On March 23, President Obama signed the “Patient Protection and Affordable Care
Act.” On March 30, he signed the companion “Health Care and Education
Reconciliation Act of 2010.” Together, the two acts represent the biggest change in
how we finance healthcare since Medicare was created in 1965. They also include
some of the most significant tax changes in a generation.
Healthcare reform has been an intensely political process. Not one single
Republican voted for the law in either the House or the Senate. And polls show that
Americans are overwhelmingly confused and concerned. They don’t know just what
the new law does, and they don’t know how much it’s going to cost. That’s no
surprise considering the actual texts of the bills runs over 2,500 pages. There’s
probably not a single person on the planet who understands it all.
I’m not here to debate the merits of the bill – it’s going to take a long time before
historians can make that call. But I can help by explaining some of the most
important changes – as well as how Washington plans to pay for it all.
Let’s start with the changes that go into effect this year.
On the tax side, small businesses with up to 25 employees earning $40,000/year or
less will get a tax credit for 35% of the cost of providing health benefits to their
employees.
And who can overlook a new 10% excise tax on indoor tanning services that use
certain ultraviolet lights? That rule takes effect on July 1, just as outdoor tanning
season goes into full swing.
On the health care side, insurers companies can’t deny coverage to children for preexisting
conditions. They have to let children stay on their parents’ plans through
age 26. They can’t set lifetime limits on plan coverage.
Finally, Medicare Part D recipients who enter the so-called “donut hole” will get
rebates and discounts on prescription drug coverage. For those of you who don’t
know, the “donut hole” is a gap in prescription coverage where the government pays
nothing and beneficiaries pay the full cost of drugs themselves.
Starting in 2011, employers will have to report the value of health benefits they
provide employees on Form W2. that doesn’t mean benefits will be taxable – but
employers will face penalties if they don’t provide that information.
On the health care side, Medicare Part D recipients entering the “donut hole” qualify
for discounts rather than rebates on prescription drugs.
2013 is a big year for tax changes:
Right now, medical and dental expenses are deductible if they exceed 7.5% of
your “adjusted gross income,” or AGI. Unless, of course, you’re subject to
Alternative Minimum Tax, in which case they have to exceed 10% of your AGI.
Starting in 2013, that floor rises to 10% of AGI for everyone. Unless you or your
spouse are 65 or older – in which case it stays at 7.5% of AGI. Unless, of course,
you’re 65 and subject to AMT. Are we all clear here?
If you participate in a healthcare flexible spending account at work, your
contributions will be capped at $2,500/year, with no contributions for over-thecounter
medications.
If your earned income is above $200,000 – or $250,000 if you file jointly – you’ll
pay an extra 0.8% Medicare tax on earned income above those amounts. Remember,
the Obama administration has already proposed extra Social Security taxes in the 24%
range on this income. If you’re in the top 39.6% marginal tax bracket that we
can expect to see in 2011, these extra taxes could push your actual marginal rate
well above 40%.
Finally, you’ll pay a 3.8% “Unearned Income Medicare Contribution” on
investment income if your AGI is above those same thresholds. “Investment
income” is defined as interest, dividends, capital gains, rents, royalties, and
annuities.
2014 is another big year on the tax side. Employers with more than 50 employees
will have to offer health benefits or pay a penalty of up to $2,000 per employee.
Generally, employers will have to pick up at least 50% of premium costs. There’s
also a 90-day limit on waiting periods before offering new employees coverage.
Most individuals who aren’t covered through their employer will have to maintain
“minimum essential coverage” or pay individual penalties. We’ll talk about that
more in a bit.
2014 is also the year when the biggest health care changes go into effect.
Specifically:
Insurance companies can’t deny coverage to anyone for pre-existing conditions.
Plans can’t set annual limits on coverage. (Remember, the ban on lifetime limits
takes effect in 2010.)
States can expand Medicaid eligibility to non-elderly, non-pregnant individuals
with incomes up to 133% of the federal poverty level. For 2014-2016, the federal
government will pick up 100% of those costs.
Finally, the law requires states to establish insurance “exchanges” where
individuals and small businesses can comparison-shop for coverage.
Finally, in 2018, the law imposes a 40% excise tax on “Cadillac plans” costing more
than $10,200 per year for singles or $27,500 per year for families. The goal here is
simply to rein in costs. But this provision doesn’t take effect until 2018 – which
many experts think means it won’t ever take effect at all.
Let’s talk a little more about the one of the most controversial parts of the law – the
so-called “individual mandate.” The law says that by 2014, all Americans have to
maintain “minimum essential coverage.” If not, they face a penalty starting at $95
or 1% of income in 2014, and rising to $695 or 2.5% of income in 2016. After 2016,
the $695 amount is indexed for inflation.
Obviously, “universal coverage” is one of the new law’s primary goals. But there’s
another reason to make sure everyone plays the insurance game. Right now, plenty
of healthy people who can afford coverage choose not to buy it. They’re
comfortable assuming the risk of not having coverage. But their decision not to buy
makes coverage more expensive for the rest of us, because we can’t share costs with
the ones who choose not to buy.
That’s a pretty big step. The government has never required us to buy commercial
products or services before. If you drive a car, most states mandate you buy car
insurance – but nobody says you have to buy a car.
Of course, there are plenty of exceptions to the rule. If your taxable income is under
the federal poverty line, or the cost of coverage is more than 8% of your household
income, you don’t have to pay. And if your taxable income is less than four times
the federal poverty limit, you’ll get tax credits to help pay for coverage.
But here’s the weirdest part of the new law. There’s no way for the government to
enforce those penalties. In fact, here’s what the congressional Joint Committee on
Taxation had to say in their explanation of the bill:
“The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.”
That means no interest. No liens. No levies. No jail time. It will be interesting to see
how many Americans actually pay if there’s no real consequence for not doing it.
Legislation this complex and far-reaching is bound to attract opposition. And in this
case, the opposition isn’t folding, even though it’s now the law of the land.
Many prominent Republicans have vowed to overturn the law. They don’t have the
votes to do it now, and they aren’t likely to get 67 votes necessary to sustain a
certain Presidential veto even if they do overturn it in the Senate. But most experts
expect the Democrats to lose congressional seats in this year’s election, and if they
lose enough, the Republicans can certainly make political hay.
State governments have also stepped up to oppose the new law. Many states are
afraid it pushes too many costs onto them, especially increased Medicaid costs. A
group of 11 state attorneys general have argued that the new law violates states’
rights, and plan to join together to block enforcement.
Politicians in 36 states have introduced and in two cases even passed legislation that
would limit or oppose various provisions of the law. For example, Virginia has
passed a law making it illegal for the federal government to require Americans to
buy health insurance. You can scoff at laws like that – but they can tie up
enforcement in red tape and court challenges.
Opponents also object that the “individual mandate” is unconstitutional. The
argument here is that while Congress can certainly regulate economic activity,
there’s no authority to penalize inactivity – specifically, not buying insurance.
There’s no telling how these challenges will play out. Right now, the “smart money”
says there aren’t five votes in the Supreme Court to repeal such a broadly political
decision.
So – where do we go from here?
There’s no doubt that what we’ve seen is just a first step in an ongoing process. You
can count on us to follow the challenges we just discussed, as well as update you as
more details become available.
I also want to remind you that there are already concepts and strategies in place to
help you cut health care costs for yourself and your business. Medical expense
reimbursement plans may let you write off family medical bills as business
expenses, avoiding the floor on itemized deductions. Health savings accounts also
let you finance deductibles and out-of-pocket expenses with pre-tax dollars.
So please, call us with your questions. If we can’t answer you right away, we’ll find
an answer for you. And don’t panic over changes like the individual mandate or tax
on “Cadillac plans.” We’ve got lots of time to see how health care reform really
shakes out.
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