Purchase Health Insurance or Pay the Penalty? 4 Questions to Ask Yourself

[Editor’s note: The following is a crosspost by M. Lewis, a financial contributor and former business leader who writes about economic policy, healthcare and small business.]

Obamacare is right around the corner, with most of the Affordable Care Act (ACA) policy changes taking place in early 2014. But one recent change to the ACA could drastically affect many individuals who thought their employer would provide the requisite coverage.

A major component of the ACA is the requirement of organizations with 50 or more employees to provide health insurance benefits to their full-time staff. However, this component was postponed until January 1, 2015. That means that the employees of companies who fall into this category may not immediately receive health benefits through their employer or coverage that is sufficient to meet the criteria, and will be required to either purchase individual health insurance by March 31, 2014 or pay a fine that will be collected when filing 2014 income taxes.

Getty Images

This delay will end up directing more people into the new federal and state insurance exchanges, or "Health Insurance Marketplaces." Plans are available in four tiers of premiums and deductibles designated as "Bronze", "Silver", "Gold", and "Platinum". Purchasers can compare plans and pick insurance policies that best fit their needs.

The question many people are asking themselves is, "Should I buy health insurance or pay the fee?"

What Is the Penalty?

Adults who do not carry health insurance for at least nine months in 2014 will pay a penalty (or tax, according to a Supreme Court ruling) of $95 per adult and $47.50 per child up to $285 per family, or 1% of income, whichever is greater. This amount escalates each year with a maximum penalty equal to the average cost of a basic insurance policy sold through the appropriate insurance exchange. The penalty is not deductible for tax purposes.

Can I Avoid the Penalty?

Yes, certain groups will not be penalized for failing to purchase health insurance. These groups include:

• Members of religious organizations opposing healthcare benefits
• Individuals qualified for the new income limits for Medicaid, but whose state of residence has chosen not to expand Medicaid eligibility
• Members of a federally recognized Indian tribe
• Individuals whose income falls below the amount required to file an income tax return ($10,000 for an individual, $20,000 for a family in 2013)
• Those who are uninsured for less than 3 months of the year

If you don't fit into one of these categories, you can apply for an exemption for special circumstances, but the exemption may not be approved.

Are There Subsidies for Government-Backed Insurance Plans?

Under the ACA, you may qualify for financial help depending on your income level. These insurance plan subsidies are in the form of:

• The Advance Health Insurance Premium Tax Credit. According to a recent report by Families USA, 25.7 million people will be eligible for the credit in 2014. The amount of credit depends on your family size and income. If you earn less than four times the Federal Poverty Level ($94,200 for a family of four in 2013), you may be eligible for a credit. For example, the Kaiser Family Foundation Subsidy Calculator estimates that a family of four (two adults, two children, non-smokers) with an annual income of $75,000 would pay $9,869 in premiums for a Silver Plan on an insurance exchange and receive a government tax credit of $2,744. The same family earning $50,000 would receive a credit of $6,504. The credit can be used at the time the insurance plan is purchased , rather than waiting until the end of the year when taxes are filed.
• Lower Out-of-Pocket Costs in Specific Circumstances. These savings apply only to those who choose a Silver Plan (the second tier of plan alternatives) and meet specific income and family size limitations. For example, a family of four earning less than $58,875 annually would be eligible for some savings while families of four earning above that amount would not. Savings result from lower deductibles, coinsurance, and copayments so while you pay the premiums of a Silver Plan, you get the benefits of a Gold or Platinum Plan.

Can I Afford to Go Without Coverage?

A number of people, even those who can afford health insurance premiums, decide not to purchase insurance because they are young, healthy, and unlikely to need care. A young, high-income earner who falls into this category probably won't feel induced to acquire insurance based on the tax penalty. However, this practice ignores the possibility of accidents, epidemics, environmental disasters, and other emergencies that can strike at any time. As such, every knowledgable financial adviser would recommend the purchase of health insurance, regardless of age or health status.

The combination of a Health Savings Account (HSA) and a Bronze Plan offered by an insurance exchange may be the best solution for those who believe they're bulletproof or whose companies don't offer health insurance. A HSA - effectively a tax-advantaged savings account combined with a high-deductible healthcare plan (HDHP) - can be used to pay health insurance premiums, copayments, coinsurance, and deductibles if the need arises. Because an HSA is also a savings account, unused funds can help build financial security for later in life. In 2014, IRS regulations will allow individuals and families to deduct $3300 and $6550, respectively, from gross income for HSA contributions. Those over 55 can put an additional "catch up" amount of $1,000 into their plans annually.

Getty Images

When employers become subject to the ACA in 2015, they're more likely to offer high-deductible health plans to their employees. A recent survey by Towers Watson and the National Business Group indicates nearly 80% of employers will offer a HDHP alternative in 2014. Transferring from a policy purchased through an insurance exchange to an employer-offered policy is easy with a HSA.

Conclusion

Because companies of at least 50 employees will not be required to provide health insurance benefits until 2015, many uninsured individuals will be required to purchase their own plan through the health insurance marketplace... or pay the penalty. The fact is, a serious accident or illness can financially destroy even those with healthy incomes and significant assets. Going without insurance simply isn't advisable. If you're stuck in a position where you're waiting on employer-provided insurance in 2015, go ahead and hedge your bets by choosing a high-deductible health care plan to tide you over. Initial enrollment with pricing information begins on October 1, 2013 with coverage starting January 1, 2014.

Are you looking forward to the health insurance marketplace?

--

[related]