gross household income reaches about $36,000 for an individual, and $112,000 for a family of four.  Third, these illustrations show that the overall maximum cap on the penalty (i.e., the national average Bronze premium) is likely to be a moot point for most families.  Based on our underlying assumptions, none of the families would reach the maximum cap within the range of scenarios illustrated here.  But the 2016 illustration shows that the single person reaches our guess at the overall maximum penalty at about $136,000 in annual income.

Who is Exempt from the Penalty?

Some persons are exempt from the individual penalty: religious objectors, members of certain health care sharing ministries, illegal aliens, prisoners, taxpayers with incomes below the filing threshold, and members of Native American tribes.  Others may be exempt due to “hardship,” or because they “cannot afford coverage.”  (In regulations, the HHS Secretary has also ruled that individuals who would have been covered by Medicaid if the State had accepted the Medicaid expansion under section 2001(a) of the Affordable Care Act are also exempt from the penalty.)

There are two ways taxpayers can be exempt from the penalty on grounds that they “cannot afford coverage.”

First, remember that an employer can avoid the § 4980H penalty (beginning in 2015) by offering coverage costing no more than 9.5% of the employee’s pay.  But, if the employee’s contribution is over 8% of his income, then the employee may decline that offer of coverage, decline to buy insurance in the Marketplace, and still be exempt from the penalty.  In the 8%-9.5% window, both the employer and the employee are exempt from the penalties, even if nobody buys coverage.  There may be a sweet spot here, where employers can avoid the § 4980H penalty, employees can avoid the § 5000A penalty, and families can purchase cheaper non-qualifying coverage tailored to their needs on an individual basis.

Second, individuals are exempt if they don’t have access to affordable employer based coverage, and the least expensive Bronze level coverage, after subsidies, exceeds 8% of household income.  This, along with the exemption for families with incomes below the filing threshold, means that households below the federal poverty level will be exempt from the individual penalty.  Based on our analysis of the Birmingham-area premiums for Bronze plans published by BlueCross BlueShield of Alabama, very few families above the FPL will qualify for this exemption, because the post-subsidy premiums for the least expensive Bronze plans will not exceed 8% of household income for many families above the FPL.  Based on our testing of various scenarios, only a larger family (two adults plus three or more children), with an income just slightly above that necessary to receive a refundable tax credit subsidy, is likely to qualify for the exemption.  That analysis may vary from state to state, and even county to county, however, because offerings and premiums vary from county to county.

Of Carrots and Sticks

One last thing.  Our homemade subsidy and penalty calculator now allows us to calculate the total economic incentive that the Affordable Care Act creates for individuals to purchase qualifying health coverage through the Marketplace.  We compute this total incentive by adding together the two “carrots” (the refundable tax credit under ACA § 1401, plus the cost sharing reduction under ACA § 1402) plus the “stick” (relief from the individual penalty that would otherwise apply under ACA § 1501).  Here’s what the total incentive looks like for a family of four over a wide range of income levels:

(For illustrative purposes only, we assume a family of four, enrolled in the second least expensive “Silver” level plan costing $750 per month, and having medical costs high enough to recognize the full monetary value of any applicable cost sharing reduction.)