Patient Protection And Affordable Care Act - How it Will Be Funded
July 13, 2010
by Bruce J. Douglas and Kelly M. Burke*
The big question on many people’s minds is where will the money come from to fund the deficit reduction and the Patient Protection and Affordable Care Act (PPACA). The Congressional Budget Office (CBO) estimates that the PPACA will cost $940 billion over the next 10 years. Even with the high cost of the PPACA, the CBO approximates that there will be a $143 billion reduction in the federal deficit over the next 10 years (2010-2019) and a $1.2 trillion reduction in the federal deficit in the 10 years following (2020-2029).
The PPACA and deficit reduction will be funded through new taxes, fees, and penalties on individuals, businesses, and the health care industry. This alert will touch upon the biggest changes individuals, businesses, and the health care industry will experience in the next few years.
Impact on Individuals
Individual tax payers will contribute to the PPACA funding through an additional Medicare tax imposed on wages and investment income, penalties for failure to maintain health care coverage, a higher threshold for itemized medical expense deductions, a tax on indoor tanning, and an additional tax on distributions from health and medical savings accounts.
The first tax on individuals will take effect in July of this year on indoor tanning services. For services provided on or after July 1, 2010, there will be a 10 percent excise tax imposed on each individual for whom “indoor tanning services” are performed.
Beginning in 2011, over-the-counter (OTC) medicines will only be reimbursed under a health care flexible spending account (FSA), health reimbursement arrangement (HRA), health savings account (HSA), or medical savings account (MSA) if they are prescribed by a physician. This means that OTC medications purchased without a prescription cannot be reimbursed from these accounts. Additionally, distributions from HSAs and MSAs not used for qualified medical expenses will be subject to a penalty tax of 20 percent of the distribution, an increase from the original 10 percent. Beginning in 2013, contributions to HSAs and FSAs will be limited to an annual amount of $2,500.
Higher-income individuals will have to pay an additional Medicare tax on their wages and on net investment income starting in 2013. The Medicare payroll tax will increase by 0.9 percent from 1.45 percent to 2.35 percent, on wages over $200,000 for individuals and $250,000 for couples filing jointly. There will also be an additional 0.9 percent Medicare tax on net investment income, increasing the tax from 2.9 percent to 3.8 percent, for net investment income in excess of $200,000 for individuals and $250,000 for couples filing jointly. Net investment income includes interest, dividends, rents, royalties, gain from disposing of property, and income earned from a trade or business as a passive activity. Both self-employed individuals and estates and trusts will be liable for the tax. However, distributions from qualified retirement plans will be exempt from paying the additional tax.
Also in 2013, the threshold for itemized medical expense deductions will increase from 7.5 percent to 10 percent of adjusted gross income. However, individuals who are 65 and older will still be able to claim the itemized medical expense tax deduction at 7.5 percent through 2016.
Finally, beginning in 2014, individuals will be required to obtain minimum essential health care coverage for themselves and their dependents. Individuals who do not obtain coverage for themselves or their dependents will be required to pay a penalty for each month they fail to have coverage (“pay or play”). The penalty is the lesser of (1) the sum of the monthly penalties for the tax year or (2) the amount of the national average premium for qualified health plans. The monthly penalties will be the greater of the flat dollar amount (which cannot exceed 300 percent of the applicable dollar amount) or a percentage of income. The penalties by year will be allocated as follows:
• 2014: $95 or 1 percent of income;
• 2015: $325 or 2 percent of income;
• 2016 and beyond: $695 or 2.5 percent of income.
The penalty for dependents under the age of 18 will be one-half of the adult penalty. The penalty will not be imposed on certain individuals such as those who are members of certain religious organizations that share medical expenses, individuals who are incarcerated, or individuals who are not citizens or legal residents. Additionally, there will be exemptions for individuals who cannot afford coverage, Native Americans, and individuals who have suffered hardships. The penalty will be included in a taxpayer’s income tax return for the tax year in which the penalty occurred.
Impact on the Health Care Industry
The health care industry will be a large source of the PPACA’s funding through fees on health insurance providers and pharmaceutical manufacturers and importers, excise taxes on medical devices and high cost employer sponsored health coverage, and a limitation on remuneration paid by health insurance providers.
Beginning this year, the deduction for employee remuneration paid by health insurance providers will be limited. The amount health insurance providers will be able deduct in applicable employee remuneration will decrease from $1 million to $500,000. The limit will apply to all officers, employees, directors, and other workers or services providers performing services for or on behalf of a health insurance provider.
A prescription drug industry user fee will be implemented in 2011 on brand name prescription drug manufacturers. The non-deductible fee will be allocated across the prescription drug industry according to market share with reductions for companies with annual sales of less than $4 million. The industry fees by year will be allocated as follows:
• 2011: $2.5 billion;
• 2012-2013: $2.8 billion;
• 2014-2016: $3 billion;
• 2017: $4 billion;
• 2018: $4.1 billion;
• 2019 and beyond: $2.8 billion.
Beginning in 2013, the medical device industry will face a new tax. Any manufacturer, producer, or importer of medical devices will be required to pay a 2.3 percent excise tax on the sales price of a medical device.
Beginning in 2014, health insurance providers will be required to pay an annual non-deductible fee according to market share based on premiums collected. The fee will not apply to companies whose net premiums are $25 million or less. For those companies whose net premiums are between $25 million and $50 million, 50 percent of their premiums will be taken into account in determining their fee. For companies with net premiums of $50 million or more, 100 percent of their premiums will be taken into account in determining their portion of the fee. The health insurance fees by year will be allocated as follows:
• 2014: $8 billion;
• 2015-2016: $11.3 billion;
• 2017: $13.9 billion;
• 2018: $14.3 billion;
• 2019: $14.3 billion plus the rate of premium growth.
Finally, beginning in 2018, healthcare providers will be charged a tax on high cost employer sponsored health coverage, also know as “Cadillac” health care plans. A 40 percent excise tax will be imposed on health care plans that cost more then $10,200 for individuals and $27,500 for families. The threshold for the tax will be adjusted for age, gender, and high risk professions. The tax will be paid by insurance companies, which may choose to pass along the tax to their customers in the form of higher premiums.
While there are several significant new fees and taxes on the health care industry, the industry will benefit from the influx of 32 million people who will now be insured as a result of the PPACA.
Impact on Businesses
Non-health care industry businesses will also face changes and penalties as part of the PPACA funding. Effective in 2010, the PPACA eliminated the cellulosic biofuel producer credit. Paper companies will now be barred from claiming $1.01 per gallon cellulosic biofuel producer credit for black liquor, a by-product of paper making. This change is estimated to raise $23.6 billion over the next ten years.
Employers will experience many more significant changes beginning in 2014. Although employers will not be required to offer health care coverage, large employers (those with at least 50 full-time employees) who do not offer qualifying health care coverage to their employees must pay a non-deductable “free rider” penalty. An employer will be subject to the penalty if the employer fails to offer health care coverage to a full-time employee and their dependents during any month and the employer has at least one full-time employee enrolled in that month in a plan through a state exchange and receives a premium subsidy. The penalty for failing to provide qualifying health care coverage is $2,000 a year, or $166 per month, per full-time employee excluding the first 30 employees.
Even if an employer offers qualifying health care coverage to their full-time employees, if at least one or more full-time employee enrolls in a plan through a state exchange and receives a premium subsidy, the employer must still pay a penalty. The penalty in this case is $3,000 a year, or $250 per month, per full-time employee receiving the tax credit or cost sharing subsidy.
If you have questions regarding the recent Health Care legislation, please contact one of our experienced Employment Law or Benefits attorneys. In a future alert, we will report on how the PPACA plans to improve the quality of the healthcare workforce.
* Ms. Burke is a summer clerk at Larkin Hoffman and a third-year student at the William Mitchell College of Law.
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