The Individual Mandate of Health Care Reform: How it Works

nder the new health care law, most Americans who do not have health insurance will be required to purchase a plan for 2014. This is the "individual mandate" of health care reform, and it applies to you, your children or anyone you claim as a dependent on your tax return.

If you're eligible for job-based insurance or a government program, those options will fulfill the mandate's requirements and you won't have to buy additional coverage. Otherwise, you will need to buy health insurance or pay a penalty, with some exceptions.

If you do not obtain health insurance and do not qualify for an exemption, you will have to pay a tax penalty. This amount will increase over the next few years and will be pro-rated to reflect the number of months you went without coverage.

The fees will be phased in according to this schedule:

  • $95 or 1 percent of your taxable income in 2014, whichever is higher
  • $325 or 2 percent of your taxable income in 2015
  • $625 or 2.5 percent of your taxable income in 2016

It's important to remember that paying the fee won't buy you health insurance coverage. You will still be responsible for 100 percent of the cost of your medical care.

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The federal government has limited power to collect the tax penalty for not purchasing health insurance. It can't send IRS agents to your door or put a lien on your assets. The most it can do is take the fine out of your tax refund. If you're not getting a refund this year, the amount would be deducted from next year's refund.

You will have until March 31, 2014 to purchase insurance for 2014. That's when open enrollment ends. If you don't have insurance by then, you won't be able to sign up for it until next fall (except for in cases of certain life events), so you'll be responsible for all of your 2014 medical costs in addition to paying the tax penalty. You won't be protected from high costs that can cause bankruptcy in the case of an unexpected illness.

AARP, American Public Health Association, Centers for Medicare & Medicaid Services, Consumer Reports, FAIR Health, Inc., HealthCare.gov, Internal Revenue Service, Kaiser Family Foundation, Medicaid.gov, Michigan Department of Community Health, Michigan Department of Insurance and Financial Services, U.S. Chamber of Commerce, U.S. Department of Health and Human Services, U.S. Department of Veterans Affairs.

Every effort was made to provide clear, accurate information about health care reform. We verified any information we had with first-tier sources – those who are involved in this change and its effect on our health care system. We also relied on well-respected national nonprofits, some who've done a masterful job of providing clear information to consumers. Our primary source of information was the Affordable Care Act's official website, HealthCare.gov. If you need additional information about how health care reform affects you, that would be your best place to start.

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