An Introduction to the Tax Provisions Under the Affordable Care Act (ACA)

The Affordable Care Act (ACA) was signed into law in 2010. It brought significant changes to the American healthcare system with the primary goals of increasing access to health insurance coverage, improving quality of care, and reducing healthcare costs for individuals and the government. A vital component of the ACA was the introduction of several new tax provisions to help fund expanded health coverage and achieve the law’s objectives. This article overviews the major ACA tax provisions impacting individuals, employers, and other healthcare organizations.

The Primary Goals of the Law

The ACA was enacted with three primary policy goals in mind:

1. Expanding access to affordable health insurance coverage. Before the law, millions of Americans did not have health insurance either because their employer did not offer it or because it was too expensive to purchase individually. The law provided subsidies like premium tax credits to make coverage more affordable for low and middle-income households.
2. She was improving the quality of healthcare and patient protection. The law implemented measures to increase the quality of care and protect patients from insurance company abuses. The ACA also funded new models of care delivery aimed at improving coordination and quality while reducing costs, such as accountable care organizations and bundled payments. Medicaid was expanded to cover more low-income adults below 138% of the federal poverty level (FPL).
3. I was reducing the overall costs of healthcare for families, businesses, and the government. Controlling rising healthcare costs was a significant impetus for reform. The law took steps to bring down costs for households and the government in multiple ways.
   To accomplish these goals, the ACA relied heavily on creating new tax revenue streams and revising the tax code for individuals and businesses. The various tax provisions helped fund expanded coverage options while serving as levers to incentivize certain healthcare behaviors.

List of Tax Provisions

The ACA introduced many new tax measures impacting healthcare stakeholders. The significant provisions can be grouped into categories based on who is affected:

1. Tax Provisions for Individuals

Tax provisions for individuals include a higher threshold for itemized medical expense deductions. Before the ACA, taxpayers could deduct qualified medical expenses exceeding 7.5% of adjusted gross income (AGI). The threshold was increased to 10% of AGI, except for taxpayers 65 and older through 2016.
Individuals earning over $200,000 and couples over $250,000 must pay an extra 0.9% Medicare payroll tax. There is also a 3.8% Net Investment Income Tax on high-income earners.

2. Tax Provisions for Employers

Small Business Health Insurance Tax Credit provides credit for small businesses with fewer than 25 full-time employees purchasing group health coverage. Cadillac Tax on high-cost employer plans establishes a 40% excise tax on employer plans exceeding certain premium cost thresholds.

Tax Provisions for Other Organizations

There are Annual fees for health insurers based on market share. Health insurance providers must pay annual fees that help fund premium subsidies and expanded Medicaid coverage. Moreover, there is an excise tax on medical device manufacturers. Makers of medical devices must pay a 2.3% sales tax on medical devices like pacemakers and CT scanners.

Before the ACA, employers received a full deduction for retiree prescription medication costs. The law trimmed the allowable deduction to the amount of actual spending.

ACA Tax Provisions Details

Now that we have covered the major categories of ACA tax provisions, let’s explore some of the critical provisions in greater detail:

Medical Expense Deduction

One of the earliest tax changes impacting individuals was increasing the medical expense deduction threshold from 7.5% to 10% of AGI beginning in 2013. This meant medical expenses had to exceed 10% of income to be deductible on federal income taxes.

Additional Medicare Tax

High-income earners saw increased Medicare taxes under the ACA. Individuals earning over $200,000 and married couples over $250,000 must pay an extra 0.9% Medicare Hospital Insurance tax on the amount of earnings above the threshold. This additional payroll tax helps fund Medicare.

Net Investment Income Tax

The Net Investment Income Tax (NIIT) also targets high-income taxpayers, individuals earning over $200,000, and couples earning over $250,000. It imposes a 3.8% surtax on net investment income like capital gains, dividends, interest, royalties, rents, and passive business income. The NIIT helps fund the law’s coverage expansions.

Employer Shared Responsibility Payments

The ACA’s employer mandate requires larger employers with 50 or more full-time equivalent employees to offer affordable health coverage meeting minimum value standards. Employers that do not comply may face stiff penalties if any full-time workers obtain subsidized marketplace coverage. The provision has been gradually implemented over time.

Small Business Health Insurance Tax Credit

To help small businesses afford health coverage, the ACA provides a tax credit to companies with fewer than 25 full-time equivalent employees making average wages below $50,000. To qualify, the small business must purchase group health insurance through the Small Business Health Options Program (SHOP) Marketplace.

Cadillac Tax

One of the law’s more controversial taxes is the Cadillac Tax on high-cost employer-sponsored health plans. It imposes a 40% excise tax on the value of group health benefits exceeding certain thresholds – $10,200 for individuals and $27,500 for family coverage in 2022. The tax aims to curb costly benefit packages but has been repeatedly delayed due to pressure from employers and unions.

Health Insurer Fee

The ACA imposes an annual fee on health insurance providers based on their relative market share of premiums. The fee helps fund premium tax credits and expanded Medicaid coverage. Congress has periodically suspended collection of this fee, including a one-year moratorium in 2021.

Medical Device Excise Tax

Manufacturers and importers of medical devices like cardiac defibrillators and surgical tools must pay a 2.3% excise tax on the sales price of these devices. Exemptions apply for eyeglasses, contact lenses, and other everyday items. Congress has also regularly delayed implementation, including a pause in effect for 2020-2021.

Tanning Excise Tax

The law enacted a 10% excise tax on indoor tanning services like tanning beds and booths to help fund expanded coverage. Tanning salons must collect this tax from customers and remit it to the IRS each quarter.

Health Care Tax Tips

With so many healthcare tax law changes, taxpayers must understand how the provisions impact them personally. Here are some tips for navigating taxes and healthcare:

• Review your income to see if you exceed the MAGI thresholds for any added taxes.
• Save medical receipts throughout the year to maximize medical expense deductions.
• Consult a tax professional to determine eligibility for the premium tax credit and other savings.
• Stay up-to-date on changing implementation timelines for provisions like the Cadillac Tax.
• Take advantage of tax-advantaged accounts to save on healthcare expenses.
• If you received advance premium tax credits, report any significant income changes to avoid repayment issues.
• Consider how benefits like workplace wellness programs and employee assistance plans can cut your tax liability.