If you did not have creditable health insurance coverage in 2020, you and your family may be subject to California’s health care mandate penalty for lack of health insurance. There are several conditions that, if properly documented, will allow you to avoid the penalty when you file your California income tax return. You must request an exemption from the penalty for most conditions with Covered California.
Exemptions From California Health Care Mandate Penalty
The health care mandate penalty will be reconciled on your California income tax return and administered by the Franchise Tax Board. The penalty for a full twelve months of no minimum essential health insurance coverage will either be a flat amount of $750 per adult ($375 per dependent) or 2.5 percent of the gross income that exceeds the filing threshold, whichever is higher. The penalty applies to those months in which you or your family did not have health insurance coverage.
There are several conditions that will exempt you from having to pay the penalty on your California income tax return. Certain conditions will be process by the Franchise Tax Board (FTB) such as –
- Federally recognized Indian tribe and Alaska native members
- Short coverage gap resulting in no penalty
- Members of health care sharing ministries
- Income is below the tax filing threshold
- Enrollment in limited scope Medi-Cal
- Certain citizens living abroad
FTB lists other conditions claimed on the State tax return that can also be used for an exemption.
- Health coverage considered unaffordable (exceeds 8.24 percent of household income)
- Families’ self-only coverage combined cost is unaffordable
Covered California Application For Penalty Exemption
However, many of the FTB exemptions seem to overlap with those exemptions that must be approved by Covered California.
- Religious conscience exemption
- Affordability hardship
- General hardship
As of November 2020, FTB has not posted what they will consider acceptable documentation for those exemptions that can be claimed on the State tax return and don’t need approval from Covered California. The condition of Families’ self-only combined cost is unaffordable seems to refer to employer group coverage where the spouse and dependents receive no employer contribution to lower their health insurance cost.
Unfortunately, if the self-only or employee-only contribution is considered affordable, the spouse and dependents cannot receive subsidies from Covered California. If the self-only unaffordable exemption pertains to employer group coverage, what is the documentation that FTB will accept to waive the penalty for any spouse and dependents? These are the little details we are waiting for from FTB.
In terms of individual and family health insurance being generally unaffordable, Covered California can provide the documentation. They have all the health insurance rates by age and region. They can tally the costs of health insurance annually for household members. That cost is compared to the calculated household income on the State tax return to determine affordability.
In order to get one of the exemptions Covered California grants, you need to file a request for an exemption with Covered California. The three categories are-
General hardship: homelessness, eviction, domestic violence, bankruptcy, medical debt, unexpected increases in household expenses, natural disaster, etc.
Affordability hardship: when 1. The cost of the lowest-cost Bronze plan, less any subsidy, or lowest cost employer plan premium exceeds 8.24 percent of project income. 2. When the cost of the employer group for spouse and dependents is more than 8.24 percent of projected income.
Religious conscience: member of a recognized religious sect who opposes health insurance.
As of November 2020, the only way to apply for an exemption through Covered California was to use an online application that utilizes DocuSign. For individuals who do not own a computer or do not have internet access, this could be challenge. I have not found any paper exemption applications on the Covered California website. That doesn’t mean they are not there or that they won’t be created later.
Even though the exemptions pretty much mirror the federal list – when there was a federal individual mandate penalty – the application still needs to be reviewed by humans. This will take time. If you need to request an exemption from California’s health care mandate penalty, do it early and start with Covered California. Even if it is an exemption that the FTB can grant, I’d still file a Covered California exemption application.
Many Exemption Questions Remain Unanswered
We don’t know how FTB is going to process the exemptions, whether a human being or machine will make a determination. If you apply with Covered California, and they respond that they don’t grant the type of exemption requested, you can cross that off of your list. The default in that situation will be FTB. Don’t expect a quick turn around if you file an exemption application with Covered California on April 14th because your taxes are due on the 15th. Start early because I think Covered California will have a crush of applications at the last minute as tax payers realize they have to cough up thousands of dollars in penalties for not having creditable minimum essential coverage.
Similar to applying for the Premium Tax Credit subsidy through Covered California, no computer software program can completely recognize the variety of household situations that may lead to a partial or full exemption from the penalty. For example, you may not have had health insurance because of the cost relative to your household income for the first half of 2020. Then you picked up employment and your final adjusted gross tax filing income was high enough so that the premium amount of the health insurance is below 8.24 percent.
If the FTB only looks at your final income amount, like the IRS does, they could ignore any affordability exemption and charge you the penalty for those first six months of the year. Because most family situations are not static for the entire year, it is best to start preparing early for defending your request for an exemption from the penalty. This means good record keeping and documents showing income, health insurance premiums offered to you, and other family and financial considerations.