Health insurance in America has changed over the past few years. Since President Obama signed into law the Affordable Care Act, insurance companies have had to adjust their policies and their approach to consumers in terms of offering benefits. The new law provides better protections and safeguards while making sure that people get the medical services they need. If you buy a new major medical plan today, you’re guaranteed coverage for ten essential benefits including things like outpatient care, prescription drugs and pediatric services.
The law’s stipulations, however, only apply to major medical plans. If you’ve been researching health insurance options, then you may have been presented with the choice to buy “short-term health plans” or STHPs. This type of insurance acts as a temporary placeholder until you can find major medical insurance.
For people with gaps in their coverage due to new jobs, college graduation or other short-term situations, STHPs offer sufficient coverage in the meantime. The relatively low cost of short-term plans makes them an attractive buy for people with limited incomes. In fact, you may be tempted to forgo major medical insurance altogether in favor of short-term coverage. Before you make that decision, know the risks of skipping out on a traditional policy.
Tax Penalties under the ACA
The Affordable Care Act sets out new guidelines for insurers and helps people gain affordable coverage for essential medical care. In order to work effectively, the law requires participation from every eligible American citizen, which means just about everybody. The IRS will impose a tax on your annual tax filing if you do not sign up for a qualifying medical plan. Signing up for short-term health insurance does not fulfill the government’s requirement for minimum essential coverage.
Temporary policies don’t have to cover the ten essential services set forth by the ACA. If you apply for a short-term plan, the insurance company can deny coverage based on illness or pre-existing conditions. You can also be dropped from the plan, and you waive a lot of the rights that people with major medical plans enjoy today.
Most important, your short-term policy does not protect you against the yearly tax penalty for skipping out on health insurance. This year, the taxes went into effect, and people without coverage in 2014 had to pay the greater of $95 or 1 percent of their taxable income to the IRS on top of anything else they owed. When you file your 2015 federal income taxes, you’ll pay 2 percent or $325, whichever is greater if you were uninsured for the 2015 calendar year. The fee increases every year. On top of the fact that your short-term policy won’t cover many of the basic services that a major medical plan covers, you’ll owe the government extra money for failing to buy qualifying health insurance.
Knowing the Facts
In short, you will be taxed the ACA penalty fee for non-compliance even if you sign up for a short-term health plan. This might sound straightforward, but some people remain confused about the new law partially due to misleading claims made by insurance companies that offer STHPs. According to a survey conducted by eHealth and reported on by Bloomberg Business, about 20 percent of those who responded thought that an STHP would meet the ACA requirement for coverage. The survey also found that another 64 percent of respondents didn’t know for sure.
No matter how great the short-term policy seems, you need to know that these plans will not prevent you from getting taxed under the ACA. Temporary policies come in handy when you need limited coverage for a short period, but they’re not created to replace major medical insurance. Before you sign up, read the fine print carefully and understand the caveats.