Who Qualifies for a Health Coverage Exemption?

A health coverage exemption is an official exception that relieves an individual from the requirement to maintain qualifying health insurance, thereby avoiding a potential tax penalty. The federal penalty associated with the Affordable Care Act (ACA) was reduced to zero starting in 2019, meaning there is no longer a federal financial consequence for not having health coverage. However, a handful of states have since enacted their own individual health insurance mandates, complete with financial penalties for residents who fail to secure coverage, which means that whether you need to seek an exemption depends on the state where you reside.

State-Level Health Coverage Mandates

Following the federal change, several states established their own health insurance requirements. These mandates mean that residents of these jurisdictions must have qualifying health coverage for themselves, their spouses or domestic partners, and their dependents for each month of the year. Failure to do so can result in a penalty on their state income tax returns, unless they qualify for an exemption.

The states that have implemented their own individual mandates include Massachusetts, New Jersey, California, Rhode Island, and the District of Columbia. Each of these jurisdictions has a unique penalty structure, often calculated based on the number of months an individual was uninsured and tied to factors like income and the cost of available insurance plans.

Categories of Coverage Exemptions

For residents in states with active mandates, several categories of exemptions are available to avoid the tax penalty. These exemptions recognize that for some individuals, obtaining health coverage is not feasible due to financial constraints, specific life circumstances, or other factors. The exemptions are grouped into categories based on the reason for not having coverage.

Income-Based Exemptions

One common income-based exemption applies if your income is below the tax-filing threshold for your state, meaning you are not required to file a state tax return. Another exemption is for unaffordable coverage. This applies if the lowest-cost health plan available to you, either through an employer or the state’s marketplace, would cost more than a specific percentage of your household income, a threshold that changes annually.

Hardship Exemptions

Hardship exemptions cover various difficult life events that may prevent someone from maintaining health coverage. Qualifying hardships include situations such as homelessness, receiving an eviction or foreclosure notice, or receiving a shut-off notice from a utility company. Other recognized hardships can include filing for bankruptcy, experiencing a natural disaster that resulted in significant property damage, or the death of a close family member.

Group Membership Exemptions

Exemptions are tied to membership in specific, recognized groups. Members of federally recognized Native American tribes are eligible for an exemption from state-level mandates. Another group-based exemption is available for individuals who are members of a recognized health care sharing ministry, which are faith-based organizations where members share medical expenses among themselves as an alternative to traditional health insurance.

Other Common Exemptions

Several other specific situations can qualify an individual for an exemption. A short gap in coverage is a frequent reason; if you lack insurance for less than three consecutive months during the tax year, you can claim an exemption for that period. Individuals who are incarcerated are also exempt from the mandate, as are those living abroad.

Information and Documentation Needed to Claim an Exemption

To claim an exemption, you must provide specific documentation to your state’s tax authority as proof of eligibility. The required evidence directly corresponds to the type of exemption being claimed.

For income-based exemptions, you will need documents that establish your household income, such as final pay stubs, W-2 forms, or a completed federal tax return. You may also need information from your state’s health insurance marketplace detailing the cost of available plans. For hardship exemptions, the documentation must substantiate the specific event, such as an eviction notice from a landlord, court filings for bankruptcy, insurance claim forms related to a natural disaster, or copies of utility shut-off notices.

If claiming an exemption based on group membership, you will need official confirmation of your affiliation. Members of a federally recognized tribe need a tribal membership card or other official tribal document. Those in a health care sharing ministry need an official letter from the ministry confirming membership for the tax year. The specific form used to report this information varies by state, such as California’s Form 3853 or Massachusetts’ Schedule HC.

How to Claim an Exemption on Your State Tax Return

You must formally claim an exemption on your annual state income tax return. This process involves attaching the specific state form or schedule for health coverage reporting to your main return. On this form, you will enter a code corresponding to your specific exemption type for each month you were uninsured.

The submission method depends on how you file. If filing a paper return, you will physically attach the completed exemption form to your state tax return, placing it in the order instructed by the state tax agency. For those who file electronically, tax software will guide you through a dedicated section for health coverage, prompting you to enter the details of your exemption and populating the necessary forms.

After you file, the state tax agency will process your return. The agency may send a follow-up letter requesting additional documentation or clarification if there are questions about your eligibility. Responding promptly to any such requests will help ensure your claim is approved.