The Patient Protection and Affordable Care Act (P.L. 111-148) as amended by the Health Care and Education Reconciliation Act of 2010 (together, the “Act”) contains far reaching provisions aimed at reducing the number of Americans without health coverage. The cost of these expenditures is expected to topple $940 billion over the next ten (10) years according to the Congressional Budget Office (CBO) estimations. The proposed expenditures to achieve enhanced coverage will be paid for by a variety of new taxes, including an increased Medicare tax on high income individuals, taxes on insurance premiums, new taxes on medical devices, and an excise tax imposed on high premium “Cadillac” insurance plans. The following outlines some of the highlights of taxes that will be imposed.
Excise Tax on High-premium Cadillac Plans
Beginning in 2018, there will be a new non-deductible 40 percent excise tax on high-premium (“Cadillac”) insurance plans costing more than $10,200 for individuals or $27,500 annually for a family, starting in 2018. An additional amount of $1,650 for individuals and $3,450 for families would be added to the threshold amounts for retired individuals over the age of 55 and for plans that cover employees engaged in high-risk professions (e.g., law-enforcement professionals, EMTs, construction and mining). Dental and vision plans are not included when calculating the total benefit value of the plans.
Taxes on High-income Individuals
Beginning in 2013, there will be an increase to the Medicare Hospital Insurance tax by 0.9 percent applied on the earnings of individuals with adjusted gross income exceeding $200,000 and couples with adjusted gross income of more than $250,000 a year, plus an additional 3.8 percent tax on unearned income, such as dividends, interest and capital gains. There will also be new annual limits for flexible spending accounts and a floor on unreimbursed medical expense deductions.
Insurance Mandate Penalties
Individuals. Individuals who don’t purchase insurance would be subject to a fine of $325 in 2015, and in 2016, the greater of (i) $695 or (ii) 2.5 percent of income.
Employers. An employer with more than 50 employees who does not offer health insurance coverage to its employees must pay $2,000 annually for each “full-time employee” (excluding the first 30 employees). A “full-time employee” is one that works 30 hours or more per week.
For those employers with more than 50 employees that offer health insurance coverage, but where the coverage is deemed “unaffordable” to an employee because the employee has to pay more than 9.8 percent of his or her income, a penalty will also apply of the lesser of (i) $3,000 for each employee receiving a premium credit or (ii) $750 for each full-time employee.
Taxes on Industries
Insurance Industry. The Insurance industry will pay $58.8 billion in fees between 2014 and 2018, with limited exceptions for plans that serve a critical purpose, including plans serving a high percentage of low income, seniors and disabled individuals. In the case of tax-exempt insurance providers, only 50 percent of their net premiums that relate to their tax-exempt status are taken into account in calculating the fee.
Pharmaceutical Industry. Beginning in 2011, manufacturers of brand name pharmaceuticals will be subject to an annual levy that gradually increases from $2.5 billion to $4.1 billion by 2018. In 2019, the fee will decrease to $2.8 billion annually and hold steady thereafter.
Medical Device Industry. Starting in 2013, the medical device industry will be charged an excise tax of 2.3 percent on the sale of any taxable medical devices, with certain exceptions. The tax will not be imposed on the sale of certain consumer products such as eyeglasses, contact lenses, hearing aids, and any other device deemed by the Secretary to be of the type available for regular retail purpose.
Nonprofit Hospitals. Effective for taxable years after enactment, there are additional requirements that a hospital must satisfy to be considered tax exempt: (1) conduct a community health needs assessment every three years and adopt an implementation strategy to meet the identified needs; (2) adopt and publicize a financial assistance policy that indicates whether free or discounted care is available and how to apply for the assistance; (3) limit certain charges to patients eligible for financial assistance to the amount generally billed to insured patients; and (4) make reasonable attempts to determine financial access eligibility before undertaking extraordinary collection actions. Penalties for violating these provisions will include a $50,000 tax per year.
Tanning Industry. The tanning industry was singled out for a special tax of 10 percent on the amount paid for any tanning service starting in 2010.
In addition to the new taxes imposed, the Act will also provide for certain tax credits. Some notable credits include:
Premium Tax Credit
Starting in 2014, individuals and families with income which falls between 100 percent and 400 percent of the Federal poverty level ($43,420 for individuals and $88,200 for a family of four) who purchase health insurance in the individual market will be eligible for refundable tax credits. The amount of the credit will depend on health insurance premiums, income level, and the number of months during which the taxpayer is insured. Taxpayers eligible for the credit are U.S. citizens and aliens lawfully present in the U.S. who meet income requirements.
Small Employers Tax Credit
Effective immediately, businesses with 25 or fewer employees and average annual wages of less than $50,000 that provide qualifying coverage will be eligible for a tax credit of up to 35 percent. In 2014, when fully effective, the new credit will be up to 50 percent. For tax-exempt employers, the maximum credit is 25 percent for years 2010 through 2013, increasing to 35 percent in 2014.
Healthcare Professionals Loan Repayment Credits
Starting in 2009, healthcare professionals may exclude from their taxable income any amounts received under any state loan repayment or loan forgiveness program that is intended to provide for the increased availability of healthcare services in underserved areas or areas where there is a shortage of healthcare professionals.
Therapeutic Research Tax Credit
A tax credit is provided for businesses with 250 or fewer employees who make a qualified investment in acute and chronic disease research in 2009 and 2010. The credit will equal 50 percent of the qualified investment. The credit has a $1 billion cap.
In summary, the Act will greatly impact the current tax system in order to partially fund the expenditures necessary to achieve enhanced coverage. With this recent legislation, it remains to be seen how stakeholders and their financial decisions will be impacted.
Amita A. Sanghvi is an associate in the firm’s Healthcare Practice. Ms. Sanghvi recently worked as a public policy extern for a major pharmaceutical company where she analyzed federal and state legislation to determine the impact on the company’s business and developed position papers, reports and talking points on issues affecting electronic prescribing and evidence-based medicine for use by the company’s state and federal lobbyists. Ms. Sanghvi received her bachelor’s degree from the University of Rochester and both her law degree and master of health administration from the University of North Carolina at Chapel Hill.