IRS Issues Final Guidelines on Obamacare's Individual Mandate: What It Means for You

With state-run health care exchanges set to open for business in just one month and two days, the pieces of the puzzle that will make up the Patient Protection and Affordable Care Act, known also as Obamacare, are starting to take shape.

Putting the polls and public opinion on the back burner, we've taken a look in recent weeks at the technological implementation aspects of this bill and how it will challenge cloud-computing developers, as well as the education aspects of informing millions of Americans about where to get their insurance, how the bill will affect them, and how to use this information to their advantage to make smart choices.

Earlier this week, another piece of the puzzle fell into place when the Internal Revenue Service released its final guidelines (link opens PDF) on Obamacare's individual mandate. While a lot of the information in the 75-page document came as no surprise to me or those who've kept abreast on what this bill means for them, prior to this IRS release there were still plenty of questions left to be answered about what constituted minimum coverage and who would or wouldn't face a penalty under the new law. Well, folks, consider those questions answered!

Below I've listed some of the most important aspects of the IRS' 75-page guidelines, which should answer nearly all previously unanswered questions about Obamacare's individual mandate and clear up confusion on how the bill might affect you.

How does the Obamacare individual mandate affect my dependents?
We finally have a straightforward answer to this question. If you file a tax return that claims your spouse or children as dependents, and one or more of them don't have health insurance, you will be paying their individual mandate fine -- or as the IRS surmises, sharing in their responsibility. As Forbes was quick to note, this is an extremely important fine-print note because it ties in so intricately with what United Parcel Service (NYSE: UPS  ) did last week by announcing that it would not be allowing approximately 15,000 of its nonunion employees to add working spouses to their health insurance plan in 2014. The move saves UPS some $60 million annually, but could potentially make that employee now responsible for their spouses mandate fine should they not get health care and be claimed as a dependent.

Are there any exemptions to the individual mandate?
Actually, there are a lot more exemptions than many realize! For instance, if you have to pay for your own health insurance and the cost of that insurance totals more than 8% of your household income, you're exempt from the mandate, which will be the case for a lot of seniors. The same is true if you don't file a tax return because you make less than the U.S. poverty line -- you'll be exempt. According to the IRS, recognized religious sects of divisions, American Indians, and those currently incarcerated in American prisons will also be exempt. Special consideration is also given to adopted children who are exempt for the first year following their adoption.

Are there any coverage gap exemptions?
Let's hypothetically say that you forgot to pay your health insurance for a month and it lapsed, or you lost your job and went a month or two without health insurance coverage... would you be penalized? The answer is "no"! The IRS notes that you will be allowed a period of three months or less of lapsed coverage once a year should there be any coverage gaps without the fear of penalty.

I have an employer-sponsored plan -- am I OK?
According to the IRS guidelines, chances are almost certain that you are. Under Obamacare, the minimum benefits coverage has been greatly expanded, raising fears that many employee-based health plans would prove insufficient. Based on the IRS' fine print, it appears that as long as your employer-based health insurance is either a government-sponsored plan (i.e., Medicare or Medicaid), or some form of plan legally purchased within the state in question for small or large groups, then it meets the standards of supplying the minimum health benefit requirements as outlined by the law.

Are there any special employer-sponsored situations?
Yes, there are! In addition to the exemptions discussed above, persons working for temporary staffing agencies are exempt from the mandate as are employees who get coverage through a union-sponsored plan. This could work in the favor of a company like General Motors (NYSE: GM  ) , which has roughly 50,000 unionized workers under the United Auto Workers labor union. With a good chunk of GM's staff no longer needing to worry about how the individual mandate will affect them, those employees can instead focus on making GM a great company once again.

What type of fines am I looking at if I choose not to purchase health insurance?
There aren't too many surprises here other than you may have not known that the top-line fine by 2016 of $695 per adult or 2.5% of family household income – whichever is greater -- will adjust higher in line with inflation each year thereafter. The next year, though, will be particularly easy from a fining aspect with penalties of just $95 per adult or 1% of total household income, whichever is greater.

Can the IRS come after me or garnish my wages to collect my mandate penalty?
In what I consider to be an incredibly odd twist, the answer is "no"! The IRS will have no authority to file criminal penalties against you or to seize your property or wages if you fail to pay to your mandate penalties for not carrying health insurance for yourself or your family.

What the IRS can do is withhold your tax refund should you be due one. This could be a defining factor that causes (at least in the first year when the penalties are considerably lower) quite a few people to opt to go without insurance. Keep in mind, though, that many of our nation's largest retailers rely on consumers spending their tax refunds to fuel their bottom line. Wal-Mart (NYSE: WMT  ) , the United States' largest employer, missed on earnings earlier this year and blamed, among other things, delayed tax refunds for its weaker results. Just imagine what could happen to its bottom line if the IRS took mandate penalties out of some of these consumers' returns!

The bottom line
There aren't a ton of surprises here save for the fact that the IRS is not planning to actively pursue those individuals who choose to accept the mandate penalty but not pay it.

The biggest implication here could be for individual health insurers like WellPoint (NYSE: ANTM  ) and CIGNA (NYSE: CI  ) , which both recently made hefty purchases -- $4.5 billion for Amerigroup in WellPoint's case and $3.8 billion for HealthSpring in 2011 for CIGNA. Although the primary goal of these purchases is to pick up a big chunk of the 16 million soon-to-be-accepted Medicaid participants under the Medicaid expansion, these companies could really struggle to lock in new participants if it's just easier for some individuals to take a nominal fine, and especially if the IRS has little means at its disposal other than withholding an individual's tax refund. Only time will tell if this proves true, but if I were a betting man, I'd definitely say the lack of IRS follow-through will result in millions more opting for the penalty in the first year than many estimates had planned for.

Without question, Obamacare is rewriting the rules for the health care industry, and in the process of doing so, it's creating massive opportunities for investors to get ridiculously rich. How? By investing in a handful of specific health care stocks. In this free report, our analysts walk you through these opportunities and the companies that are positioned to exploit them. The informational edge contained in it is invaluable, but can only be exploited profitably while the rest of the market remains in the dark. To access this free report instantly, simply click here now.

 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2013, at 3:01 PM, RASiegfried wrote:

    It is sad that we use the SS Gestopo the IRS to go after the hard working law abiding citizens. The IRS never Audit and make the Gang and Drug dealers pay taxes. Why are they exempt from paying taxes on their income?? Are they going to pay for Obamacare? NO. Government and Congress exempt themselves along with the Gangs and drug dealers. They only make us pay and follow the law.

  • Report this Comment On August 29, 2013, at 3:23 PM, doco177 wrote:

    Google.... "Obamacare Flowchart" at Intellectual Takeout .... to see a visual representation of the corrupt mess this really is

    Congress,Muslims, Amish, Native Americans are exempt from mandate and penalties under Obamacare that the rest of us have to pay.

    1. Millions are losing the insurance Obama promised they could keep. Because ObamaCare forces employers to offer expensive Cadillac plans but also offers the option of paying a fine for not providing health insurance that can be cheaper than providing it, between seven and twenty million Americans are likely to lose their health insurance coverage according to the Congressional Budget Office. The original estimate was closer to four million.

    2. The cost of healthcare premiums is about to further skyrocket. Premium costs have already exploded, but that is a slow-motion explosion. In the near future, we could see costs double or worse. Naturally, these costs will hit an already burdened middle class hardest.

    3. Lost jobs. Lost jobs.

    The Federal Reserve's March beige book on economic activity noted that businesses "cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff."

    Consulting firm Adecco found that half of the small businesses it surveyed in January either plan to cut their workforce, not hire new workers, or shift to part-time or temporary help because of ObamaCare.

    4. Doctor shortages that will mean rationing: The healthcare industry is already a bureaucratic quagmire. ObamaCare is about to add steroids. As the profession becomes tyrannized by government, the talented people currently practicing medicine plan to get out sooner than expected. Who knows how many will choose not to get in. Doctor shortages are what lead to the nightmare known as rationed care.

    5. Somewhere around $800 billion in tax increases will hit America's middle class. This added burden will not only further oppress a middle class already reeling from a drop in wages over the last few years, but could damage the overall economy.

    6. Inflation, the cruelest tax on the poor. When businesses get socked with added costs brought about by higher taxes and burdensome government mandates, they pass those cost along to the consumer in the form of higher prices.

    7. Added bureaucracy. Even those Obama lapdogs over at the Washington Post's Wonk Blog are admitting that applying for health care is about to get more burdensome than the byzantine paperwork involved in buying a home.

    8. To cut costs or to avoid having to provide insurance, workers on the economic margins are already losing hours, which means a lower paycheck. There are a million sad stories in ObamaVille; here are just a few of them.

    9. ObamaCare is projected to add $6.2 TRILLION to a deficit the GAO has already declared "unsustainable." That's "trillion" with a "t".

    10. More taxes than currently estimated are likely to hit because of situations like this one.

    Three years ago, Obama, Democrats, and his media lied to us about cutting the cost of health care, being able to keep our insurance, and not taxing the middle class. Today, those lies and what ObamaCare is and will do to the working and middle class are the biggest untold story in America.

    The govt becoming more involved in health care is the reason the costs have increased. So Govt creates a crisis, then provides a solution that comes at the expense of liberty and freedom, costs trillions, and by most accounts won't solve the problem but in fact make it far worse.Corruption, incompetence, disregard of the Constitution, and lying are integral to the way that this country is being run.

    Boycott and Repeal Obamacare...If only a mere 20% of the over 300 million population of the USA boycott Obamacare the government would be overwhelmed to even think they could penalize or mandate every citizen that refused to participate in the most corrupt and unlawful ways which it was passed that circumvented the constitution of the United States.

  • Report this Comment On August 29, 2013, at 3:35 PM, wolf1952 wrote:

    I will not be buying this crap ins I will just pay the fine or not. I think I wont even pay the fine/

  • Report this Comment On August 29, 2013, at 3:44 PM, cupera1 wrote:

    The Obama care system will have the speed of the US post office, the monetary discipline of the department of defense, the compassion of the IRS, the organization efficiency of Dept of Aquiculture and lines that will make your local DVM seam short and speedy. When Canadians come across the border for heath care they will have to go all the way to Mexico.

    The death panels in Obama, aka Independent Payment Advisory Board IF you are a good party member that has made large and regular financial contributions to the DNC then you will be taken care of. See the example of Fred Baron with his ties to John Edwards. ALL others will be given two aspirin and call back in a week

  • Report this Comment On August 29, 2013, at 3:55 PM, roger142 wrote:

    The last paragraph about changing the way we shop for and receive health care is not accurate. The ACA is all about insurance, and doctors are not going to stop taking it. As for how we shop for health care, has anyone ever tried to get price quotes from a hospital? Just for the record, they will usually never put a price quote in writing.

  • Report this Comment On August 29, 2013, at 3:59 PM, sdchanman wrote:

    U.S. Gov't Funding $313M in Mortgages—For Palestinians on West Bank

  • Report this Comment On August 29, 2013, at 4:01 PM, echodan wrote:

    "With a good chunk of GM's staff no longer needing to worry about how the individual mandate will affect them, those employees can instead focus on making GM a great company once again" How wonderful for those GM union employees! You know, the one's who demand ridiculous salaries and benefits, go on strike if they don't get them, for decades built crap until they were literally forced to finally get competitive, AND the one's who's company was propped up by billions of taxpayer dollars after all of the above?? I'm so HAPPY they don't need to worry about the mandate, like the rest of us losers, and can make the company great again! Fool, are you kidding me????

  • Report this Comment On August 29, 2013, at 4:12 PM, politiconned wrote:

    Conned by politicians.

    Our hard earned income being given to sloths.

    War will come to our shores, from inside the country which is why they want to take away our guns. Why Homeland Security is buying armored vehicles. Why the NSA is spying on us. They know what's happening and they're getting prepared.

  • Report this Comment On August 29, 2013, at 4:40 PM, flakyme wrote:

    Well, isn't this great. I am getting laid off at the end of January at which time I will pay off my mortgage and get a minimum wage job so will not be buying obamacare since I am in my 60's and still too young for medicare. The cost would be more that 8% of my salary and now they cannot fine me.

  • Report this Comment On August 29, 2013, at 4:43 PM, Veritas177 wrote:

    You have to understand the disaster that is about to unfold. The millions of sick people who currently cannot get insurance, or are covered under state or federal high risk pools, will most certainly sign up, adding billions in high medical costs. The only possible way to pay for those bills is for millions of healthy individuals to sign up and pay far more in premium than they take in services. However, the higher costs for healthy people, insincere and obviously ineffective enforcement for those who do not buy, the mandate that allows such people to purchase insurance after they get sick, and completely inadequate attempt to sell this coverage to this population makes it highly unlikely such healthy people are going to enroll in anything near sufficient numbers. To those who understand insurance, there is a very clear risk of what is called a "death spiral" where rates quickly skyrocket and healthy people get priced out.

  • Report this Comment On August 29, 2013, at 5:05 PM, katnlfkn wrote:

    I could have simplified the whole document down to one page.

    Simply stated....

    Americans are screwed.

  • Report this Comment On August 29, 2013, at 5:10 PM, CrazyDocAl wrote:

    So just reduce the amount of taxes withheld so you are not going to get a refund and you'll be fine. The IRS can't come after you to get the extra money for not having insurance. So the country as a whole looses (less money sitting in the IRS coffers waiting to be returned, less refund checks for people to spend) but the mandate has no teeth.

  • Report this Comment On August 29, 2013, at 5:49 PM, obamasucks69 wrote:

    To everyone,

    The IRS can not fine you if you do not buy health insurance.. they do not have the power to just send Mr and Mrs john doe a bill for not buying health insurance......what the IRS will do is keep any or all tax refund money coming to you at the end of the year...so what to do most people pay way to much into the IRS every week from their pay check so adjust your W-4 so you break even at tax time or get very little in refunds....then the IRS will get the shaft..

    hope this helps ya"ll

  • Report this Comment On August 29, 2013, at 7:07 PM, malclave wrote:

    You can't really find out what's going on with Obamacare by looking at the law... the administration has decided that the law doesn't need to be followed, and that favored courtiers may be granted indulgences in the form of exemptions.

  • Report this Comment On August 29, 2013, at 9:13 PM, SLTom992 wrote:

    Am I the only one that has something to say about the IRS but doesn't want to get audited?

  • Report this Comment On August 29, 2013, at 10:08 PM, Speedracer69 wrote:

    This will create one of the biggest financial messes in the history of the United States! Stand up and say no to Obamacare and get your state representatives involved to put an end to it!

  • Report this Comment On September 01, 2013, at 11:23 PM, lowmaple wrote:

    echodan: the hideous union workers were not at fault for building the poorly designed GM cars. The company was. Oh and I don't work for GM or know anyone who does.

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