How the ACA Changed Taxes

If you’ve followed the developments related to the Affordable Care Act in the last few months, no doubt you’ve heard about the “surprises” that many exchange enrollees will face during this tax season.

According to a Kaiser Family Foundation report, about half of U.S. households that qualified for health insurance premium subsidies under the ACA likely will have to return part of the money to the federal government. The surprise goes both ways, though: About 45% of those who got coverage through the ACA will end up with larger refunds than expected.

Although those surprises have been a focus of the both public and the media, the ACA has numerous other tax implications. In fact, the ACA has resulted in “the tax code … undergoing its biggest change in 20 years,” according to H&R Block President and CEO Bill Cobb.

In recognition of today, April 15, as tax day, California Healthline looks at some of the other tariff-related intricacies of the ACA.

Medical-Loss Ratio

The Obama administration in late 2014 trumpeted that consumers saved nearly $3 billion over two years because of the ACA’s medical-loss ratio.

Under the MLR provision, insurers must issue refunds to customers if they spend:

  • Less than 80% of the premiums they collect for plans sold on the individual and small group markets; and
  • Less than 85% of plan premiums in the large group market on medical care.

However, what the administration didn’t mention was the tax effects of such rebates. Shifting the money back and forth between insurers, employers and employees creates a situation in which each entity’s taxable income changes.

So, for example, although insurers in some instances must return money to their customers, those rebates reduce the company’s taxable income. Inversely, rebates issued to individuals who purchased a policy will be considered in that person’s gross income.

For employers, a portion of the rebate is considered taxable income. Further, the rebates create a more complicated tax situation, in which they must decide how to distribute the payment to their employees, which can affect employee taxes. 

The Immigrant Issue

More than 600,000 youths who have qualified for the Deferred Action for Childhood Arrivals program, as well as millions of other undocumented immigrants, are ineligible to purchase coverage through the ACA’s exchanges. As a result, they also are exempt from the law’s individual mandate.

However, as two immigration advocates — National Immigration Law Center Executive Director Marielena Hincapié and Alliance for a Just Society Executive Director LeeAnn Hall — note in an op-ed in The Hill, many such immigrants are “getting hit with a double whammy.” That’s because some immigrants who have filed their taxes have either misunderstood the exemption or had tax preparers mistakenly tell them they must pay the penalty for not having coverage.

Further, there are reports that some unscrupulous tax preparers have asked such immigrants to pay the penalty directly to them instead of the U.S. Treasury, which Hincapié and Hall called “a sure sign of preparer fraud.”

IRS has received a number of reports of such fraudulent activity and has created a form individuals can use to report such incidents.

The Battle Over the ‘Cadillac Tax’

The so-called “Cadillac tax” — which, beginning in 2018, will impose a 40% excise tax on employer-sponsored health plans that exceed a certain cost — likely will be one of the last ACA provisions to be implemented. It also is expected to be one of the largest fundraisers for the law, with the Congressional Budget Office estimating that it will bring in $149 billion in revenue between 2018 and 2025, though only one-quarter of that will come from the tax itself.

According to Politico, the tax could be the “next big Obamacare fight.” As employers and unions plot out how they will respond to the tax, many have begun speaking out against it. “Employers are coming to the table asking for cuts in benefits based on their preliminary projections around the tax,” Shaun O’Brien, AFL-CIO assistant policy director for health and retirement, told Politico.

Part of the issue with the tax is that experts predict it will affect far more people than originally anticipated. Although the nickname for the tax implies that it will affect few, some experts say that in practice the tariff could affect a majority of employers that offer health benefits. Beth Umland, Mercer’s director of research for health and benefits, told Politico that the Cadillac tax “a misnomer,” because of the possibility that “any employer could be hit by this tax.”

Other Tax Implications

The law also features a number of other tax provisions that will affect individuals and companies. A partial list of those is below.

Additional Medicare Tax & Net Investment Tax

The Additional Medicare Tax took effect in 2013 and applies an extra 0.9% tax to individuals with annual incomes above $200,000 and couples with annual incomes above $250,000.

Meanwhile, people with incomes that meet those same thresholds also must pay the Net Investment Tax. The tax adds 3.8% on top of the standard investment income taxes and applies to interest, dividends, capital gains, rental and royalty income and non-qualified annuities, according to IRS.

Combined, the two taxes brought in $23 billion in revenue for the federal government in 2014, which was about $3 billion more than expected, according to the Wall Street Journal. The Additional Medicare Tax reaped $6.5 billion, while the Net Investment Tax netted $16.5 billion.

Small Business Health Care Tax Credit

Not every ACA tax implication means money coming out of U.S. residents’ pockets. For example, the Small Business Health Care Tax Credit gives certain small businesses credit of up to 50% in 2014 and beyond for small businesses and small not-for-profit employers for helping employees with premiums for coverage purchased through the Small Business Health Options Program exchanges.

Unfortunately, enrollment in SHOP exchanges has been lower than expected, according to the Government Accountability Office. GAO found that about 76,000 U.S. residents from almost 12,000 small businesses had signed up for coverage through the state-based shop exchange as of June 1, which was fewer than anticipated based on official estimates and stakeholder expectations. CBO originally projected that two million U.S. residents would enroll in coverage via SHOP, meaning that each state-run SHOP exchange would need to enroll roughly 40,000 individuals. By contrast, GAO found that 16 state-run exchanges enrolled on average fewer than 5,000 individuals.

Medical Device Tax

The Medical Device Tax levies a 2.3% tax on devices.

The tax already faces implementation problems. IRS last summer reported that it received fewer device tax forms than expected and brought in $913.4 million in the second and third quarters of 2013, below the $1.2 billion it expected.

Further, the tax has encountered bipartisan opposition from the beginning. Most recently, Sen. Edward Markey (D-Mass.) introduced legislation to repeal it. From indications earlier this year, the legislation would have the support of all Republicans and enough Democrats to gain approval. However, it’s unlikely President Obama would sign such a bill.

Additional Requirements for Tax-Exempt Hospitals

The ACA established new requirements for hospitals to qualify as 501(c)(3) charitable hospitals. According to Health Affairs, the new requirements cover a host of key areas, including “community health planning, financial assistance for patients and hospitals billing and collection practices.” IRS released the final rules in December 2014.

The new requirements have contributed new challenges to hospitals’ tax exemption status, which “Road to Reform” chronicled last week.

Around the nation

Here’s a look at other stories making news on the road to reform.

Sticks and stones … . Dylan Scott writes in National Journal that Republican presidential candidates likely will “do their best to tie Hillary Clinton” to President Obama and the ACA. However, Clinton “doesn’t seem too worried about it,” as evidenced by her enthusiasm for the law via Twitter and in other forums.

On the right. The newest presidential candidate is Marco Rubio, who announced his candidacy on Monday night. Rubio has been vocal about his distaste for the ACA, and frequently has outlined his plan for repealing and replacing the law.

What happens if? Sen. Ron Johnson (R-Wis.) outlines what he thinks will happen if the Supreme Court rules in favor of the plaintiffs in King v. Burwell in a Wall Street Journal opinion piece. Trust us, it’s not what many other Republicans think will happen.

Related Topics

Road to Reform The Health Law