5 Steps to Understanding Obamacare's Penalty for the Uninsured

PHOTO: A Florida woman looks to purchase an insurance policy under the Affordable Care Act at the store setup in the Westland Mall in Hialeah, Fla., Nov. 14, 2013.
Joe Raedle/Getty Images

You may feel overwhelmed with the daily stories about Obamacare and it's online insurance shopping portal, Healthcare.gov. If you're one of 48 million Americans without health insurance, you not only have the challenge of understanding what the law means for individuals: you'll also face the important decision of purchasing insurance or paying a tax penalty. These five steps will help you better understand the penalty and your options.

1.
Not everyone is subject to the individual mandate

You have likely heard that Obamacare imposes an individual mandate, which means that just about everyone is required to have health insurance starting in 2014. There are, however, exceptions to this rule. The individual mandate doesn't apply to incarcerated individuals or to undocumented immigrants. Additionally, you're not required to obtain coverage if buying health insurance poses a severe economic hardship, in which premiums are greater than 8 percent of your income. If you're a member of an American Indian tribe or if you belong to a religious group that opposes healthcare, you are also not required to buy coverage.

Read More: 3 Guys, 3 Days to Build a Better Obamacare Website

2.
If you're purchasing a new plan, make sure it qualifies

If you're part of the group required to have coverage and you're planning to purchase a plan and therefore avoid the penalty, you must obtain a health plan that provides "minimum essential coverage." Qualifying plans provide essential health benefits, such as ambulatory service, hospitalization, maternity/newborn care, laboratory tests and preventative care. All new plans in the insurance marketplaces include these benefits, so you can avoid ending up with a non-qualified plan by purchasing through a marketplace. If you'd rather shop outside the marketplace, be sure to select a qualifying plan—you'll be subject to the penalty if you don't.

3.
The penalty starts low, but gets increasingly more expensive

Anyone can choose to pay the yearly penalty for being uninsured—the amount will be withheld from your tax return. The penalty is a flat fee per adult or a percentage of household income, whichever is greater; the penalty per uninsured child is half the adult penalty. In 2014, the penalty is just $95 per adult, but this quickly escalades to $695 in 2016. Individuals with higher incomes may be subject to higher fines. Calculating the tax penalty for your family is fairly straightforward, and you should do so before making the decision of whether to get insured.

You can decrease your penalty by having coverage for part of the year: the penalty will be prorated if this is the case. In addition, you are permitted to go without coverage for a three-month period before being liable for the penalty.

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4.
Purchasing insurance to avoid the penalty? Monthly premiums won't be your only costs

If you do purchase insurance, preventative care for many conditions will be free. But since many Obamacare plans have deductibles (which can be as high as $6,350) your yearly out-of-pocket costs may skyrocket if you end up needing expensive care. Given the cost of care even for the insured, paying the penalty may make the most financial sense. Before deciding, however, be sure to weigh both the financial and practical implications of both options.

Read More: Healthcare.gov Enrollment Falls Far Short of Expectations, Only 26,794 Sign Up

5.
The penalty isn't the only cost of being uninsured

If you're learning toward paying the penalty, you should keep in mind that you're likely to have other out-of-pocket health costs throughout the year. The average out-of-pocket healthcare spending per capita is nearly $1,000 a year, according the U.S. Department of Health and Human Services. This might be less if you're healthy, but emergency care is notorious for adding up quickly—and getting insured can help to decrease your financial burden in case of emergency.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Napala Pratini writes for NerdWallet Health. Learn more about affordable coverage on the Obamacare insurance page.

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