Taxes and the Affordable Care Act

Some of the most important changes stemming from the Affordable Care Act (ACA), also known as Obamacare, center around taxes. To understand how taxes are affected in 2023 by this law, which changed the landscape for healthcare insurance in the United States, it's important to review the history of taxes under the ACA.

A Brief History of Taxes Under the Affordable Care Act

Under the ACA, it was initially estimated that the total amount raised by new taxes and penalties on individuals and businesses would climb to approximately $514 billion by 2023.

The tax changes in the ACA were primarily intended to implement credits for low-income Americans and tax hikes for higher earners, notably people who earn $200,000 annually on an individual basis or $250,000 for an annual family income.

However, the average American was also impacted by the individual mandate, a requirement to buy health insurance, as well as insurance premium hikes passed on by insurers hit with new fees and taxes.

New Tax Policies

A total of 21 tax policies were linked to the ACA. Some are tax hikes, some are tax breaks, while others are just new reporting requirements. Below is a list of the 21 tax policies (with notes as to which have been repealed):

1. 2.3% tax on medical device manufacturers (repealed)
2. 10% tax on indoor tanning services
3. Blue Cross/Blue Shield tax hike
4. Excise tax on charitable hospitals that fail to comply with requirements of the ACA
5. Tax on brand name drugs
6. Health insurers fee (repealed as of 2021)
7. $500,000 annual executive compensation limit for health insurance executives
8. Elimination of tax deduction for employer-provided retirement prescription drug coverage in coordination with Medicare Part D
9. Employer mandate on businesses with over 50 full-time equivalent employees (requirement to provide health insurance options to all full-time employees)
10. Net investment income tax of 3.8% on investments, including the sale of stocks and bonds for those who earn more than $200,000 for single or $250,000 for married filers, as of 2021
11. Medicare Part A tax increase to 0.9% (as of 2021) for income over $200,000 for single or $250,000 for married filers
12. Employer reporting of insurance on W-2
13. Corporate 1099-MISC information reporting (repealed)
14. Codification of the economic substance doctrine
15. 40% excise tax on high-end premium health insurance plans (Cadillac tax) (repealed)
16. Annual $63 fee levied by the ACA on all plans through 2017
17. Medicine cabinet tax (repealed)
18. Additional tax on health savings account (HSA)/medical savings account (MSA) distributions for non-qualified medical expenses
19. Flexible spending account (FSA) cap
20. Medical deduction threshold tax (suspended through the tax year 2020)
21. The individual mandate or the requirement to buy health insurance (repealed)

Breakdown of Tax Changes

Here's a simple breakdown explaining how ACA taxes initially worked.

• It was estimated that all Americans who already had health insurance, making up around 83% of the population, would face no or no significant changes to their taxes.
• Of the remaining 17% of Americans who did not have health insurance, the most significant tax changes revolved around three key pillars of the ACA—the individual mandate, the employer mandate, and tax credits linked to healthcare exchange plan premium costs for individual Americans, families, and small business owners.
• There was an outlier: Americans who previously invested in HSAs and FSAs would also see new limits on healthcare-related tax deductions.

The Individual Mandate

For most Americans, the biggest tax issue came from the individual mandate, which stated that U.S. adults who could afford to do so must sign up for healthcare, either directly through an insurance company or via a state or federal healthcare insurance exchange.

Exceptions to this mandatory healthcare purchasing rule were granted if:

• The premium from the lowest-priced bronze plan purchased through a health insurance exchange in someone's home state was more than a certain percentage of the purchaser’s household annual income.
• The purchaser’s annual household income was below the threshold for Internal Revenue Service (IRS) tax filing statutes.

Some taxpayers were also granted a tax exemption for religious beliefs, not being a U.S. citizen, being incarcerated, or belonging to an American Indian tribe.

Anyone who didn't buy qualifying health insurance had to pay an income surtax. The extra tax was calculated by taking the higher of the listed percentage of adjusted gross income (AGI) or the dollar figure shown below:

Tax penalties for failure to comply with the individual mandate raised $4 billion for the government in 2018, the final year it was in effect.

On the employer side, companies with 50 or more employees faced paying $2,000 (non-deductible and indexed for inflation) per full-time employee for not offering health coverage. This fee has been raised gradually since 2015 and now stands at $2,880 for 2023. This is called the employer shared responsibility payment.

Additional Repeals of ACA Taxes

Three additional provisions, the Cadillac tax, the medical device tax, and health insurer fees, were repealed as part of the short-term continuing spending resolution referred to as the Further Consolidated Appropriations Act, which passed in December 2019.

These key taxes raised considerable revenues, significantly more than the individual mandate penalties, for the government to partially offset the additional costs incurred due to the ACA. Here's where these items stand as of 2021.

Cadillac Tax

The Cadillac tax was a 40% tax on employer-issued health insurance that exceeded certain thresholds. The high-end premium health insurance plans impacted by the Cadillac tax were those at or above the 85th percentile of health insurance benefits (approximately $11,200 for individual coverage or $30,100 for family coverage).

The intention behind the tax was to discourage unnecessary or unreasonable use of medical services by individuals with generous health insurance coverage. Unsurprisingly, it wasn't popular with major employers, patient advocates, labor unions, or healthcare companies, many of whom banded together to create the Alliance to Fight the 40.

The Joint Committee on Taxation estimated that repealing the Cadillac tax would reduce government revenues by $197 billion over the next 10 years.

The tax was delayed twice before being repealed. In 2015, Congress delayed the implementation of the Cadillac tax from 2018 to 2020. In 2018, it was delayed again until 2022. In December 2019, it was officially repealed as of the 2020 tax year.

Health Insurer Fees

Health insurance providers were initially charged an annual fee due to the industry benefiting from more customers as a result of a larger portion of the population having health insurance coverage. The annual fee and the medical device tax were designed to help defray the cost of the ACA's expanded health insurance coverage.

The health insurer fee applied to insured medical, dental, and vision plans. It was based on a health insurer's market share of the industry. It took effect in 2014 but was suspended for both 2017 and 2019, although it continued to apply for the 2018 calendar year. It also applied for the 2020 calendar year but has been repealed as of 2021.

Medical Device Tax

The medical device tax failed to lower healthcare costs for consumers but increased costs and burdens on the healthcare sector as a whole. The medical device tax was a 2.3% excise tax on the price of medical devices sold in the United States. There was bipartisan support in favor of repealing the medical device tax permanently.

The impact on the medical device industry was substantial. Between 2013 and 2015, 29,000 jobs were lost in the medical device industry, 22,000 of which were estimated to be solely due to the tax. Medical device companies postponed investments in research and development (R&D)—85% of companies in the industry reported they would reinstate previously foregone R&D investments when the tax was permanently repealed.

It was in effect from 2013 to 2015 but was suspended by Congress in 2016 through 2019, prior to being permanently repealed for the tax year 2020. The Joint Committee on Taxation estimates that repealing the medical device tax and health insurer fees will reduce government revenues by $151 billion over the next 10 years.

ACA Taxes That Survived

Medical Deduction Threshold Tax

The ACA brought with it a $15 billion tax on individuals who take a deduction based on having high medical bills. The old threshold of deductible medical expenses exceeding 7.5% of AGI was replaced with a threshold of 10% from 2013 to 2016. Americans aged 65 and over were exempt from this higher threshold.

The Tax Cuts and Jobs Act reinstated the former threshold of 7.5% of AGI for tax years 2017 and 2018. The Further Consolidated Appropriations Act in December 2019 also extended the lower 7.5% AGI threshold for tax year 2022.

Health Savings Accounts Caps

The ACA placed an annual contribution limit on health savings accounts (HSA) as well as flexible spending accounts (FSAs). These caps are updated annually to account for inflation.

Medicine Cabinet Tax

One ACA tax estimated at $5 billion, called the medicine cabinet tax, also outlined that U.S. adults could not use HSAs, FSAs, or health reimbursement pretax dollars to buy nonprescription, over-the-counter medicines. This provision was permanently repealed as of the 2020 tax year as part of the CARES Act. Certain over-the-counter medications and products, as well as menstrual care products, are now eligible for HSA and FSA reimbursement without a prescription.

Indoor Tanning Tax

This tax, which went into effect in July 2010, placed a 10% excise tax on U.S. indoor tanning salons. While it was expected to bring in $1 billion in new tax revenues during the first four years, the tax has since been deemed a failure, raising just over $367 million in its first four years. It also contributed to the demise of the indoor tanning salon industry, which proponents of the provision still count as a public health win. The tax is still in effect as of 2022.

Medicare Tax

The 0.9% Medicare surtax applied to wages and self-employment income over $200,000 for individuals and $250,000 for married couples remains unaffected by subsequent suspensions and repeals, as it would be unpopular to repeal an additional tax on high earners that funds Medicare.

Net Investment Income Tax

The 3.8% ACA tax on net investment income applies to unincorporated taxpayers (basically individuals, estates, and certain trusts) who have a modified adjusted gross income (MAGI) above these annual income levels:

• $250,000 in the case of married taxpayers filing a joint return or a surviving spouse
• $125,000 in the case of a married taxpayer filing separately
• $250,000 for a qualifying widow(er) with a dependent child
• $200,000 for everyone else, except estates and trusts, where the threshold is equal to the highest amount at which the maximum tax rate begins

These rates are not indexed for inflation. The tax is still in effect as of 2022.

Additional Legislative Changes

The American Rescue Plan Act of 2021 (ARPA) brought significant changes to the Affordable Care Act. These changes aimed to expand access to affordable healthcare coverage during the COVID-19 pandemic. ARPA increased premium subsidies for individuals and families purchasing insurance through the ACA's marketplaces, making insurance more affordable and extending subsidies to middle-class households.

ARPA also ensured that low-income individuals could access zero-premium plans, provided temporary COBRA subsidies for job loss-related coverage, and offered incentives for Medicaid expansion in states that hadn't already done so. Additionally, the law extended the dependent coverage age to 26, and the open enrollment period for marketplace plans was lengthened, making it easier for more Americans to obtain health insurance and reducing the number of uninsured individuals.

In addition, other recent changes to the Affordable Care Act were announced by the Department of Health and Human Services (HHS) in April 2022. These changes are part of the Biden-Harris Administration’s ongoing effort to strengthen and build on the ACA. One of the major policies announced is the advancement of Standardized Plan Options, which will simplify the consumer shopping experience by establishing standardized plan options for issuers offering Qualified Health Plans (QHPs) on HealthCare.gov. It is important to note that both the ARPA and changes by HHS largely do not affect taxes but still contribute to the overall evolution of the ACA.

The Bottom Line

People may not realize it, but amidst all the controversy about how the ACA was rolled out, a resulting trove of taxes has since dramatically impacted the financial lives of many Americans. For as long as the ACA remains the law, be sure to consult a tax specialist to minimize any financial harm.