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How the feds will know if you have health insurance

The Patient Protection and Affordable Care Act will require most Americans to have health insurance.

That means unless you qualify for an exemption under the law, you have to buy a health plan if you don't already have one through work, a government program (such as Medicare or Medicaid) or an individual health plan. If you meet certain income requirements, you could get a tax credit to help you afford coverage.

But how does the government know if you have health insurance -- and how much of a penalty do you pay if you don't?

Reporting health insurance coverage

The health insurance coverage you have during the year will be reported to the federal government when you file your annual taxes. Health insurers, employers that sponsor health plans and agencies that administer government health plans will file annual reports to the IRS about who is covered under their plans. They also provide the people they insure with documentation about the coverage.

When you file your tax return for the previous year, you will report whether you and your family members had health insurance coverage.

If you did not have health insurance and also are not exempt from the mandate, you will pay a tax penalty.

The first year the law went into effect, the penalty was relatively small, but it will grow each year according to cost-of-living adjustment. In 2016, the penalty is $695 per person or $2,085 per family of three or more, or 2.5 percent of income, whichever was greater.

Sutton says the penalty will be subtracted from your income tax refund. If you do not get a refund, the penalty likely will be subtracted from any future refund the government owes you.

Carrot-and-stick approach

"The mandate comes in a carrot and stick format," says Steven Zaleznick, executive director for consumer strategy for HealthPocket, a Sunnyvale, Calif.-based company that compares and ranks health plans.

The "carrots" include the tax credits that will help moderate-income Americans afford health insurance as well as the numerous consumer protections provided under the Affordable Care Act. Starting in 2014, health insurers were no longer allowed to charge higher premiums for or reject applicants with health conditions.

Click here to read the most recent information on open enrollment dates, coverages, tax credits and penalties.

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