Minimum Essential Coverage

What Is Minimum Essential Coverage?

Minimum essential coverage is a type of health insurance policy an individual needed to meet the shared responsibility provision under the Patient Protection and Affordable Care Act (ACA). Individuals who lacked minimum essential coverage previously were hit with a financial penalty. The Tax Cuts and Jobs Act passed in 2017 removed that penalty and buying health insurance is no longer mandatory at the federal level.

Most states followed suit. However, Massachusetts, New Jersey, Vermont, California, Rhode Island, and the District of Columbia continue to penalize residents who lack health insurance coverage under individual mandate laws.

Understanding Minimum Essential Coverage

You are considered to have minimum essential coverage if you have:

Employees of businesses whose employer-sponsored plans fail to meet minimum value criteria specified in the individual mandate can apply for a premium subsidy at state-run exchanges. Coverage only for vision or dental care, workers’ compensation, coverage for a specific disease or condition, and plans that solely offer discounts on medical services do not count as minimum essential coverage under the ACA.4

Marketplace Plans

Individuals who lack minimum essential coverage may have to pay a penalty if they live in Massachusetts, New Jersey, Vermont, California, Rhode Island, and the District of Columbia.

However, people earning limited incomes may be exempt from the fee. For example, you may not have to pay if you are uninsured for less than three months of the year, the lowest-priced coverage available to you costs more than 8.09% of your household income, or if you are not required to file a tax return because your income is too low. There are other exemptions, including hardship exemptions (for example, if you are homeless or facing foreclosure).

Some products that help pay for medical services don’t qualify, according to the Internal Revenue Service. Examples include:

  • Coverage only for vision care or dental care
  • Workers’ compensation
  • Accident or disability insurance
  • Some Medicaid plans7

Beginning in the 2019 tax year, tax payers will no longer be required to pay a penalty if they lack minimum essential coverage. For prior tax years, penalties were calculated in two ways. In the percentage method, only the part of your household income that’s above the yearly tax filing requirement is counted. In the per-person method, you pay only for people in your household who don’t have insurance coverage. If you had coverage for part of the year, the fee is 1/12 of the annual amount for each month you (or your tax dependents) don’t have coverage. If you’re uncovered only 1 or 2 months, you don’t have to pay the fee at all.

Example of Minimum Essential Coverage

Ryan lives in New York and his employer provides health insurance coverage that satisfies minimum essential coverage requirements as defined in ACA. He is laid off in 2019 and loses the coverage. New York does not have a tax penalty associated with the individual mandate. Even though he is not able to find another job, Ryan does not have to pay tax penalty for absence of coverage.

Raul has a similar situation in California. He has also been laid off and lost health insurance coverage. But he manages to find a job in the next three months. California has a tax penalty associated with individual mandate and Raul could be on the hook for it. But Raul applies for and is granted short gap exemption and escapes penalty payment.