Tax penalties on individuals without health insurance

No federal penalty after 2018 but state penalties may apply

Aug 15, 2021
Federal tax Employee benefits Compensation & benefits

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.

Individual mandate penalty

The Affordable Care Act (ACA) imposed a 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 for 2019 and later years. Consequently, individuals no longer report on their federal income tax returns whether they had health insurance during the year, or pay a penalty if they did not have coverage.

However, certain states have created their own 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 health coverage beginning 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 a health care shared responsibility payment on individuals beginning in 2007. This was several years before enactment of the ACA in 2010, which instituted the federal individual mandate starting in 2014. To prevent individuals from paying both a federal and a state penalty for not having health insurance, Massachusetts allowed the amount of the federal individual shared responsibility payment as a reduction against its state health care penalty. However, individuals in Massachusetts now pay the full state penalty since the federal penalty was reduced to zero starting in 2019. Massachusetts residents report the penalty on Schedule HC, Health Care Information, attached to their state tax return. More information is available at Health Care Reform |
  • New Jersey. Since 2019, New Jersey has imposed a 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 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 took effect starting in 2020 and requires individuals to have health coverage unless they qualify for an exemption. Individuals check a box on their 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 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 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 effective 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 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 Get Covered. Stay Covered. | DC Health Link.

Information reporting requirements

In order to enforce their shared responsibility rules, 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 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. For 2020 and subsequent years, employers who employ California residents are required to report health plan information to California’s Franchise Tax Board (FTB) by March 31 each year. 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 filed with the state, 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. New Jersey provides guidance on the filing requirements at NJ Health Insurance Mandate - Employers and Coverage Providers.
  • Rhode Island. Businesses that employ Rhode Island residents are required to file 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 January 31. Additional information on the reporting requirements can be found at Health Insurance Mandate: Reporting Requirements FAQ.
  • 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. Forms must be filed for individuals for whom wages were withheld and paid to the District, or who had a home or mailing address in the District at any time during the year. The deadline is 30 days after the IRS filing deadline. Additional information about the filing requirements is available in OTR Notice 2019-04.

These state filing requirements are in addition to the federal information reporting requirements and add more complexity to the annual filing process.

RSM contributors