Some of the most important changes stemming from the Affordable Care Act (ACA), also known as Obamacare, center around taxes. To understand how taxes are affected in 2021 by this law, which changed the healthcare insurance landscape in the United States, it's important to review the history of taxes under the ACA.
- 21 new tax provisions stemmed from the Affordable Care Act.
- Some of these provisions have since been suspended or repealed in various pieces of legislation, including the Tax Cuts and Jobs Act, the Further Consolidated Appropriations Act, and the CARES Act.
- Certain provisions have had widespread support (such as the Medicare surtax on high earners), while others have had bipartisan support for repeal (such as the medical device tax).
A Brief History of Taxes Under the Affordable Care Act
Under the ACA, it was initially estimated that the total amount raised by new taxes and penalties on individuals and businesses would climb to approximately $514 billion by 2023.
The tax changes in the ACA were primarily intended to implement credits for low-income Americans and tax hikes for higher earners (people who earn $200,000 annually on an individual basis, or $250,000 for an annual family income).
However, the average American was also impacted by the individual mandate, a requirement to buy health insurance, as well as insurance premium hikes passed on by insurers hit with new fees and taxes.
21 New Tax Policies
Altogether, 21 new tax policies were linked to the ACA, some are tax hikes, some are tax breaks, and some are just new reporting requirements. Below, a list of the 21 tax policies (with notes as to which have been repealed):
- 2.3% tax on medical device manufacturers (repealed)
- 10% tax on indoor tanning services
- Blue Cross/Blue Shield tax hike
- Excise tax on charitable hospitals that fail to comply with requirements of the ACA
- Tax on brand name drugs
- Health insurers fee (repealed as of 2021)
- $500,000 annual executive compensation limit for health insurance executives
- Elimination of tax deduction for employer-provided retirement prescription drug coverage in coordination with Medicare Part D
- Employer mandate on businesses with over 50 full-time equivalent employees (requirement to provide health insurance options to all full-time employees)
- Medicare tax on investment income (3.8% over $200,000 for single or $250,000 for married filers)
- Medicare Part A tax increase (0.9% for income over $200,000 for single or $250,000 for married filers)
- Employer reporting of insurance on W-2
- Corporate 1099-MISC information reporting (repealed)
- Codification of the "economic substance doctrine"
- 40% excise tax on high-end premium health insurance plans ("Cadillac tax" repealed)
- Annual $63 fee levied by the ACA on all plans through 2017
- Medicine cabinet tax (repealed)
- Additional tax on health savings account (HSA) /medical savings account (MSA) distributions for non-qualified medical expenses
- Flexible spending account (FSA) cap
- Medical deduction threshold tax (suspended through 2020)
- The individual mandate (requirement to buy health insurance, repealed)
Breakdown of Tax Changes
Here's a simple breakdown explaining how ACA taxes initially worked.
- It was estimated that 85% of all Americans who already had health insurance wouldn't face any, or at least any significant, changes to their taxes.
- Of the remaining 15%, the most significant tax changes revolved around three key pillars of the ACA—the individual mandate, the employer mandate, and tax credits linked to healthcare exchange plan premium costs for individual Americans, families, and small business owners.
- There was an outlier. Americans who had previously invested in HSAs and FSAs would also see new limits on healthcare-related tax deductions.
The Individual Mandate
For most Americans, the biggest tax issue came from the individual mandate, which stated that U.S. adults, who could afford to do so, must sign up for healthcare, either directly through an insurance company or via a state or federal healthcare insurance exchange.
Exceptions to this mandatory healthcare purchasing rule were granted if:
- The premium from the lowest-priced bronze plan purchased through a health insurance exchange in someone's home state was more than 8.3% of the purchaser’s household annual income.
- The purchaser’s annual household income was below the threshold for Internal Revenue Service (IRS) tax filing statutes.
Some taxpayers were also granted a tax exemption for religious beliefs, not being a U.S. citizen, being incarcerated, or belonging to an American Indian tribe.
Anyone who didn't buy qualifying health insurance had to pay an income surtax. The extra tax was calculated by taking the higher of the listed percentage of adjusted gross income (AGI) or the dollar figure shown below:
Source: Internal Revenue Code (IRC) §5000A
Tax penalties for failure to comply with the individual mandate raised $4 billion for the government in 2018, the final year it was in effect.
The Tax Cuts and Jobs Act, passed in December 2017, included a permanent repeal of the individual mandate provision of the Affordable Care Act, as of the 2019 tax year.
On the employer side, companies with 50 or more employees face paying $2,000 (non-deductible and indexed for inflation) per full-time employee for not offering health coverage. This is called the "employer shared responsibility payment."
Additional Repeals of ACA Taxes
Three additional provisions, the Cadillac tax, medical device tax, and health insurer fees, were repealed as part of the short-term continuing spending resolution referred to as the “Further Consolidated Appropriations Act,” which passed in December 2019.
These key taxes raised considerable revenues, significantly more than the individual mandate penalties, for the government to partially offset the additional costs incurred due to the ACA. Here's where these items stand as of 2021.
The Cadillac tax was a 40% tax on employer-issued health insurance that exceeded certain thresholds. The high-end premium health insurance plans impacted by the Cadillac tax were those at or above the 85th percentile of health insurance benefits (approximately $11,000 for individual coverage or $30,000 for family coverage).
The intention behind the tax was to discourage unnecessary or unreasonable use of medical services by individuals with generous health insurance coverage. It was, unsurprisingly, not popular with major employers, patient advocates, labor unions, or healthcare companies, many of whom banded together to create the Alliance to Fight the 40.
The Joint Committee on Taxation estimated that repealing the Cadillac tax would reduce government revenues by $197 billion over the next 10 years.
The tax was delayed twice before being repealed. In 2015, Congress delayed the implementation of the Cadillac tax from 2018 to 2020. In 2018, it was delayed again until 2022. In December 2019, it was officially repealed as of the 2020 tax year.
Health Insurer and Medical Device Tax Fees
According to the Tax Policy Center, the annual fee on health insurance providers and the medical device tax were both intended to help finance the ACA’s health insurance coverage expansion and to recoup some of the benefits these industries would receive by having a larger population with health coverage.
The health insurer fee applies to insured medical, dental, and vision plans. The fee is based on a health insurer's market share of the industry. It took effect in 2014 but was suspended for both 2017 and 2019, although it continued to apply for the 2018 calendar year. It also applied for the 2020 calendar year but is repealed as of 2021.
The government collected $8 billion from this fee in 2014 and $14.3 billion in 2018. Revenue estimates for 2020 were projected to be approximately $16 billion.
According to the Tax Foundation, the medical device tax failed to lower healthcare costs for consumers but increased costs and burdens on the healthcare sector as a whole. The medical device tax was a 2.3% excise tax on the price of medical devices sold in the United States. There was bipartisan support in favor of repealing the medical device tax permanently.
The impact on the medical device industry was substantial. Between 2013 and 2015, 29,000 jobs were lost in the medical device industry, 22,000 of which are estimated to be solely due to the tax. Medical device companies postponed investments in research and development (R&D)—85% of companies in the industry reported they would reinstate previously foregone R&D investments when the tax is permanently repealed.
It was in effect from 2013 to 2015 but was suspended by Congress in 2016 through 2019, prior to being permanently repealed for the tax year 2020.
The Joint Committee on Taxation estimates that repealing both of these taxes will reduce government revenues by $151 billion over the next 10 years.
In December 2019, Congress repealed three significant ACA taxes—the Cadillac tax, the health insurer fee, and the medical device tax—in the short-term continuing spending resolution referred to as the Further Consolidated Appropriations Act. Various other provisions were repealed in the Tax Cuts and Jobs Act in 2017 and the CARES Act in 2020.
ACA Taxes That Survived
Medical Deduction Threshold Tax
The ACA brought with it a $15 billion tax on individuals who take a deduction based on having high medical bills. The old threshold of deductible medical expenses exceeding 7.5% of AGI was replaced with a threshold of 10% from 2013 to 2016. Americans aged 65 and over were exempt from this higher threshold. The Tax Cuts and Jobs Act reinstated the former threshold of 7.5% of AGI for tax years 2017 and 2018. The Further Consolidated Appropriations Act in December 2019 also extended the lower 7.5% AGI threshold for tax years 2019 and 2020.
Health Savings Accounts Caps
The ACA placed an annual contribution limit on health savings accounts, which is $3,600 for individual coverage and $7,200 for family coverage for 2021, and on flexible spending accounts, which is $2,750 for the 2021 tax year.
Medicine Cabinet Tax
A new ACA tax estimated at $5 billion, called the medicine cabinet tax, also outlined that U.S. adults could not use health savings accounts, flexible spending accounts, or health reimbursement pre-tax dollars to buy nonprescription, over-the-counter medicines.
This provision was permanently repealed as of the 2020 tax year, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Certain over-the-counter medications and products, as well as menstrual care products, are now eligible for HSA and FSA reimbursement without a prescription.
Indoor Tanning Tax
This tax, which went into effect in July 2010, placed a 10% excise tax on U.S. indoor tanning salons. While it was expected to bring in $1 billion in new tax revenues during the first four years, the tax has since been deemed a failure, raising just over $367 million in its first four years. It also contributed to the demise of the indoor tanning salon industry, which proponents of the provision still count as a public health win. The tax is still in effect as of 2021.
The 0.9% Medicare surtax applied to wages and self-employment income over $200,000 for individuals and $250,000 for married couples, remains unaffected by subsequent suspensions and repeals, as it would be unpopular to repeal an additional tax on high-earners that funds Medicare.
Medicare Tax on Investment Income
According to the IRS, the 3.8% ACA tax on net investment income applies to unincorporated taxpayers (basically individuals, estates, and certain trusts) who have a modified adjusted gross income (MAGI) above these annual income levels:
- $250,000 in the case of married taxpayers filing a joint return or a surviving spouse
- $125,000 in the case of a married taxpayer filing separately
- $250,000 for a qualifying widow(er) with a dependent child
- $200,000 for everyone else, except estates and trusts, where the threshold is equal to the highest amount at which the maximum tax rate begins
These rates are not indexed for inflation. The tax is still in effect as of 2021.
The Bottom Line
People may not realize it, but amidst all the controversy about how the ACA was rolled out, a resulting trove of taxes has since dramatically impacted the financial lives of many Americans. For as long as the ACA remains the law, be sure to consult a tax specialist to minimize any financial harm.
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