Is the Affordable Care Act on life support? In our continued review of the new administrations impact on taxes we will examine the changes that could result with the repeal of this legislation.
The Affordable Care Act
Since its enactment, the Republicans have been focused on the repeal of the Affordable Care Act (ACA), also known as Obamacare. The ACA has been the subject of numerous challenges by allied states attorney generals and other organizations in the court system. Now with the Republicans in control it seems as good as dead. However, tremendous political pressure exists from those 20 million Americans who have obtained insurance because of the ACA. Many in the Republican Party now feel a replacement will have to be formulated prior to the repeal of the ACA. As a replacement, the President has promoted high-deductible health plans and health savings accounts while eliminating the requirement to buy health insurance. He has indicated that improved competition in the health insurance market must be encouraged as part of his plan. Health insurance costs and deposits to health savings accounts would be allowed as deduction from income or a credit from taxes.
Current Penalties
Currently, the ACA imposes penalties on both individuals and business, classified as taxes, when an individual fails to obtain health insurance and when businesses fail to provide health insurance. This is known as the joint responsibility portion of the law. Business with more than 50 full-time equivalent employees are subject to a $2,000 penalty for each employee over 30 full-time workers that were not provided insurance and a $3,000 penalty for each employee provided unaffordable coverage or coverage that did not meet a minimum value. Individuals are subject to a household tax on the greater of 2.5% of household income or $695 per adult and $347.50 per child.
Businesses with 50 or more full-time equivalent employees must report insurance data for each full-time employee to both the IRS and to the employee. Business must also file additional information with the IRS that provides details of the coverage offered to employees. These forms are due to the employees by March 2, 2017, instead of January 31. The reporting to the IRS is due by February 28, 2017, unless e-filing.
The ACA also imposes an additional 0.9% Medicare tax on earnings in excess of $200,000 for an individual return and $250,000 for a joint return. This additional tax is withheld by employers and reported by the employee on Form 8959. The tax is not matched by the employer as is traditional Medicare Tax. The tax is also imposed on self-employed taxpayer’s earned income.
Finally, the ACA imposes a Net Investment Income Tax of 3.8% on interest, dividends, non-qualified annuities, royalties, capital gains unless from a non-passive trade or business, rental income not part of an active trade or business and passive flow-through income from a partnership or S-Corporation. The tax is imposed when modified adjusted income exceeds $200,000 on an individual tax return or $250,000 on a joint return.
Getting Through the Senate
The expectation at this point is for the repeal of the above discussed provisions and replacing it with some form of the President’s proposal. However, first the President must overcome what will surely be a filibuster in the Senate by the Democrats. Obtaining the required 60 votes in the Senate will be a Herculean challenge. If the President fails to pass repeal of the Affordable Care Act, he and the Republicans can take small steps by executive order, incremental legislative changes and the budget process to gut the Affordable Care Act without a replacement at the cost of forcing millions of people off health insurance. Should the President succeed with his replacement the long term question will remain, will the President’s plan of high deductible health insurance coupled with health savings accounts be an adequate replacement or will some form of the Affordable Care Act return in the future?
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About the Author
James Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.
