Tax penalties on individuals without health insurance

No federal penalty after 2018 but state penalties may apply

Dec 19, 2023
Federal tax Employee benefits Compensation & benefits

Executive summary:  State reporting requirements regarding employer health coverage

Individuals without health insurance may be subject to tax penalties in certain states. In addition, employers with employees in those states may be required to file annual information returns to the states. To avoid potential penalties, employers should ensure that they are complying with all state information reporting requirements.

Individual mandate penalty

The Affordable Care Act (ACA) imposed a federal tax penalty on individuals without health insurance starting in 2014. However, the Tax Cuts and Jobs Act, passed in 2017, reduced this penalty to zero starting in 2019. Consequently, individuals are no longer required to report on their federal income tax returns whether they had health insurance during the year and are no longer subject to a federal tax penalty if they did not have coverage.

However, certain states have created their own tax penalty on individuals without health insurance. This penalty is commonly called an individual mandate penalty or a shared responsibility payment. The states imposing this mandate are California, Massachusetts, New Jersey, Rhode Island, Vermont, and the District of Columbia.

Here is a brief summary of the rules in these states:

  • California. California adopted an individual mandate requiring residents to have qualifying health coverage starting in 2020. Residents who choose to go without coverage could face a financial penalty, unless they qualify for an exemption. Health coverage exemptions and the individual shared responsibility penalty are reported on California Form 3853. More information is available at Franchise Tax Board | Health Care Mandate.
  • Massachusetts. Massachusetts implemented an individual health care shared responsibility payment starting in 2007. This was several years before enactment of the ACA in 2010, which instituted the federal individual mandate. To prevent individuals from paying both a federal and a state penalty for not having health insurance, Massachusetts allowed a reduction of the state penalty by the amount of the federal individual shared responsibility payment. However, since the federal penalty was reduced to zero starting in 2019, individuals in Massachusetts are now subject to the full state penalty. Massachusetts residents report the penalty on Schedule HC, Health Care Information, submitted with their state income tax return. More information is available at Health Care Reform |
  • New Jersey. Since 2019, New Jersey has imposed an individual shared responsibility payment on residents without health insurance unless they qualify for an exemption. Residents attach Schedule NJ-HCC, Health Care Coverage, to their state income tax returns to indicate whether they have health coverage or qualify for an exemption. More information is available at NJ Heath Insurance Mandate.
  • Rhode Island. Rhode Island’s mandate went into effect starting in 2020 and requires individuals to have qualifying health coverage unless they qualify for an exemption. Individuals check a box on their state income tax returns to certify that they had health coverage all year, or include with their returns Form IND-HEALTH (and the Shared Responsibility Worksheet, if a penalty applies). More information is available at Department of Revenue | Health Coverage Mandate.
  • Vermont. Vermont’s individual health coverage mandate became effective on January 1, 2020, and individuals must report on their state income tax returns whether they had health coverage for the year. However, there currently is no penalty imposed for not having health coverage. More information is available from the Vermont Department of Taxes.
  • District of Columbia. The District of Columbia adopted an individual mandate requirement starting in 2019. The law requires all residents to have qualifying health coverage or meet an exemption in order to avoid paying a shared responsibility payment. Residents without full health coverage during the entire year must include Schedule HSR, DC Health Care Shared Responsibility, with their state income tax return to claim an exemption or calculate the penalty. More information is available at DC Health Link.

Information reporting requirements

In order to enforce their individual shared responsibility rules, some states are requiring insurers, certain employers, and other providers of health coverage to file annual information returns with the state. Although Massachusetts has its own reporting form (Form MA 1099-HC), other states require certain federal forms to be filed electronically with the state. These federal forms include Form 1094-B (Transmittal of Health Coverage Information Returns), Form 1095-B (Health Coverage), Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns), and Form 1095-C (Employer-Provided Health Insurance Offer and Coverage).

  • California. Starting in 2020, employers who employ California residents are required to report health plan information to California’s Franchise Tax Board (FTB) by March 31 each year. No penalty will apply if the returns are filed on or before May 31. Employers with self-insured plans will be required to file with the state. Employers with insured plans are only required to file if their health plan insurers fail to do so. Additional information on the reporting requirements can be found at Report Health Insurance Information.
  • New Jersey. New Jersey requires Forms 1095-B and 1095-C to be electronically filed with the state by April 2 each year, but the filing requirements vary depending on the size of the employer and whether it has a fully insured or self-insured health plan or participates in a multiemployer plan. It is important to note that out-of-state companies that employ New Jersey residents have the same filing requirements as in-state businesses. Consequently, any company that withholds New Jersey payroll taxes or employs a New Jersey resident needs to become familiar with these filing requirements. More information can be found at NJ Health Insurance Mandate - Employers and Coverage Providers.
  • Rhode Island. Businesses that employ Rhode Island residents are required to file federal Forms 1095-B or 1095-C to report health plan information to the Division of Taxation. However, employers are not required to file these forms with the state if their health plan insurers comply with the reporting requirements. The reporting deadline is March 31. Additional information on the reporting requirements can be found at Individual Mandate Deadlines.
  • Vermont. Vermont currently does not have a requirement to file with the state.
  • District of Columbia. The District of Columbia requires employers and other entities that provide health coverage to individuals to submit the federal Forms 1094-B, 1095-B, 1094-C and 1095-C, as applicable, electronically to its website MyTax DC by April 30. Forms must be filed for individuals for whom wages were withheld and paid to DC, or who had a home or mailing address in DC at any time during the year. Additional information about the filing requirements is available in Notice 2020-04.

These state filing requirements are in addition to the federal information reporting requirements and add more complexity to the annual filing process. For information about the federal information reporting requirements, see our article entitled: Information reporting requirements under the Affordable Care Act.

RSM contributors