On June 28, 2012, the United States Supreme Court, in a five to four decision, held the Affordable Care Act (“ACA”) constitutional. This holding allowed several lawsuits that were on hold pending the decision to be released to move forward. This is a summary of the present challenges that are being litigated post the Supreme Court decision.
First of all, it is to be understood that, as of this moment, the ACA is the law of the land. Regulations are being released that had been worked on for many months prior to the recent election but were put on hold awaiting the outcome. Thus, companies and individuals need to be preparing for compliance in accordance with the timetable set forth by ACA, especially the January 1, 2014 date at which time the “Individual Mandate” to provide or have health insurance takes effect.
In the meantime, there are several serious constitutional challenges to ACA. The first such challenges, which involve an evangelical university and Roman Catholic owners of businesses, are rested on the requirement that employers under the terms of ACA are required to provide coverage for contraceptive health care. These challengers base their challenge to this part of ACA on their religious beliefs, and claim that this part of the ACA violates their freedom of religion. One of these cases in the Fourth Circuit has just been sent back to the Fourth Circuit by the Supreme Court for a further determination of this issue.
A further challenge is being maintained by the Attorney General of Oklahoma. This challenge involves the technical anomaly and oversight in the ACA that allows certain subsidies to be given with respect to health insurance exchanges that are state based but not federally based. Since
Finally, a case in the Washington DC District Court raises the question of whether or not the classification of the Individual Mandate as a tax rather than a penalty dooms the ACA constitutionally since all revenue bills must be introduced in the House of Representatives, and the ACA began its life as a Senate bill. This case is in its preliminary stages.
Paying for Health Care Reform
Now that we know the ACA is here to stay, at least for the time being, we must resign ourselves to the cost of this health care reform. When enacted, the price tag for the ACA health care reform measures was estimated to be $940 billion over the next decade. If all goes as intended, efficiencies in the delivery and availability of health care, as well as reductions in the levels of reimbursements to Medicaid and Medicare, will offset much of these costs. Nevertheless, a principal source of funding for these health care reform measures are new fees and other assessments, including increased taxes imposed upon higher-income taxpayers.
Certain of these new taxes that become effective for 2013 and beyond are summarized below.
- 1. Annual Limitation on Health FSA Salary Reduction Contributions. Effective for the plan year that begins on or after January 1, 2013, the maximum amount that an employee can contribute to a health FSA account on a salary reduction basis for a plan year is $2,500.
- 2. Increase in Medical Expense Deduction Threshold. Currently, individuals are allowed an itemized deduction for unreimbursed medical expenses, but only to the extent that such expenses exceed 7.5 percent of their adjusted gross income (“AGI”). Effective for 2013, the ACA increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5 percent to 10 percent of AGI. However, through 2016, if either the taxpayer or the taxpayer’s spouse attains age 65 before the end of the year, the increase does not apply, and the threshold remains at 7.5 percent of AGI.
- 3. Additional Medicare Tax on Higher-Income Employees. The ACA increases the employee portion of the FICA Medicare tax by an additional 0.9 percent (from 1.4 percent to 2.3 percent) on wages received in excess of $250,000 (in the case of a married couple filing jointly), and $200,000 (in the case of an unmarried employee). An employer must begin withholding the additional Medicare tax for the pay period in which it pays wages in excess of $200,000 to an employee.
- 4. Medicare Tax on Investment Income. In addition to buttressing Medicare through the additional tax on higher-income employees, the ACA imposes a new Medicare tax on net investment income. The tax is 3.8 percent of the lesser of:
- A taxpayer’s net investment income (including interest, dividends, annuities); or
- The excess of the taxpayer’s adjusted gross income over a threshold amount.
The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
- 5. Individual Responsibility Tax. Effective as of 2014, individuals will be required to have qualifying health insurance for themselves and their dependents. If they do not, they will be subject to a federal penalty tax. Ultimately, the tax will be 2.5 percent of the individual’s household income that exceeds the applicable filing threshold for the applicable tax year.