Why Do I Have an Insurance Penalty in California?

Posted: March 06, 2023

If you are a Californian with no health insurance, you may face a tax penalty when you file. Though there is no uninsured tax penalty on a federal level, individual states, like California, can still implement mandates. You may still need to pay a tax penalty if you live in California and do not have health insurance.

You can either not carry health insurance and pay the penalty at tax time, or enroll in a qualified insurance plan and avoid the penalty. Some exceptions may apply, depending on your circumstances.

What Is an Insurance Penalty?

An insurance penalty, also called an uninsured tax penalty or uninsured health care penalty, is a fee you must pay if you do not have a qualifying health insurance plan for a tax year. These penalties used to be in place at a federal level with the Affordable Care Act — aka Obamacare — in 2014. They required most people who were legal residents or U.S. citizens to purchase qualifying health insurance or pay a tax penalty.

In 2019, the Trump administration rescinded this penalty. Several states have since created mandates to bring the uninsured penalty back. California is one of those states, which added a tax penalty for uninsured people and businesses starting with the 2020 tax year.

Many people already have qualifying health insurance coverage. They may get this through their employers or public programs like Medi-Cal and Medicare. If you do not have this kind of coverage, the mandate requires you to purchase insurance, typically through one of two avenues.

• A federal- or state-run health benefits exchange: These platforms, like Healthcare.gov and Covered California, have plans that meet requirements for avoiding the penalties. Lower-income families may also qualify for tax credits or subsidies that can apply to plans from a health benefits exchange.
• Private insurance companies: Private companies may be more expensive and won’t qualify for subsidies, but you might have more options to choose from.

As a California resident, you should carry insurance throughout the year with no gaps in coverage of 90 days or more. Otherwise, you may face a tax penalty when you file your tax return.

There are some exemptions to California’s penalty, which we’ll discuss later.

How Much Is an Insurance Penalty in California?

The cost of the tax penalty for being uninsured varies depending on your income, the length of time you were uninsured and the size of your household. The state will assess the fee in one of two ways, depending on whichever is higher.

• A flat amount based on the number of people in the household – $850 per adult 18 years or older and $425 per dependent child, up to an annual max of $2,550.
• A percentage of the household income – 2.5% of all gross household income over the tax filing threshold.

Both options are prorated according to how long you were uninsured. If you were only uninsured for one month, you’ll pay one-twelfth of the fee. The state even offers an estimator tool to help you understand how much your penalty for no health insurance might be.

Why Do I Have an Insurance Penalty?

If you see an insurance penalty on your W-2, it is because you did not have health insurance during that tax year. In California, this method of assessment began in January 2021.

Why Does California Have an Insurance Penalty?

California began using insurance penalties for similar purposes as the ACA did. Individual mandates aimed to encourage young, healthy people to get or stay insured. Research suggests eliminating the penalty causes fewer people to be insured and increases premiums.

When coverage is only for older, sicker individuals, premiums tend to rise, since the people enrolled have higher, more expensive needs. Enrolling more young, healthy people spreads out the costs, reducing premiums for everyone. Tax credits, or subsidies on qualifying plans, further encourage enrollment by lowering the individual cost of coverage.

After the Trump administration eliminated the federal mandate in 2019, California implemented its version to fund more affordable initiatives and encourage insurance enrollment.

How Are Insurance Penalties Assessed?

Previously, the tax filing process involved checking a box that stated whether you had insurance during the previous year. Now, you will see the uninsured health insurance penalty listed on your W-2 or will otherwise need to pay it when filing your taxes.

What Can I Do to Avoid an Insurance Penalty?

If you want to avoid the California penalty for no health insurance, you must enroll in a qualified health plan or qualify for an exemption.

1. Enroll in a Qualified Health Plan

Qualified health plans meet specific standards and minimum essential coverage requirements. ACA plans through Covered California, the state’s health insurance exchange, fulfill these prerequisites. Depending on your income, you may be eligible for subsidies on these plans to offset the cost. You could also choose a plan from a private insurer on the exchange. These plans wouldn’t qualify for subsidies, but they might give you more options.

Typically, the open enrollment period for California occurs between November and January. If you miss this window, you can apply during the special enrollment period if you’ve experienced a qualifying life event. Some examples include the following.

• Losing health insurance: You may lose existing coverage if you become unemployed, age out of a parent’s plan, lose Medi-Cal due to an increase in income or return from active military duty. In these cases, you must have lost your coverage involuntarily.
• Getting married or having a baby: Getting married, entering a domestic partnership, having a baby or bringing a child into the home through adoption or foster care can also qualify you for special enrollment.
• Moving to or within California: If you permanently moved to California from another state, you can get special enrollment. You may also qualify if you move within California to an area with at least one new plan that wasn’t available to you at your previous residence.

Other qualifying life events include gaining citizenship or lawful presence, being released from incarceration and being a Native American or Alaska Native.

You may come across short-term health insurance plans. Unfortunately, they are not qualified health plans and won’t help you avoid the insurance penalty.

As you prepare for the upcoming tax season, you will need specific documents to prove that you and the members of your household had qualifying health insurance coverage. These include Forms 1095-A, 1095-B and 1095-C. You likely received these in the mail, but if you can’t find them, check with your insurance provider or employer. For employer-sponsored plans, these documents typically come from the employer.

2. Have a Valid Exemption

There are a few circumstances where you may be exempt from paying a tax penalty. They typically fall under one of three categories — religious conscience, affordability and hardship.

You may be eligible for an exemption if you meet the following criteria.

• The coverage is unaffordable: If the lowest-cost plans on the Covered California marketplace or through an employer exceed a specific percentage of your individual or household income, they are unaffordable. In 2022, this value is 8.09% for individuals and households.
• You had a short coverage gap: A short coverage gap means you are uninsured for fewer than three consecutive months during the year.
• Your income is lower than the state threshold for tax filing: If your income is lower than the state tax filing requirement, you may not need to file taxes or pay a penalty for not having health insurance.
• You were incarcerated: You may be exempt from the tax penalty if you were incarcerated.
• You are a member of a Native American tribe: You may be exempt from the tax penalty if you belong to a federally recognized Native tribe.
• You experienced general hardship: Some circumstances may have prevented you from obtaining qualified insurance. If you experienced these hardships, such as homelessness, eviction, domestic violence, unpaid medical bills or the death of a close family member, you might be exempt from the tax penalty.
• You are a member of a religious sect: You may be exempt from the tax penalty if you are a member of a specific religious group or a healthcare sharing ministry.

If you plan to claim one of these exemptions, you may need to submit an application and documentation. Speak with a tax professional about the details of valid exemptions to determine whether one may apply to your situation.

Sign up for Insurance With Health for California

Health insurance is one of the most crucial purchases you will make. In California, you may need to purchase individual health insurance in the following circumstances:

• Your need for benefits has changed although you already have health insurance.
• The group plan you are enrolled in does not cover your dependents or spouse.
• Your health plan premiums are too high.
• Your employer does not offer a group health insurance plan.
• You are self-employed.

To avoid the California insurance penalty, you should obtain health insurance. Get a free quote for insurance with Health for California today.