Study: A Lifetime of Obamacare Penalties Can Total 6 Figures

Now that the March 31 enrollment deadline has passed, we can be sure that many Americans opted to pay the Obamacare tax penalty for being uninsured. Many will have calculated their penalty and realized that, for 2014, paying the penalty is quite affordable. But what about those who decide to go uninsured for years on end?

NerdWallet estimated the cost of a lifetime of penalties -- that is, what penalties might cost for someone who never purchases insurance. Our calculations predict that individuals will pay a minimum of $36,556, and families of four a minimum of $109,668. Combined with the financial risk of going uninsured, we predict that the tax penalty will lead many more Americans to purchase insurance in the coming years.

Key findings

  • Those who go uninsured will incur over the course of their lifetimes tens, or even hundreds, of thousands in tax penalties.

  • For 2014, 2015, and 2016, the minimum penalty will be $95, $325, and $695 annually, respectively. After 2016, tax penalties will be calculated based on annual cost of living adjustments as determined each year by the Social Security Act.

  • To estimate the "lifetime" sum of tax penalties, we used two methods:
    • Based on projected future inflation rates, individuals will pay a minimum of $36,556, and families of four a minimum of $109,668 in total tax penalties. This estimate assumes a 2% increase in the cost of living each year.
    • Based on historical cost-of-living data, individuals will pay a minimum of $42,077 and families of four a minimum of $126,231 in total tax penalties. This estimate assumes a 2.78% increase in the cost of living.
      • Both methods represent the minimum sum because the calculations are based on the flat fee for the penalty, rather than the penalty based on percentage of income.
      • Our "lifetime" of penalties calculates starts at age 27, the age at which a young American is no longer eligible to remain on a parent's health insurance plan, and extends through age 64. At age 65, Americans automatically qualify for Medicare coverage.

  • Higher-income uninsured individuals and families will pay much more for the tax penalty.
    • For example, an individual making approximately $200,000 in 2016 will pay an estimated penalty of $4,500-$5,000 for one year.
    • For these individuals, paying the penalty will cost the same as purchasing insurance -- meaning that there will be zero financial incentive to go uninsured.
  • Although penalties are low in 2014, penalties rise steeply over the next few years. We predict that while many will choose to pay the penalty this year, sign-up rates will be higher in 2015 and 2016 as penalties increase.

How is the penalty calculated?

  • The penalty is calculated based on a flat fee per individual in your household, or a percentage of your family income -- whichever is greater.
    • The "percentage of income penalty" is 1% of income for 2014, 2% for 2015, and 2.5% for 2016 and beyond -- capped at the national average premium for a bronze-level health plan for your family size.
      • This is to be determined -- but the Congressional Budget Office has estimated the national average for an individual bronze policy in 2016 to be $4,500-$5,000.
    • The "flat rate penalty" is $95 in 2014, $325 in 2015, $695 in 2016, and scaled for cost of living after that -- capped at three times the flat fee for a family.

Discussion
The past few months have been riddled with news stories about the ups and downs of federal and state marketplaces, but the real impact of the Affordable Care Act on health insurance coverage -- and on the health of the nation -- remains to be seen. This study predicts that the tax penalty will play a large role in many Americans' decision to purchase insurance -- especially as the fee increases substantially. According to Christina LaMontagne, VP of health at NerdWallet: "Even lower-income individuals and families will end up paying hundreds, even thousands, of dollars per year in penalty fees in coming years. This will create a significant financial burden for this population, increasing the incentive to instead purchase insurance."

With a higher incentive to purchase insurance in the coming years, we will likely see higher enrollment in health insurance plans. Says LaMontagne: "Regardless of whether or not the government's enrollment goals are reached in 2014, the long-term outlook for uninsured rates is positive. Between elevated awareness about the importance of health insurance, the ironing out of marketplace kinks, and an increasingly large disincentive to going uninsured, many Americans will seek out and obtain affordable health insurance -- ultimately leading to decreased health costs and increased health awareness on a national level."

The minimum cost of a lifetime of Obamacare penalties

Age

Year

Assuming 2% Annual Increase, Based on Projected Future Inflation Rates

 

Assuming 2.78% Annual Increase, Based by Historical Cost-of-Living Adjustments

   

Minimum penalty for individual

Minimum penalty for family of 4

Minimum penalty for individual

Minimum penalty for family of 4

27

2014

$95.00

$285.00

$95.00

$285.00

28

2015

$325.00

$975.00

$325.00

$975.00

29

2016

$695.00

$2,085.00

$695.00

$2,085.00

30

2017

$708.90

$2,126.70

$713.96

$2,141.88

31

2018

$723.08

$2,169.23

$733.44

$2,200.31

32

2019

$737.54

$2,212.62

$753.44

$2,260.33

33

2020

$752.29

$2,256.87

$774.00

$2,322.00

34

2021

$767.34

$2,302.01

$795.11

$2,385.34

35

2022

$782.68

$2,348.05

$816.80

$2,450.41

36

2023

$798.34

$2,395.01

$839.09

$2,517.26

37

2024

$814.30

$2,442.91

$861.98

$2,585.93

38

2025

$830.59

$2,491.77

$885.49

$2,656.47

39

2026

$847.20

$2,541.60

$909.65

$2,728.94

40

2027

$864.15

$2,592.44

$934.46

$2,803.39

41

2028

$881.43

$2,644.28

$959.95

$2,879.86

42

2029

$899.06

$2,697.17

$986.14

$2,958.43

43

2030

$917.04

$2,751.11

$1,013.04

$3,039.13

44

2031

$935.38

$2,806.14

$1,040.68

$3,122.04

45

2032

$954.09

$2,862.26

$1,069.07

$3,207.21

46

2033

$973.17

$2,919.50

$1,098.23

$3,294.70

47

2034

$992.63

$2,977.89

$1,128.19

$3,384.58

48

2035

$1,012.48

$3,037.45

$1,158.97

$3,476.91

49

2036

$1,032.73

$3,098.20

$1,190.59

$3,571.76

50

2037

$1,053.39

$3,160.16

$1,223.07

$3,669.20

51

2038

$1,074.46

$3,223.37

$1,256.43

$3,769.30

52

2039

$1,095.94

$3,287.83

$1,290.71

$3,872.12

53

2040

$1,117.86

$3,353.59

$1,325.92

$3,977.76

54

2041

$1,140.22

$3,420.66

$1,362.09

$4,086.27

55

2042

$1,163.03

$3,489.08

$1,399.25

$4,197.74

56

2043

$1,186.29

$3,558.86

$1,437.42

$4,312.26

57

2044

$1,210.01

$3,630.04

$1,476.63

$4,429.89

58

2045

$1,234.21

$3,702.64

$1,516.91

$4,550.74

59

2046

$1,258.90

$3,776.69

$1,558.30

$4,674.89

60

2047

$1,284.07

$3,852.22

$1,600.81

$4,802.42

61

2048

$1,309.76

$3,929.27

$1,644.48

$4,933.43

62

2049

$1,335.95

$4,007.85

$1,689.34

$5,068.01

63

2050

$1,362.67

$4,088.01

$1,735.42

$5,206.27

64

2051

$1,389.92

$4,169.77

$1,782.76

$5,348.29

Total

 

$36,556.09

$109,668.26

$42,076.83

$126,230.48

Sources: NerdWallet Health Analysis, HealthCare.gov, Social Security Administration, Federal Reserve System.

Methodology:

Tax penalty for 2014-2016: HealthCare.gov.

Tax penalty estimations for 2017 and beyond: According to the IRS, in calendar years after 2016, the penalty will be "increased by the product of $695 and the cost-of-living adjustment." The Social Security Administration states that "a COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W [Consumer Price Index for Urban Wage Earners and Clerical Workers] for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective." Thus, COLA cannot be projected for future years: We used the following methods to estimate future COLAs, and therefore increases in the cost of the penalty.

  • Method 1: We found that the cost-of-living adjustment and rate of inflation have grown at a ratio of nearly 1:1 since 1975; therefore, we assumed the COLA to be equal to the rate of inflation. In 2012, the Federal Reserve System set an inflation target of 2%, so we assumed that the penalty would increase by 2% per year.
  • Method 2: We estimated future COLAs by taking the average of historical COLA values over the past 25 years -- which we found to be 2.728%.

Tax penalty for high-income individual in 2016: The Congressional Budget Office has estimated the national average for an individual bronze policy in 2016 to be $4,500-$5,000. This represents the penalty cap for this year. A figure of $5,000 represents 2.5% of $200,000, so any individual making more than $200,000 will pay $5,000 in penalty fees.

Time period employed in "lifetime" of penalties calculations: Because Americans can be covered through their parents' health insurance plans through age 26 and automatically qualify for Medicare plans starting at age 65, we calculate a "lifetime of penalties" starting at age 27 and ending at age 64.

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