December 2nd 2013 by Marty McCutchen
America’s healthcare system is a mess. We spend more per capita on healthcare than any other country on earth, and generally twice as much as our first-world peers. Yet, our health outcomes are no better than anyone else’s, and one in seven Americans has no health insurance.
That was the problem President Obama set out to solve with the 2010 “Patient Protection and Affordable Care Act” and companion “Health Care and Education Reconciliation Act of 2010.” Together, those two acts – better known by Republicans and Democrats alike as “Obamacare” – represent the biggest change in how we finance healthcare since Medicare was created in 1965. The two acts also include some of the most significant tax changes in a generation.
In this article, I want to briefly cover the most important tax and health insurance changes of the law. In future articles, I will give you a framework for making smart choices in the new healthcare environment. It’s also worth noting that whenever you may be reading these words, I’m writing them in the first week of November 2013. Insurance exchanges just started enrolling consumers (or attempting to enroll them, in the case of the federal exchange at www.Healthcare.gov). The Obama administration just announced plans to delay the employer mandate until 2015, and some Republicans in Congress are still working to repeal the whole thing.
Not a week passes without major news about implementing the law. There’s still much to learn about Obamacare and much that we simply can’t know yet. So … we’ll all have to keep our eyes open and our wits about us as events unfold.
2013 is a big year for tax changes:
- Up until 2013, medical and dental expenses were deductible if they exceeded 7.5% of your adjusted gross income (AGI). Unless, of course, you’re subject to Alternative Minimum Tax (AMT), in which case they have to exceed 10% of your AGI. Starting in 2013, that floor rose 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 until 2016. Unless, of course, you’re 65 and subject to AMT.
- 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-the-counter medications.
- If your earned income is above $200,000 – or $250,000 if you file jointly – you’ll pay an extra 0.9% Medicare tax on earned income above those amounts. Given the new marginal tax rates in 2013 “fiscal cliff” legislation, that extra Medicare tax could help 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. This new Medicare tax might not seem like a big deal, especially if your income isn’t high enough that you’ll actually pay it. Hey, it’s just 3.8%, right? How bad can that be? Well, leaving aside the fact that a new tax still hurts, this is the first time investment income has ever been subject to Medicare tax. In addition, lots of commentators fear it’s just the proverbial camel’s nose “under the tent” for even higher taxes. After all, it’s a lot easier for legislators to go from 3.8% to 5.8% than it is to go from 0 to 3.8%. So we’ll be paying lots of attention to this provision.
On the healthcare side, starting in 2013, the new law limits health insurance company deductions for executive compensation to $500,000 per person, as opposed to the regular $1 million for other businesses. It doesn’t stop insurance companies from paying their top executives more than half a million – it just stops them from deducting anything over that amount on their own tax returns.
2014 Changes:
- Most individuals must maintain “minimum essential coverage” or face penalties.
- Businesses with >50 employees must offer health coverage or pay penalty of $2,000/employee.
- Insurance companies cannot deny adults coverage for pre-existing conditions
- Plans can no longer set annual limits on coverage
- Medicaid expands to cover all Americans with income up to 138% of poverty line
- State-run insurance “exchanges” begin offering coverage to individuals and small businesses
2014 brings the most controversial changes. Specifically, this is the year when the “individual mandate” and “employer mandate” were both scheduled to begin:
- Most individuals who aren’t covered through their employer will have to maintain “minimum essential coverage” or pay individual penalties. This is the so-called “individual mandate” you’ve heard so much about.
- Employers with more than 50 employees must offer health benefits or pay a penalty of up to $2,000 per employee. If they offer coverage that doesn’t meet minimum standards, the penalty could jump to $3,000. The Obama administration has since postponed this requirement to 2015.
2014 is also the year when the biggest insurance and healthcare changes go into effect. Specifically:
- Insurance companies can’t deny coverage to anyone for pre-existing conditions. Remember, starting back in 2010 they could no longer deny coverage to children for preexisting conditions.
- Plans can’t set annual limits on coverage. Remember, the ban on lifetime limits took effect in 2010.
- States can choose (or not choose) to expand Medicaid eligibility to non-elderly, non-pregnant individuals with incomes up to 138% of the federal poverty level. For 2014-2016, the federal government will pick up 100% of those costs.
- The law requires states to establish insurance “exchanges,” or join a federal exchange, where individuals and small businesses can comparison-shop for coverage.
- All health insurance plans must provide coverage for “essential benefits,” in categories such as maternity care, substance abuse services, mental and behavioral health services, and prescription drugs. The trade association America’s Health Insurance Plans, which represents 1,300 health insurance companies, estimates that these “essential benefit” provisions may raise premiums as much as 33% in states that currently allow more stripped-down plans.
2018 Changes
The law doesn’t specify any significant new changes in years 2015-2017. But finally, in 2018, it 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 on these most-expensive plans, and they really are pretty pricey – the average American family doesn’t pay nearly that much for its mortgage. There’s evidence to suggest this provision is already working.
Employers who are likely to be affected by the tax have begun cutting back on some of the most generous plans by raising deductibles, co-pays, prescriptions, and the like. But this provision doesn’t take actual effect until 2018 – which some commentators think means it won’t ever take effect at all.
Resources: There are also several related stories written by Intuit’s Mike D’Avolio about the Affordable Care Act. In addition to the stories below, be sure to review Intuit’s own
webpage on the Affordable Care Act.
