How long can I be uninsured before I have to pay the individual mandate penalty?

Q. I know that the individual mandate allows for a gap in coverage as long as it’s less than three months in a year. But what if I have two gaps that are each just a month long? Or what if I’m uninsured for the last two months of one year and also the first two months of the following year?

The Insider’s Guide to Obamacare’s Open Enrollment offers time-saving strategies for selecting coverage during open enrollment.

A. There are several things to understand about the penalty exemption:

• It applies only to the first short gap in coverage during the year.
• The gap in coverage has to be less than three months in duration. If you’re uninsured for three or more months, you’ll pay a penalty for the full duration of the gap.
• People who become uninsured as of January 1, 2018 and enroll on March 1, 2018 (using a special enrollment period triggered by loss of coverage at the end of 2017) will face a penalty, as they will be uninsured for three months.
• If you’re insured for even a single day of a given month, you’re considered insured for that month.
• It’s very unlikely that you’ll be able to obtain a health insurance plan with a start date of anything other than the first of the month, or that you’ll be able to terminate a plan on anything other than the last day of a month.
• The IRS has addressed the possibility of a gap in coverage that spans two calendar years.

There is a long list of exemptions from the ACA’s individual mandate penalty. In fact, while about 6.5 million tax filers reported an individual mandate penalty on their 2015 tax returns, there were another 12.7 million tax filers who, despite being uninsured for at least a portion of 2015, were not assessed a penalty because they claimed an exemption instead.

One of the exemptions applies to people who experience a single short gap in coverage during the year. Let’s take a look at how this works.

Yes, there is still a penalty for being uninsured in 2018

The GOP tax bill (H.R.1) that was enacted in December 2017 will repeal the individual mandate penalty starting in 2019. But the penalty remains in place in 2018. People who are uninsured in 2018 for three or more months will face a penalty when they file their 2018 tax returns in early 2019.

Only the first gap is exempt

The exemption for a short gap in coverage seems fairly obvious at first glance, but it has some nuances that might not be readily apparent. For example, a person who is uninsured for June and July (but insured for all other months of the year) would not face a penalty, because there is just one short gap in coverage, with a duration of under three months. But a person who is uninsured in June and again in September (but insured for all other months of the year) would face a penalty for September (one-twelfth of the annual penalty amount), because only the first short gap in coverage (in this case, June) is exempt from the penalty. September would be a second gap, which is not exempt.

Three-month gap = penalty for all three months

If the gap in coverage is one or two calendar months, it’s exempt. But if it’s three calendar months, there’s no exemption, and you’ll pay a penalty for each month you were uninsured. So a three-month gap in coverage would result in a penalty equal to one-quarter (3/12) of the total annual penalty. You do not get an exemption for the first two months of the gap if the gap extends to three months or longer.

Got a special enrollment period through March 1? Pay attention to effective date rules

If your health insurer exits the market or otherwise terminates your coverage (for example, eliminates all PPO plans and replaces them with HMOs), you’re eligible for a special enrollment period (SEP) during which you can pick a new plan. The special enrollment period continues for 60 days after the loss of your old plan, and applies to people in numerous states who lost coverage at the end of 2017.

For people who lost coverage on December 31, 2017, the special enrollment period continues until March 1, 2018. This is a significant benefit, given that general open enrollment ended on December 15, 2017 in most states — these individuals have an extra two and a half months to pick a new plan. But it’s important to understand how the effective date rules work during the SEP for loss of coverage. The rules are outlined in CFR 155.420 (b)(2)(iv): Basically, if you picked a new plan on or before December 31, 2017, the new plan took effect January 1. But if you pick your new plan on January 1 or later, the exchange has the option of using regular effective date rules (ie, enroll by the 15th to get a plan effective the first of the following month) OR granting a first of the following month effective date, regardless of the date you apply.

So for people who are enrolling in January, February, or on March 1 as a result of a loss of coverage that occured on December 31, effective dates can be February 1, March 1, or April 1. If they had a plan in the exchange and were mapped to a new plan by the exchange, the plan that the exchange picked will cover them until their own selection takes effect. But for people who had off-exchange coverage that terminated, leaving them uninsured on January 1, they will have a gap in coverage if they didn’t pick their replacement plan by December 31.

The gap in coverage will qualify for the short gap exemption as long as they sign up for a new plan by February 15, since coverage will take effect March 1 (leaving them with a two-month gap in coverage). And depending on the exchange, they may be able to sign up as late as February 28 and still get a March 1 effective date, if the exchange chooses to grant a first of the month effective date. But anyone who is uninsured at the start of the year and waits until March 1 to pick a new plan will end up with a three-month gap in coverage, since the effective date of the new plan will be April 1. People in that situation will face a penalty equal to one-quarter of the total penalty for 2018 (assuming they maintain coverage for the remainder of the year), since they’ll be uninsured for three of the 12 months.

Being insured for one day = being insured for the whole month … but partial month coverage is rare

If you’re uninsured for most of a month but have minimum essential coverage for at least one day of the month, you’re considered insured for that month. But planning to obtain coverage for just a few days of a given month in order to qualify for the short gap exemption is unlikely to work. That’s because it’s virtually impossible to have a health plan end on any day other than the last day of the month, or to have a new plan start on any day other than the first day of the month.

Mid-month plan terminations do sometimes happen with loss of employer-sponsored coverage (a lay-off in the middle of the month with immediately terminated benefits, for example), but that’s rare — benefits typically continue until the end of the month. And there is no provision in the ACA-compliant individual market (on or off-exchange) for plans to end any day other than the last day of the month.

Similarly, virtually all new plans will have first-of-the-month effective dates. The only exception to this in the individual market is for a new baby or adopted child, with coverage backdated to the date of birth or adoption; otherwise, all plans are effective on the first of a given month. Plans that aren’t minimum essential coverage — like short-term health insurance, for example — often allow applicants to pick any start date they like, but obtaining coverage under these plans does not meet the individual mandate requirements.

So it would be unwise to have two full months without coverage and plan to obtain coverage mid-way through the third month. If you’re able to obtain coverage at all at that point (assuming you have access to a special enrollment period, for example), your new coverage won’t start until the first day of the fourth month — at the earliest — leaving you with a three-month gap and a penalty for all three months.

What if you’re uninsured November through February?

What if you’re uninsured in November, December, January, and February? (A total of four months, but only two in each calendar year?) You would be assessed a penalty for being uninsured in the second year, but not in the first. (More details in this document on page 53654.)

The end date of a period without health coverage is never later than December 31, even if you remain uninsured after that date. So for the first year, your uninsured period would be counted as two months (November and December) and would be exempt from the shared responsibility provision because it’s less than three months.

But the start date for an uninsured period begins when you become uninsured, even if that date is prior to January 1. So for the second year, your uninsured window would be counted from November of the prior year, and would include a four-month period.  Thus, you would not qualify for the exemption for a short gap in coverage.  However, your prorated penalty for the second tax year would only apply to January and February, since November and December were in a prior tax year.  Thus, your penalty would be one-sixth of the total penalty you would have paid if you had been uninsured for the full year (you can use this penalty calculator to get specific numbers).

The purpose of the shared responsibility provision – or individual mandate – is to make sure that as many people as possible are in the health insurance pool at all times, and to avoid the adverse selection that would arise if people waited to enroll in a health plan until they were in need of care (open enrollment windows are the other mechanism that prevents adverse selection). From that perspective, a four-month gap in coverage is deleterious to the overall risk pool, regardless of when it occurs during the year.

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