Mandated Health Insurance — How It’s Taxed

April 15th, 2010 by Lee Eldridge

TaxmanDon’t ask me what I want it for
If you don’t want to pay some more
Cause I’m the taxman
Yeah I’m the taxman
–George Harrison, Taxman by the Beatles

I’ve been reading a number of comments from both sides about mandated health insurance, so I thought it was time to weigh in. Lots of misinformation floating around. The point of this post isn’t to discuss the merits or intrusions of government mandated health insurance, or the Constitutionality of it, but to discuss how it will be enforced and taxed.

As many of us understand, Congress has mandated health insurance for all Americans beginning in 2016. Those who do not have coverage will be taxed. Congress calls this a “fee” but it’s a tax. (See definition of tax here.)

How You Will Be Taxed
Similar to documents you receive from an employer concerning your income and taxes withheld, insurance companies will now be required to provide people who are insured with documents proving that the person has health insurance. When you complete your federal tax returns every year, there will be a place to indicate whether or not you have coverage, and you will have to supply the documents provided by your insurance company to prove that you have coverage. If you do not have health insurance, you will have to pay a tax based on your level of income. This is lumped in with the rest of the taxes you owe, or for many, deducted from the refund that you will receive.

Who Will Pay This Tax
Here’s one of the things I find interesting about this discussion. Most taxpayers overpay taxes during the year, which means they’re due a tax return from the federal government. There’s really no way that these Americans who choose to forgo health insurance can avoid paying the tax as it will be computed with their potential refund. So basically everybody who forgoes coverage and files taxes, will have to pay this tax.

So in practicality, the only people who will be able to avoid paying the tax will be the same people who already fail to file their tax returns.

The Consequences of Non-Payment of this Tax
This has been one of the primary disagreements between proponents and opponents of mandated coverage. Some extreme opponents have claimed that people will go to jail if they don’t buy health insurance, and refuse to pay the fee. Proponents of the bill have claimed this to be a lie.

The truth is this: In earlier versions of the bill, people who chose to forgo health insurance coverage, and refused to pay the “fee” imposed by the federal government, could be prosecuted either criminally or civilly by the federal government. (Read this document prepared by Thomas A. Barthold from the Joint Committee on Taxation in November of 2009.)

Refusing to pay the “fee” is tax evasion. Few people ever go to jail for tax evasion, but it is a possible consequence of non-payment.

I have also read that the health insurance bill has been revised so that people are not penalized for non-payment of this tax. It doesn’t mean they don’t owe the tax. Just that their aren’t “penalties” for not paying this portion of their taxes. However, this will be interesting to watch in application. Basically you’re looking at a small group of individuals who fail to file their taxes, thus have also failed to pay the tax on forgoing health coverage. They can be accessed penalties and interested on the taxes owed EXCEPT on the amount that’s owed for the “fee” for forgoing health coverage.

In all practical purposes, people who forgo coverage AND refuse to pay the “fee” will be the same people who are already trying to avoid paying their taxes. Their really will not be an option for the everyday taxpayer to refuse to pay the fee if they refuse to purchase health coverage.


2 Responses to “Mandated Health Insurance — How It’s Taxed”

  1. Bobby Says:

    Hey Lee. Great find on the PDF from Barthold. Very elightening. So do you think it’s constitutional?

  2. Lee Eldridge Says:

    Hey Bobby. I may write a full post on this at some point. Personally I don’t believe it’s Constitutional, though I have no feeling for which way the Supreme Court would rule on this one. And I’m not entirely sure they’d be in the wrong to uphold mandated health coverage is legal.