The Patient Protection and Affordable Care Act, more commonly known as the health reform bill, was signed by President Obama Tuesday. The Congressional Budget Office estimates the health care overhaul will cost $940 billion over 10 years, and will cover 32 million uninsured individuals.
Meanwhile, Americans wait to find out how much our share of the tab will be, and how this mammoth legislation will affect our daily lives.
How will this bill be paid for?
Clint Stretch, the managing principal of tax policy for Deloitte Tax, LLP, says Obama intends to raise approximately half of the bill’s cost, $400 billion over the next decade, by raising taxes on what the president calls “top earners.” A quarter of the bill’s cost will be raised through an excise tax on the health insurance industry. And the balance will come through new fees assessed on targeted industries, including pharmaceutical manufacturers and importers, medical device manufacturers, and indoor tanning salons.
“Once Democrats decided they were going to reform health care, they had two choices to pay for it,” Stretch said. “They could raise taxes or they could borrow the money.” Borrowing, said Stretch, would put the burden on our kids and grandkids. ”It’s probably better in that case to raise taxes.”
Still, he wonders how they justify making higher income individuals pay a large part of the bill because there’s no reason to believe the top 3 percent of taxpayers use more health care than the rest of the population. It’s a “fig leaf,”Stretch said. In other words, what came first was the decision by Democrats to raise taxes on higher income individuals. Then they had to decide how to spend the money, and they chose health care.
“We need to ask ourselves how long we can ask the top earners to pay for whatever new programs we are going to have,” Stretch said. “Why weren’t other income levels asked to contribute?”
When asked how his advice to high-income clients will change because of the new bill, Stretch said, “All of this takes effect in 2013. This is not today’s problem,”and added optimistically that legislators might find another way to balance the budget before then.
“No forecast can be taken as gospel,” but the net effects, he predicted, will be that capital formation will be reduced, which in turn reduces growth in the gross domestic product. Beyond that, he added, the effect is subjective, depending more on your politics than on your knowledge of economics. If you believe Obama’s plan makes health care more affordable for people, then the population is better off. If you see this as driving up debt, then the population is not better off.
What will the impact be on individuals?
The simple answer is: Those individuals making higher wages or income will pay more tax to provide coverage for those making less. The additional tax will take several forms.
Stretch noted that the Democrats have been trying to raise tax on top earners by rolling back President Bush’s tax cuts since the day those cuts were enacted. Obama pledged to do that by letting the top two tax brackets, which were reduced under Bush to 33 and 35 percent, revert to their previous levels of 36 and 39.6 percent. When it comes to wage income, said Stretch, there’s no real way for individuals to do financial planning. If you want to lower your taxes, your only choices are to make less money or choose to defer more compensation.
Obama also has proposed to raise the capital gains rate from its current maximum of 15 percent up to 20 percent on dividends, interest income, and royalties. If that happens, said Stretch, his advice to his clients concerning capital gains planning will be about the same as it is now, including timing the gains and netting gains and losses.
Raising ordinary income tax and capital gains tax are significant increases that will impact higher income earners greatly, but they only begin to pay for the health overhaul. Another $86.8 billion will come from two new Medicare-related taxes on higher earners – both of which will take effect in 2013.
Part one of the Medicare tax, known as HI Tax (Hospital Insurance Tax) –
This is a tax of nine-tenths of one percent, which will be taken from single filers who earn at least $200,000 per year, and joint filers earning at least $250,000. The added tax will be on the excess earnings above those thresholds. Here are some examples from an analysis prepared by Deloitte Tax
- At the $250,000 income level, single filers will pay an additional $450 of taxes. Joint filers earning $250,000 will pay zero additional tax.
- With income of $350,000, a single filer likely would see an increase in taxes of $2,000, but a married couple with income of $350,000 would see their tax liability drop by $5,700, attributable to a lower AMT liability. *
- At the $500,000 income level, single filers will pay an additional $2,700. Joint filers with the same income will pay an extra $2,250.
These examples assume that Obama’s other proposed tax increases also apply, including a hike in ordinary income rates, higher capital gains and dividend taxes, the restoration of the phase-out of personal exemptions, the restoration of the 3 percent reduction in itemized deductions, and the extension of the higher exemption for AMT calculation.
The Medicare tax will be withheld by employers and there are possible penalties for under-withholding. In the case of joint filers, employers are not required to consider the earnings of the spouse, which could result in penalties being owed by the taxpayers. Deloitte gave this example: One spouse earns $200,000 and therefore no additional Medicare tax is withheld. The other spouse earns $100,000, which also results in no additional withholding. But when the couple files their joint return for a total of $300,000 in earnings, they exceed the joint filer threshold, which leaves them owing additional Medicare taxes plus penalties.
Part two of the Medicare tax, known as the investment income tax – This tax is equal to 3.8 percent, and will be levied on unearned income when modified adjusted gross income exceeds $200,000 for single filers and $250,000 for joint filers.
Deloitte gave this example: A single taxpayer with $300,000 in wages, investment income of $60,000, and modified AGI of $350,000 would pay the wage-based HI tax on $100,000 of wages, and 3.8 percent on the unearned income of $60,000. That equates to $3,180 above their other tax obligations. See Deloitte’s full analysis
for more examples.
Brief summary of changes to health care coverage
Requirement to obtain health insurance. Beginning in 2014, the new bill will require individuals to either obtain health insurance on their own, or pay a penalty on their income tax.
Health insurance choice. Individuals and small businesses can choose their plans through the new state-based purchasing pools, or exchanges,which will be available in 2014. The exchanges will allow for purchasing power similar to employees of big companies.
Government-run plan. Individuals and families will have the option to purchase coverage through a national plan, but there will be no government-run insurance plan.
Abortion. No health plan would be required to pay for abortion coverage. In policies that do offer such coverage, policyholders would have to pay for it separately. States could ban abortion coverage offered in exchange plans.
Subsidies. The bill also provides a refundable health care premium tax credit intended to help individuals and families buy health insurance on the individual market. The credit can be distributed in advance by the Treasury to insurers as a way to defray the insurance cost. Eligibility will be determined by a sliding scale for those whose income is between 100 percent and 400 percent of the poverty line (for a family of four, $88,200). Premiums for a family of four earning $44,000 would be capped at 6 percent of income.
Flexible spending accounts. After 2010, employee contributions to FSAs will be capped at $2,500 to limit the amount of pre-tax dollars that can be used to purchase health care, resulting in a higher individual tax bill.
Itemized deductions for medical expenses. For tax years beginning after December 31, 2012, the threshold to claim itemized deductions for unreimbursed medical expenses will rise from 7.5 to 10 percent, also resulting in higher individual taxes for those who itemize.
Nonqualified health savings account distributions. The penalty for such withdrawals rises from 10 to 20 percent for HSAs and from 15 to 20 percent for Archer MSAs. This is effective for tax years beginning after 2010.
Medicare “donut hole.” Beginning in 2011 the new bill will provide a $250 rebate to Medicare recipients who hit the donut hole, or coverage gap.Also beginning in 2011, the government will work with drug manufacturers to provide discounts on pharmaceuticals intended to close the gap.
Adoption credit. Effective for 2010, the child adoption tax credit increases from $12,170 to $13,170. This credit is extended through 2011, and is made refundable.
How will businesses be impacted?
The total impact to businesses is not definable, according to Deloitte Tax, but businesses will have to change in several significant ways.
Businesses, for example, will not be required to provide health coverage but as of 2014, employers who have at least 50 full-time employees (defined as working 30 hours per week or more) amd who don't provide health insurance will be assessed a penalty of $2,000 per employee per year.
Furthermore, James A. Klein, the president of the American Benefits Council, speculated that the Obama Administration has not taken into account all the relevant costs that will arise from the health reform bill. The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system.
“If and when President Obama signs the health care reform bill into law, potentially over the next few days, many of America’s largest employers will be forced to make an unpleasant choice: Drop their retiree prescription drug coverage or take an earnings hit that could seriously damage the company,” Klein said. “That is why organized labor and the business community are united in our concern over the impact of the provision in the health reform bill that would force this choice.”
Employers currently receive a 28 percent subsidy for providing prescription coverage to retirees. But according to the rules enforced by the Securities and Exchange Commission, when Obama’s health bill becomes law, those companies will have to charge the present value of decades of future taxes against current earning.
“Absorbing this kind of earnings hit would be deeply disruptive in today’s economic environment,” Klein said.
The Towers Watson consulting firm estimated that if companies do not move their retirees off of their own plans and onto Medicare, the aggregate impact on America’s corporations will be $14 billion. The American Benefits Council estimates that 1.5 million to 2 million retirees would have to be moved to avoid the hit.
“Most ironic of all, this provision has been tacked on to the health care bill as a revenue-raiser ($4.5 billion), but in fact it could end up losing the government money. The $4.5 billion figure only looks at the revenue from the tax; it does not take into account the increased government outlays as retirees are moved to the Medicare Part D program. As more retirees are moved, the revenue collected will go down and the government expense in Medicare will go up,” Klein said.
The new legislation also includes an excise tax on excess benefit plans.This part of Obama’s plan exacts a nondeductible 40 percent excise tax on what is labeled “excess benefits.” Excess benefits are those which, on an annual basis, exceed $8,500 for individuals or $23,000 for families.
All employer-sponsored coverage is affected, including reimbursement plans such as flexible spending accounts, health reimbursement accounts, and health savings accounts, dental, vision, and supplementary health insurance. Even self-employed individuals will be affected to the extent the self-employed insurance premiums create a tax deduction. Companies that are found undervaluing their plans to avoid the excise tax will be penalized. This part of Obama’s plan is set to take effect in 2013, but depending on the reconciliation actions of the Senate, might be delayed until 2018.
The Administration is counting on the excise tax to provide $149 billion in revenue through 2019. But Deloitte’s analysis predicts employers will avoid the tax impact by reducing excess benefits which are tax-free compensation, and increase taxable compensation. Employees will not only face reduced benefits but also pay higher deductibles and co-pays.