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Feb 17, 6:01 PM EST

Correction: Health Overhaul-Penalties story

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FORT WORTH, Texas (AP) -- In a story Feb. 14 about tax penalties assessed on those without health insurance, The Associated Press reported erroneously that taxpayers must apply for health insurance through the federal exchange and Medicaid before seeking an exemption. Eligible taxpayers may file for the exemption without first applying for health coverage.

A corrected version of the story is below:

Millions in health coverage gap seek to avoid tax penalty

HealthCare.gov enrollment aides scramble to help those in coverage gap avoid federal penalty

By EMILY SCHMALL

Associated Press

FORT WORTH, Texas (AP) - Stephanie Daugherty earns too much from her part-time job at a doctor's office to qualify for Medicaid, but not enough to comfortably afford one of the health plans for sale through the federally-run insurance exchange that Texas and many states use.

So the 26-year-old nursing student and mother paid a $180 tax penalty - 1 percent of her annual income - to spend another year uninsured.

"I just figured it was cheaper than signing up for health insurance," said Daugherty, whose 4-year-old son is covered by Medicaid and who limits doctor visits to an annual exam at a Planned Parenthood clinic.

With Sunday's deadline to enroll through the exchange looming, Daugherty met with an exchange adviser, or navigator, at her Fort Worth community college to see if she might qualify for federal subsidies. She doesn't, but she also learned she may not have had to pay the penalty, after all.

Daugherty and millions of other low-income, working adults who fall into a so-called coverage gap - ineligible for either federal subsidies or Medicaid - may qualify for an exemption to the penalty. In Texas and nearly two dozen other conservative states that chose not to expand their Medicaid coverage under the federal health care overhaul, nonprofit groups and volunteer tax advisers are trying to help people avoid the penalty for not having insurance.

"If the people who can't afford the federal marketplace pay the penalty, that's like being hit twice," said Mimi Garcia, Texas director of Enroll America. Garcia said she advises navigators to make sure that people who can't even afford the marketplace's cheapest plans file for an exemption on their tax returns this year.

Texas has the nation's highest uninsured rate and more residents who fall into the coverage gap than any other state. About a million uninsured low-income working adults in Texas will be exempt from paying the penalty, according to U.S. Department of Health and Human Services Regional Director Marjorie Petty.

Nationally, about 4 million people fall into the coverage gap, according to the Kaiser Foundation.

The hole has become so noticeable that the Internal Revenue Service on Monday issued a form for taxpayers in the 22 states that didn't expand Medicaid to claim an exemption if their household income is equal to or less than 138 percent of the federal poverty level, or about $16,104 for an individual or $32,913 for a four-person household. Undocumented immigrants, prisoners and members of Indian tribes are also exempt.

To avoid the federal tax penalty, eligible taxpayers may file for an exemption on their tax forms.

The Affordable Care Act "was written assuming states were going to expand Medicaid. Now we have a situation where we have some states that did not expand it and their residents are left in this gap," said Cheryl Parcham, the private insurance director of Washington, D.C.-based nonprofit Families USA.

The Supreme Court ruled in 2012 that Congress cannot force states to expand their Medicaid programs.

Jill Hanken, the director of HealthCare.gov enrollment at the Virginia Poverty Law Center, said groups like hers are communicating with volunteer tax preparers in the state to help get the word out that people who fall into the gap may be exempt from the penalty.

"It's a real problem in all the non-expansion states, so we're trying to provide the best information we can," she said.

The penalty will rise to either 2 percent of income or $325, whichever is higher, for individuals this year, and 2.5 percent or $695 in 2016.

The Treasury estimates that between 10 and 20 percent of taxpayers nationwide will file for an exemption from the penalty on their 2014 tax returns.

The exemptions will stay in place as the rollout of the health care law continues, Petty said.

"People going online to try to do this, they're running blind," said Brendan Riley, a navigator in Raleigh, N.C.

Opponents of the health care law are taking a case to the Supreme Court next month that challenges the validity of the law's subsidies in states that have not set up their own insurance markets, which is most of them.

If the court agrees with the plaintiffs, at least 6.5 million people will lose subsidies for their premiums and other costs. Most would drop coverage.

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