Our office in Orange County provides service to the Los Angeles area...See Locations Details
Supreme Court Upholds Obamacare
By Paul Treinen, Tax Partner, While Nelson Diehl Evans LLP
On June 28, 2012, the United States Supreme Court issued its decision regarding the constitutionality of the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA), which are hereinafter referred to as “Obamacare.” After passage of Obamacare several states challenged the laws on constitutional grounds. The cases started in the federal district courts and eventually worked their way through the circuit courts of appeal and finally landed before the Supreme Court.
In a nutshell, the nation’s highest court upheld the law, except for certain Medicaid provisions. The Court’s 5 to 4 decision preserves many far-reaching tax provisions and health insurance reforms. Perhaps the most surprising of the five votes to uphold was that of Chief Justice John Roberts. Long considered a conservative justice, Roberts’ vote to uphold Obamacare has cast him squarely in the cross fire of the Republican Party. Having now survived the Supreme Court, Obamacare will be tested again in the November elections as the Republicans will likely use this tactic to possibly repeal the laws. It still appears that this politically-charged issue will face voters and there could potentially be some provisions within Obamacare that may be repealed as fodder for congressional races. Here is what we know as of now.
The new law contains an “individual mandate” often referred to as the “Share Responsibility Penalty.” The mandate requires U.S. citizens and legal residents to have qualifying health coverage or be subject to a tax penalty. Under the Act, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing.
The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 or the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.
Potentially Costly Tax Items
There are other tax provisions aside from the individual mandate that may affect you or your business. The listing below is not all inclusive. In fact, we highly recommend that you contact your White Nelson Diehl Evans (”WNDE”) tax professional to start planning for these provisions below:
• Code Sec. 45R small employer health insurance tax credit
• Additional Medicare tax for higher income individuals
• Medicare tax on investment income
• FSA contribution limits
• Increased itemized medical expense deduction threshold from 7.5% to 10% of AGI
• Excise tax on “Cadillac” health insurance plans
• Additional tax on distributions from health savings accounts (HSAs) and certain other arrangements
• Excise tax on certain medical devices
• Limits on use of health FSA dollars on over-the-counter medications
• Enhanced simple cafeteria plan rules for small businesses
• Codification of the economic substance doctrine
• Branded prescription drug fees
• Reporting requirements for sponsors of health care coverage
As is the case with individuals, Obamacare does not require that a â€œlarge employerâ€ provide health coverage to its employees. With this said, after 2013 a business will be penalized for failing to provide such coverage. A large employer (generally, an employer with at least 50 full-time employees) will be required to make an “assessable payment” to the IRS if certain conditions exist with respect to the insurable employee. These conditions generally are as follows:
• The employer does not offer health care coverage for all its full-time employees; or
• The employer offers minimum essential coverage that is either “unaffordable” or the health plan has certain health expense ratios that are adverse
The “applicable payment amount” will be $166.67 with respect to any month or $2,000 annually.
Along with the tax-related provisions above, Obamacare does include many structural reforms for the insurance system in general. These include but are not limited to the following:
• Enhanced coverage for certain dependents
• Summary of benefits coverage and uniform glossary
• New rules for internal and external reviews of adverse decisions by health insurance carriers
• Patient’s bill of rights
• New rules for preventive services
On the Horizon
As we stated earlier, it appears that we have not heard the end of the challenges for Obamacare. Everyone from individuals to business should prepare for the sweeping tax and structural changes in health care in coming years. Please contact your WNDE tax professional to start the planning process for these reforms.
We will follow this article up in the following months with a complete synopsis and timeline for Obamacare.