Individual Shared Responsibility (ISR) Penalty, CA Form 540, Page 3, line 92

  • California’s Individual Healthcare Mandate began with 2020. All California residents and their dependents are required to have health insurance the entire year. Failure to do so could result in a penalty up to the greater of:
    • $900 per adult plus $450 per minor dependent
    • 2.5% of income over the CA filing threshold
  • If a taxpayer didn’t have health insurance for at least one day in every month for each person on their tax return and for anyone else they could have claimed as a dependent, then they’re required by CA law to include FTB Form 3853 Health Coverage Exemptions and Individual Shared Responsibility Penalty Form with their CA return. Taxpayers cannot escape the ISR penalty by choosing not to claim a dependent, so it almost always makes sense for them to claim all possible dependents on both federal and CA returns, as dependent credits (federal) and personal exemptions (CA) offset at least some of the ISR penalty. If a taxpayer refuses to claim a dependent on their California return for whom they would owe the Individual Shared Responsibility penalty, then the return is out-of-scope.
    • Additional guides to the CA shared responsibility penalty, with examples, can be found in the shared CA-wide REFERENCES folder (tiny.cc/ca-ref).
  • TaxSlayer automatically adds Form 3853 to the CA return if you answer “No” to “Did the Taxpayer have Full year minimum essential health care coverage for all members of the household?” during the initial return setup. It can also be added or removed later by navigating to [State Section > California Return > Health Care Shared Responsibility Tax (Form 3853)] and changing the answer to the insurance question at the top of the page.

Note for CA returns: TaxSlayer defaults the health insurance question to “No”, so forgetting to change this answer to “Yes” incorrectly assesses the penalty for insured families. Quality reviewers should always verify that the CA return correctly includes or excludes Form 3853.

  • If taxpayer income is below the CA filing threshold, the penalty is $0 but Form 3853 must still be filed.
  • The maximum penalty is assessed if no members of the taxpayer’s household had insurance at all.
  • TaxSlayer automatically handles the cases where the minimum ($0) or maximum penalty is assessed, as long as the health insurance question is answered correctly. 
  • Employer coverage affordability calculator: https://www.coveredca.com/learning-center/employer-sponsored-coverage/employer-coverage-and-financial-help/
  • The exemptions listed below provide relief for some or all of the penalty if anyone in the taxpayer’s household qualifies for one or more of them.
    • Tip: Before entering any exemptions, it’s useful to generate a PDF of the CA return to see Form 3853:  use the printer icon on the State Section page. If the checkbox in part II at the bottom of page 1 of the form is checked, then TaxSlayer has determined that the taxpayer is exempt from the penalty and there’s no need to do any more work in this section of the return.
  • Exemptions. After verifying that Form 3853 shows a penalty is due, determine if any exemptions in this table are applicable for any part of the year.  Exemptions are determined on a monthly basis, and except for C (short coverage gap) can be applied to multiple discrete periods.


Coverage Exemption

Exemption Code on 3853

Individual has coverage for at least one day of the month

Z

Individual has a certificate issued by Covered California conferring an exemption for:

  • General hardship
  • Members of certain religious sects
  • Coverage considered unaffordable based on projected income



K

L

M

Short coverage gap of 3 months or less. Only the first gap of the year can be used, and it can’t be greater than 3 months total, including the final months of the prior year. Example: if the coverage gap ran from November 2023 to February 2024, then January and February do not qualify for the exemption on the 2024 tax return since the entire gap is four months. This does not apply if the gap extends into the following tax year. In the example above, November and December would still qualify for the exemption on the 2023 return.


C

Citizens living abroad and certain noncitizens — return is out-of-scope if not filing a full-year resident return for California.

  • A U.S. citizen or a resident alien who was physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months; 
  • A U.S. citizen who was a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year; 
  • A bona fide resident of a U.S. territory; or 
  • An individual who is not a citizen or national of the United States and is not lawfully present in the United States for that month.






D

Nonresident of California/Part-year resident of another state – in-scope only for dependents; don’t use for a full-year resident taxpayer or spouse.

E

Members of a healthcare sharing ministry

F

Members of Indian tribes eligible for services through an Indian healthcare provider or the Indian Health Service.


G

Incarceration

H

Member of applicable household born or adopted during the year.

Member of applicable household died during the year.

Note: these two codes are only used when filing Form 3853 for other reasons. If everyone in the household had health insurance for all months they were alive, don’t file Form 3853. These codes are to create an exemption and avoid penalty for any months the individual was not alive or not a member of the household.

I

J

Certain Medi-Cal (Medicaid) programs that are not minimum essential coverage are exempt from the ISR penalty – some Medi-Cal programs are restricted in scope or don’t provide coverage until the client pays a share of the cost.


N

Coverage considered unaffordable – employer coverage for an individual that costs more than 7.97% of the household’s income is considered unaffordable.


A

Aggregate coverage considered unaffordable – if two or more members of the household have employer offers of coverage and the total cost is greater than 7.97% of the household’s income, coverage is considered unaffordable.


B

Enter any exemptions that apply in [State Section > California Return > Health Care Shared Responsibility Tax (Form 3853) > Part III – Coverage Exemptions]. Add an exemption record for each household member, even if that person has no exemptions, and select the relevant choices for the year or for each month.

  • If exemption records were created for the household, then Shared Responsibility Payment records must also be created and completed for each person in the household in [State Section > California Return > Health Care Shared Responsibility Tax (Form 3853) > Shared Responsibility Payment]. If any dependents had a California filing requirement because their income exceeded their filing threshold, enter their income in this screen. Don’t enter income for dependents whose income is below the filing threshold if they filed a return only to claim a refund of CA tax withholding. See 2023 Instructions for California Form 3853 Health Coverage Exemptions and Individual Shared Responsibility Penalty for more details on filing requirements.

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