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Funding Mechanisms in Place for the Affordable Care Act

General Business News

September 2012

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Funding Mechanisms in Place for the Affordable Care Act

With the presidential campaign getting into full swing, President Obama’s signature piece of legislation – the Patient Protection and Affordable Care Act, informally known as Obamacare – will come under increased scrutiny in the months ahead. Both sides will debate the Act’s implications, but its funding mechanisms are already in place.

The Supreme Court upheld the constitutionality of the PPACA on June 28 based on the federal government’s taxing power. The Act requires that all individuals not covered by an employer-sponsored health plan or a public insurance program to purchase health insurance or pay a penalty. In exchange, insurance companies are required to cover all applicants and offer the same rates to them, regardless of pre-existing conditions or gender. The Act will provide health insurance coverage for 32 million currently uninsured Americans.

The PPACA will be funded through a variety of fees, spending offsets and taxes. The fees include annual charges to health insurance providers and manufacturers and importers of branded drugs, while the spending offsets require reduced funding for Medicare Advantage policies, reduced Medicare home health care payments, and certain reduced Medicare hospital payments. The most debated funding mechanisms, however, are the increased taxes.

The PPACA imposes a 2.3 percent annual excise tax on manufacturers and importers of certain medical devices, which is intended to raise $20 billion over the next 10 years, according to the non-partisan Congressional Budget Office. The Act also calls for a 10 percent sales tax on indoor tanning services.

Individuals will face increased taxes on high-cost insurance policies, a reduced ability to use the medical expenses deduction on their tax forms, limited annual contributions to flexible spending arrangements for cafeteria plans, and for high-income taxpayers, an increased Medicare tax and a separate investment income tax.

Subscribers to high-cost insurance policies, or so-called Cadillac plans, will face a 40 percent excise tax on annual health insurance premiums over $10,200 for individuals and $27,500 for a family. That provision is intended to raise $32 billion over 10 years.

The adjusted gross income floor on the medical expenses deduction will be raised from 7.5 percent to 10 percent, meaning that only medical expenses that exceed 10 percent of the taxpayer’s adjusted gross income will be deductible. The CBO estimates it will raise $15.2 billion over 10 years.

The most common type of flexible spending arrangement for a cafeteria plan is the Medical Expense FSA, which allows an employee to set aside a portion of earnings to pay for qualified expenses, such as deductibles and copayments. Previously, there was no federal limit on contributions to such a plan, although employers usually had a $5,000 annual ceiling. Under the PPACA, the annual contribution limit will be $2,500. The provision is effective Jan. 1, 2013, and will raise an estimated $13 billion over 10 years.

Finally, also effective Jan. 1, 2013, the PPACA imposes an additional Medicare tax of 0.9 percent and a new 3.8 percent tax on unearned investment income for single filers with income over $200,000 and joint filers with income in excess of $250,000. Most taxpayers currently pay 1.45 percent of their wages to support Medicare through the Medicare payroll tax. The new 0.9 percent increase will be imposed on wages in excess of the threshold amounts. The investment income tax targets dividends, interest, royalties, capital gains, annuities and rents for the same high-income taxpayers. These provisions are intended to raise by far the most revenue under the PPACA, at an estimated $210.2 billion over 10 years.

The CBO estimates that the PPACA will actually trim the federal budget deficit over the next 10 years. Voters will make their own decisions about the worthiness of the Act as they sort through the rhetoric from both sides in the presidential race.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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