1. Money

Discuss in my forum

William Perez

Tax Impacts of the Supreme Court's Health Care Decision

By July 3, 2012

Follow me on:

The Supreme Court on June 28, 2012, decided that the Patient Protection and Affordable Care Act was constitutional.

I'm sure you've all read about this in the news. Now that a few days have past, we can digest some of the details of the high court's decision.

The Patient Protection and Affordable Care Act (PPACA) and its companion legislation, the Health Care and Education Reconciliation Act, was enacted back in March 2010. Together, these two laws brought about a wide variety of tax incentives impacting individuals and businesses and outlined a path to reform of the healthcare sector.

One of the most controversial of the tax provisions was the requirement for individual persons to obtain health insurance coverage beginning in the year 2014 or else pay a "shared responsibility penalty," unless the person was exempt from the individual mandate. In the case National Federation of Independent Businesses, el al., v. Sebelius, the Supreme Court was asked to decide on four questions:

  1. "on whether the Anti-Injunction Act (Code Sec. 7421) applies,
  2. "whether the individual mandate (Code Sec. 5000A) is a proper exercise of Congress' taxing power or its power under the Constitution's Commerce or Necessary and Proper Clauses; and
  3. "whether the PPACA's expansion of Medicaid exceeds the government's spending authority" (quoting from the CCH Tax Briefing: Supreme Court Upholds Health Care Law, p 1, hyperlinks added); and finally,
  4. Whether the individual mandate, if it was unconstitutional, could be separated from the rest of the legislation. (This was made clear to me by Kelly Phillips Erb's article in Forbes.)

The Court, in a majority of 5 in favor to 4 against, decided

  1. the Anti-Injunction Act (IRC section 7421) does not apply;
  2. the individual mandate is properly legislated under the taxing power granted to Congress, (but not under the Commerce Clause);
  3. the expansion of Medicaid is proper, but that the federal government cannot penalize states that choose not to participate in the program's expansion by withholding existing Medicaid funding;
  4. the decision over whether the remainder of the PPACA could stand separated from the individual mandate was rendered a moot question since the mandate was found constitutional.

For more about the Supreme Court decision, see How the Justices Ruled (NYT), and the extensive media round-ups gathered by tax law professor Paul Caron in his posts on The Affordable Care Act and the Taxing Power, and More on the Affordable Care Act and the Taxing Power. Kelly Phillips Erb's article (linked to above) was the best and most informative of the articles I read about this court case.

The Supreme Court's decision leaves all the tax provisions in PPACA intact. Those tax provisions include:

  • the requirement for individuals to maintain health insurance coverage beginning in 2014 or else pay a tax penalty;
  • individual premium assistance tax credits to help low- and middle-income families purchase health insurance on state-run insurance exchanges;
  • an increase in the threshold for deducting medical expenses as an itemized deduction from the current 7.5% to 10% starting in 2013;
  • an increase in the tax penalty to 20% for non-qualifying distributions from Health Savings Accounts, Flexible Spending Accounts or Archer Medical Savings Accounts;
  • an additional 0.9% Medicare hospital insurance tax on wages and self-employment income over $200,000 for unmarried persons and over $250,000 for married couples starting in 2013;
  • an additional 3.8% Medicare hospital insurance tax, also starting in 2013, on investment income or modified adjusted gross income over $200,000 for unmarried persions and over $250,000 for married couples;
  • an increase in the adoption tax credit and making this credit fully refundable, effective for the years 2010 and 2011;
  • an excise tax of 10% on indoor tanning services;
  • the requirement that health insurance plans cover dependents up to age 26 on their parent's plan;
  • a tax exclusion for student loan repayment assistance programs for health professionals to work in underserved localities;
  • a shared responsibility payment on large employers who fail to provide adequate health insurance plans for their full-time employees effective starting in 2014;
  • a tax credit for small employers ranging from 25% to 50% for providing health insurance coverage to their employees, effective for the years 2010 through 2015;
  • a decrease from $5,000 to $2,500 in the amount that can be saved pre-tax through a healthcare flexible spending account, effective starting 2013 and with the amount inflation-indexed for subsequent years;
  • restriction of the definition of qualified medical expenses for healthcare flexible spending accounts, health savings accounts, health reimbursement accounts and Archer medical savings accounts so that only prescribed medications and insulin are eligible for tax-qualified disbursements, effective since 2011;
  • a business tax credit of 28% of covered drug costs for employers who provide health plans offering precription coverage for retired employees, effective beginning in 2013;
  • limitations in the amount that health insurance companies can deduct for any one employee's compensation to $500,000 effective beginning in 2013;
  • a new economic substance penalty of either 20% or 40% for tax transactions after March 30, 2010, that do not involve a substantial change in a person's economic situation or have a substantial business purpose;
  • a new excise tax of 40% on high-cost health insurance plans offered by employers starting in 2018;
  • an annual fee on manufacturers and importers of brand-name prescription medicines;
  • an excise tax of 2.3% on medical devices starting in 2013.

Source: CCH Tax Briefing (linked to above).

Planning for the individual mandate, the employer mandate and the premium assistance tax credits will involve some rather sophisticated financial decision-making, both on the part of employees, their families, and employers. There's an outstanding paper by law professor David Gamage detailing the economic and mathematical interactions that employers and employees will face starting in 2014. Gamage outlines possible incentives (and disincentives) for job seekers, persons contemplating marriage (or divorce), the design of group health plans, whether to offer group health plans at all, and whether employers and their employees might find it more advantageous to seek coverage through state-run insurance exchanges even with employer penalties factored in.

The Internal Revenue Service has published a variety of guidance related to the Affordable Care Act. On a related note, the Treasury Inspector General for Tax Administration reported on June 20th, 2012, that "appropriate plans have been developed [by the IRS] to implement most tax-related provisions of the ACA" and that "the IRS would benefit from improving the quality of its resource estimation process."

Comments
July 3, 2012 at 3:25 pm
(1) Ron J says:

[quote]…the federal government cannot not penalize states…[/quote]
The double negative indicates to me that they must penalize states, is that what you meant?

[quote]a new economic substance penalty of either 20% or 40% for tax transactions after March 30, 2010, that do not involve a substantial change in a person’s economic situation or have a substantial business purpose[/quote]
Anybody know where I can get clarification on what this means?

July 3, 2012 at 4:46 pm
(2) William Perez says:

Ron J, thank you for reading and for point out my error. I have corrected the text above to remove the double negative. And the article you pointed to is most interesting.

July 3, 2012 at 3:36 pm
(3) Ron J says:

I found the answer to my question above at: http://www.nixonpeabody.com/files/Tax_Credit_Alert_04_21_2010.pdf

October 23, 2012 at 12:36 pm
(4) Roxanne says:

I still don’t get it, and I work in Finance.

November 10, 2012 at 6:46 pm
(5) Dennis Neufeld says:

This Act creates a legal morass for most citizens that I predict a significant growth of the underground economy and increasing avoidance of this law by both patients and doctors. Look for more doctors to focus their talents on cash patients, leading to an increasing scarcity of doctors, especially specalists. Nancy Pelosi was wrong, legislators should have read it first.

Leave a Comment

Line and paragraph breaks are automatic. Some HTML allowed: <a href="" title="">, <b>, <i>, <strike>

©2014 About.com. All rights reserved.