What Are Health Coverage Exemption Codes Used For?

Health coverage exemption codes are specific identifiers used on tax forms to show why a person did not have health insurance for a period and should not pay a penalty. These codes originated with the federal Affordable Care Act (ACA), which included a provision known as the individual shared responsibility payment, a tax penalty for not maintaining health coverage. While this federal penalty was eliminated, the system of exemptions and their codes remains relevant.

The continued use of these codes is a direct result of some states creating their own health insurance mandates. For residents in these jurisdictions, failing to have qualifying health coverage can lead to a state-level tax penalty. Therefore, understanding and correctly using exemption codes is how certain taxpayers can avoid financial penalties on their state tax returns.

Federal vs. State Individual Mandates

The Tax Cuts and Jobs Act of 2017 reduced the individual shared responsibility payment to zero dollars, effective for the 2019 tax year and beyond. As a result, for federal income tax purposes, most taxpayers no longer need to report whether they have health coverage, claim an exemption, or pay a penalty for being uninsured when filing their Form 1040.

In response to this federal change, a handful of jurisdictions enacted their own individual mandates to encourage residents to maintain health coverage. These state-level laws require individuals to have qualifying health insurance for themselves and their dependents for each month of the year or face a penalty on their state tax return. As of the 2025 tax year, the jurisdictions with their own individual health insurance mandates and associated penalties are:

• California
• District of Columbia
• Massachusetts
• New Jersey
• Rhode Island

Vermont also has a mandate, but it currently does not impose a financial penalty for non-compliance. For residents of these specific areas, the state tax filing process now includes reporting coverage status and, if uninsured, claiming a valid exemption to avoid a penalty.

Qualifying for a Health Coverage Exemption

Qualifying for a health coverage exemption depends on your specific life circumstances. One of the most common reasons is related to income. If your household income is below the threshold that requires you to file a state tax return, you are exempt from the mandate. Another income-related exemption is for unaffordable coverage, which applies if the lowest-cost Bronze plan or employer-sponsored plan would cost more than a set percentage of your household income.

A short gap in coverage is another frequent exemption. Individuals who are uninsured for a period of less than three consecutive months during the year can claim this exemption. For example, if you lose a job and are without insurance for January and February but secure new coverage that begins in March, you would qualify. However, if the gap extends to three full months or more, this exemption cannot be claimed for any of those months.

Hardship exemptions cover a wide range of difficult life events that can prevent someone from affording or obtaining coverage. These can include situations such as homelessness, eviction, receiving a utility shut-off notice, bankruptcy, or being a survivor of domestic violence. Other qualifying hardships include the death of a close family member or substantial property damage from a natural disaster.

Membership in certain groups also provides a basis for an exemption. This includes members of a federally recognized Native American tribe or individuals eligible for services through an Indian health care provider. Members of a recognized health care sharing ministry are also exempt, as are members of a recognized religious sect with established objections to accepting insurance benefits.

Finally, exemptions are available for individuals in specific situations related to their legal status or location. Those who are incarcerated are exempt from the coverage requirement, as are individuals who are not lawfully present in the United States.

How to Claim an Exemption on Your Tax Return

Once you determine you qualify for an exemption, you must report it correctly on your state income tax return to avoid a penalty. This process involves using specific state-level tax forms, not the federal Form 1040. Each state with a mandate has its own unique forms and procedures.

For California residents, exemptions are claimed on Form 3853, Health Coverage Exemptions and Individual Shared Responsibility Penalty. New Jersey taxpayers use Schedule NJ-HCI, Massachusetts residents use Schedule HC, and Rhode Island reports on Schedule H. For the District of Columbia, taxpayers use Schedule HSR. On these forms, you will enter a specific letter code that corresponds to your reason for exemption.

Some exemptions, particularly certain hardship cases, require you to first apply for and receive an Exemption Certificate Number (ECN) from the Health Insurance Marketplace. When filling out your state tax form, you will enter this ECN in the specified field instead of a letter code. This number serves as proof to the state tax agency that your hardship claim has been reviewed and approved.