Dear Client,

Many clients (like yourself) have asked us about the tax impact of the health care reform law now that the U.S. Supreme Court has indicated that the law is largely constitutional. The following paragraphs provide a broad outline of some of the key individual tax provisions in that law.

The Personal Responsibility Tax Penalty

The U.S. Supreme Court found that the personal responsibility “penalty” is a tax and thus constitutional. This tax provision is found in Section 5000A of the tax code. It starts in 2014 and “ramps up” (increases) quickly. In 2016, the penalty is equal to the greater of $695 or 2.5% of household income (a family cap of $2,085 applies). This provision applies to all clients irrespective of income level.

The personal responsibility penalty tax is aimed at individuals who fail to maintain health insurance coverage. To avoid the penalty, the individual must maintain minimum essential coverage.

Medical Deduction

It is very hard to obtain an itemized deduction for out-of-pocket medical care costs. Under current law, a taxpayer must exceed a 7.5% of AGI (adjusted gross income) threshold to obtain a deduction. Under the health care reform, a 10% of AGI threshold will apply.

This rule will generally come into effect in 2013. However, individuals age 65 and older will be able to use the existing 7.5% through 2016.

Health FSA Cafeteria Plan Contributions

The new law limits health flexible spending account contributions to $2,500 in 2013. This significantly restricts these benefits for individuals.

Remember, the pre-tax nature of a health FSA contribution is a major benefit to individuals. Many individuals work for companies that sponsor “cafeteria plans” (pre-tax plans) that contain such pre-tax health FSA type benefits.

Other Individual Tax Provisions In The Affordable Care Act

  • Individuals who take a non-qualified distribution from a health savings account (HSA) (or Archer MSA) will incur a 20% (up from a 10%) additional tax (effective 2011).
  • In 2018, the new law imposes a 40% excise tax on “cadillac” health care policies (health coverage). It is an “indirect tax.” The excise tax is imposed on the insurers on a pro rata basis. Thus, either policies will be modified to avoid the tax or there will be higher costs for these types of policies. Stay tuned.
  • There are other provisions that may directly or indirectly impact a particular individual client. For example, there is an excise tax on manufacturers and importers of certain medical devices. This cost may be passed on to the individual consumer.

Please contact our CPA firm if you have any questions regarding the tax impact of the Affordable Care Act.