How can I avoid paying ACA penalty?


Editorial team Published on

The federal individual mandate penalty was eliminated at the end of 2018, meaning there is no longer a federal tax penalty for lacking health insurance. However, how you avoid penalties depends on whether you mean an individual state mandate or an employer penalty:

1. Avoiding State-Level Individual Mandates (If You Live in Certain States)

While the federal penalty is $0, several states and Washington, D.C., have active individual mandate laws and assess state-level tax penalties if you go without coverage:

  • States with penalties: California, Massachusetts, New Jersey, Rhode Island, and the District of Columbia.
  • How to avoid the state penalty:
    • Maintain Minimum Essential Coverage (MEC) through an employer, Medicare, Medicaid, CHIP, or a state Marketplace plan.
    • Qualify for a short-term gap exemption (typically lasting less than 3 consecutive months).
    • Apply for a formal hardship or affordability exemption through your state’s health connector or state tax return if the lowest-cost plan exceeds a set percentage of your income.

2. Avoiding Employer "Pay-or-Play" Penalties (If You Are a Business Owner)

If you are an Applicable Large Employer (ALE)—generally meaning you have 50 or more full-time equivalent employees—you can avoid ACA employer penalties by:

  • Offering Minimum Essential Coverage (MEC): Cover at least 95% of your full-time employees and their dependents.
  • Meeting Minimum Value (MV): Ensure the plan pays for at least 60% of total allowed medical costs (equivalent to a Bronze-level plan or higher).
  • Satisfying Affordability: Ensure the employee's cost for self-only coverage does not exceed the IRS annual affordability threshold (e.g., 9.02% of income for 2025), using a recognized safe harbor (W-2, rate of pay, or federal poverty level).
  • Accurate IRS Reporting: Timely and accurately file Forms 1094-C and 1095-C with correct codes on Lines 14 through 16 to prevent IRS Letter 226J penalty assessments.

3. Avoiding Advance Premium Tax Credit (APTC) Repayments

If you buy your individual insurance through the HealthCare.gov Marketplace and receive monthly subsidies (APTC), you can avoid having to pay back excess credits at tax time by:

  • Accurately projecting your household income when you enroll.
  • Reporting mid-year life or income changes (such as a new job, salary increase, or transition to employer coverage) immediately to your Marketplace account.