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ACA Repeal

Healthy Choices? Understanding the Tax Implications for Businesses and Individuals of an ACA Repeal

The future of health care is among the most controversial and important issues facing the country. Repealing and/or replacing the Affordable Care Act (ACA), often referred to as “Obamacare,” will significantly impact many individuals and businesses. In recent days, lawmakers have attempted to repeal and replace, then simply repeal, the ACA. As of this writing, the Senate, with 51 votes (including a vote from Vice-President Mike Pence), successfully motioned to debate health care in hopes of replacing the ACA. As a tax professional, my aim is to briefly discuss only a portion of the debate’s potential “monetary” impact on you or your business.

Individuals

“And the agreement reached this week will reduce the deficit even more by asking the wealthiest 2 percent of Americans to pay higher taxes for the first time in two decades. So that’s progress…We now raised those rates permanently, making our tax code more progressive than it’s been in decades.”

– President Barack Obama (one week after Congressional passage of the ACA)

In 2013, tax practitioners and taxpayers alike wondered what to make of two new taxes, the Medicare surtax and the net investment tax. The net investment tax applies to those with incomes above $200,000 and couples with incomes that exceed $250,000. The Medicare surtax applies to those with wages above $200,000 and couples with wages above $250,000. These taxes were opposed by many legislators and may be dissolved if Congress ultimately agrees on a repeal and replace of the health care plan.

The taxes that fund Obamacare tax wealthier individuals and, conversely, some proposals to repeal the ACA suggest substantial tax cuts for these taxpayers.

Here’s an analysis of tax returns of those who earned $1 million or more, according to an IRS-published 2014 statistical table: These taxpayers had an average of 40 percent of their AGI coming from taxable interest, dividends and capital gains.[1] Over 56 percent of the total taxable interest, dividends, and capital gains were made by these individuals.[1] According to the Tax Policy Center, if you combine savings from a repeal of the Medicare surtax and the net investment tax, taxpayers with income of over $1 million would save an average of $50,000 in 2025.[2]

So how does this affect those who earn less?

Even if the above two taxes don’t affect you, your tax is still affected by Congress’ repeal and replace effort for health care. The ACA made purchasing health insurance mandatory by placing a potential penalty on tax returns of those who declined insurance. There are two formulas to calculate this penalty.[3] The higher calculation is the one that taxpayers subjected to this penalty are required to pay.[3] In 2015, 28.5 million Americans did not have health coverage.[4] In a survey conducted among uninsured nonelderly adults, almost half of these people attempted to buy coverage but found it to be too expensive.[4] As a result, these uninsured nonelderly adults opted to pay the tax penalty instead of health insurance. If this penalty goes away, these people will pay less tax.

Companies

In 2013, individuals were not the only ones trying to understand the new taxes. Businesses also had taxes that required examination. The first tax that will be discussed is the medical device tax. This is a 2.3 percent excise tax that a medical device company must pay on sales.[5] But device turns out to be a relatively broad term—it can be anything from an X-ray machine to a chemical substance such as reagent.[6] This tax applies to both manufacturers of the medical devices and importers.[5]

Revenue gained from the medical device tax in 2015 was approximately $3 billion dollars.[9] In 2015, the medical device industry lost 28,800 jobs and put the blame on the tax.[7] It can be argued that this industry has been losing jobs since 2011. A survey from January 2015 shows that approximately 56 percent of CEOs in the medical device industry did not make any changes as a result of the tax. [8]  Additionally, a 2017 report by Emergo shows confidence in the medical device industry in the U.S.[8]  According to an estimate made by the Joint Committee on Taxation, a full repeal of this tax would cost the government $20 billion over ten years. [2]

Another tax, this one hitting drug companies, is a collective annual fee that is based on drug sales to government health programs. Total revenue that the government received as a result of this fee was $2.8 billion in 2013.[9] The only pharmaceutical companies that pay this fee are the ones with revenue over $5 million toward prescription drug sales made to specified government programs.[9] According to the Department of Health and Human Services, government programs include: Medicare Parts B and D; Medicaid; any program under which branded proscription drugs are obtained by the Department of Veteran Affairs and/or the Department of Defense; and the TRICARE retail pharmacy program.[9] According to an estimate made by the Joint Committee on Taxation, a full repeal of this tax would cost the government $29 billion over 10 years.[2]

The third and final tax is the fee on insurers. This applies to entities that provide health insurance for U.S. taxpayers. The total amount of fees collected by the government in 2015 was $11.3 billion.[10]   These fees are paid by health insurance providers in proportion to their share of the health insurance market.[10] According to an estimate made by the Joint Committee on Taxation, a full repeal of this tax would cost the government $145 billion over 10 years.[2]

These three taxes – the medical device tax, the drug company tax and the fee on health providers, were  enacted with the belief that more people would sign up for health insurance to avoid the insurance penalty. If more people have health insurance, then there may be more demand for medical devices and prescription drugs. As a result, the ACA is being paid for and these affected companies are still raising more in revenue.

So how does this affect me?

Effective as of 2016, even if your business was not in any of the industries previously discussed, the ACA mandates that any business with 50 or more full-time equivalent employees must offer their employees health coverage, or the business may end up paying a tax penalty. Businesses with 100 or more full-time equivalent employees had the ACA mandate in effect starting in 2015. Options for these companies when buying health insurance include, but are not limited to: buying coverage through insurance companies such as Medical Mutual; buying insurance from an industry or professional trade group; or becoming a self-insured plan. This can be quite costly for many employers. However, more than 96 percent of firms that were affected by this mandate already offered coverage to their employees.[11]       

No one knows what a “replaced” health care law may look like, and that makes it nearly impossible to theorize its monetary impact on you. What you can expect is change, which Skoda Minotti will monitor and keep you informed of. Stay tuned.

Do you have questions about the ACA or similar issues? Contact Justin Slaby at 440-449-6800 or email Justin.

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Sources

[1] “SOI Tax Stats – Individual Statistical Tables by Size of Adjusted Gross Income.” Www.IRS.gov. N.p., n.d. Web. 10 July 2017. <https://www.irs.gov/uac/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income>.

[2] Huang, Chye-Ching, and Brandon Debot. “House Health Bill: Tax Cuts for Wealthy, Insurers, and Drug Companies Paid for by Low- and Middle-Income Families.” Center on Budget and Policy Priorities. N.p., 22 May 2017. Web. 10 July 2017. <https://www.cbpp.org/research/federal-tax/house-health-bill-tax-cuts-for-wealthy-insurers-and-drug-companies-paid-for-by>.

[3] “The fee for not having health insurance.” HealthCare.gov. N.p., n.d. Web. 10 July 2017. <https://www.healthcare.gov/fees/fee-for-not-being-covered/>.

[4] “Key Facts about the Uninsured Population.” The Henry J. Kaiser Family Foundation. N.p., 29 Sept. 2016. Web. 10 July 2017. <http://www.kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/>.

[5] “Medical Device Excise Tax: Frequently Asked Questions.” Www.IRS.gov. N.p., 3 Nov. 2016. Web. 10 July 2017. <https://www.irs.gov/uac/medical-device-excise-tax-frequently-asked-questions>.

[6] “Is The Product A Medical Device?” U.S. Food and Drug Administration. N.p., 12 Sept. 2014. Web. 10 July 2017. <https://www.fda.gov/MedicalDevices/DeviceRegulationandGuidance/Overview/ClassifyYourDevice/ucm051512.htm>.

[7] Book, Robert. “Employment Effects of the Medical Device Tax.” American Action Forum. N.p., 2 Mar. 2017. Web. 10 July 2017. <https://www.americanactionforum.org/research/employment-effects-medical-device-tax/>.

[8] Lee, Michelle Ye Hee. “The claim that the medical-device tax led to the loss of 20,000 U.S. jobs.” The Washington Post. N.p., 16 Mar. 2017. Web. 10 July 2017. <https://www.washingtonpost.com/news/fact-checker/wp/2017/03/16/the-claim-that-the-medical-device-tax-led-to-the-loss-of-20000-u-s-jobs/?utm_term=.df7f4795a5d0>.

[9] “Annual Fee on Branded Prescription Drug Manufacturers and Importers.” Www.IRS.gov. N.p., 20 Mar. 2017. Web. 10 July 2017. <https://www.irs.gov/businesses/corporations/annual-fee-on-branded-prescription-drug-manufacturers-and-importers>.

[10] “What are the major federal excise taxes, and how much money do they raise?” Tax Policy Center. N.p., n.d. Web. 10 July 2017. <http://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise>.

[11] “ObamaCare Employer Mandate.” Obamacare Facts. N.p., n.d. Web. 10 July 2017. <https://obamacarefacts.com/obamacare-employer-mandate/>.

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