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Sally P. Schreiber Alistair M. Nevius

Health care decision leaves many tax items in place

Attention has focused on the Supreme Court's characterization of the health care insurance mandate as a tax—but the health care law is full of tax provisions.

July 12, 2012
by Sally P. Schreiber, J.D., and Alistair M.Nevius, J.D.

The much-anticipated and widely reported Supreme Court decision that declared the mandate in Sec. 5000A, requiring U.S. citizens and legal residents to maintain minimum essential health coverage, to be a permissible exercise of Congress’s taxing powers under the Constitution also upheld many other tax provisions in the law (National Federation of Independent Business v. Sebelius, Sup. Ct. Dkt. No. 11-393 (U.S. 6/28/12)).

The court, in a 5–4 decision, held that the payments required of individuals who do not maintain minimum health coverage under the “individual mandate” are not a penalty, but rather are a tax and are within Congress’s power to tax under Article 1 of the Constitution. This means they are constitutional, even though a majority of the justices found that the individual mandate went beyond Congress’s powers under the Commerce Clause.

Subsequent commentary, in the media and by politicians, has focused on the Court’s characterization of the “shared responsibility payment” in Sec. 5000A as a tax. But in addition to making sweeping changes to the U.S. health care system, the 2010 health care reform legislation added a number of new taxes and made various other revenue-increasing changes to the Code to help finance health care reform. It also made several health-care-related changes to the Code to benefit certain taxpayers, including a credit to offset part of the costs of health insurance for low- to middle-income individuals and families and a credit to offset part of the costs to small businesses of providing health insurance for their employees.

Shared responsibility payment is a tax

Although the individual mandate’s “shared responsibility payment” in Sec. 5000A is labeled a penalty, not a tax, the Court held it is a tax for purposes of determining its constitutionality and ultimately upheld it as a valid exercise of Congress’s power to tax.

Chief Justice John Roberts concluded that the individual mandate must be construed as imposing a tax on those who do not have health insurance, if such a construction is reasonable, because “every reasonable construction must be resorted to, in order to save a statute from unconstitutionality” (Hooper v. California, 155 U.S. 648 (1895)).

The Court held that the individual mandate is within Congress’s power under the Constitution’s Taxing Clause. The Court concluded that the individual mandate is not a legal command to buy insurance, but rather is a tax on the choice to forgo buying insurance. It does not apply to people who are not required to file income tax returns. The fact that the Patient Protection and Affordable Care Act, P.L. 111-148 (PPACA), calls it a penalty instead of a tax was not controlling, the Court said.

Provisions in the health care law

The entire act was upheld, although the Court did limit the federal government’s power to terminate states’ Medicaid funds. The Court held that the Medicaid portion of the PPACA, which requires states to accept an enormous expansion in the number of people they cover under the program or face a cut of all Medicaid funds, was unconstitutional as enacted, but found that a severability clause in the law allowed the Medicaid provision to go forward without the threat of the loss of all Medicaid funds.

Several health-care-related elements of 2010’s health care reform legislation (the PPACA and the Health Care and Education Reconciliation Act of 2010, P.L. 111-152) are already in effect, and the Court’s decision allows them to continue. These include a temporary high-risk pool for individuals with preexisting health conditions, a prohibition on lifetime dollar limits for essential benefits in insurance policies, and a requirement that dependents be allowed to stay on their parents’ health coverage until they turn 26. In addition, insurers are prohibited from excluding preexisting conditions for children under age 19 and, starting in 2014, will be prohibited from discriminating against any individual based on a preexisting medical condition. Also in 2014, states will be required to establish health insurance exchanges, and the insurance premiums of individuals in households with income up to 400% of the poverty line will be subsidized.

Other key health-related provisions that go hand in hand with the individual health insurance mandate are:

  • Guaranteed issue: A requirement that health insurers sell coverage to anyone regardless of health status;
  • Community rating: A requirement that people in the same age group pay the same premium regardless of health status; and
  • Employer responsibility: A requirement that every company with a workforce of at least 50 full-time-equivalent employees offer affordable health insurance to its employees.

Some of the various tax provisions in the health care legislation are already in effect; others take effect over the next few years. They include:

  • A 3.8% Medicare tax on certain investment income (takes effect in 2013);
  • Codification of the economic-substance doctrine (already in effect);
  • Premium-assistance tax credits to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange (takes effect in 2014);
  • A tax credit for nonelective contributions that a small business makes on behalf of its employees for insurance premiums (already in effect);
  • An increase in the threshold for the itemized deduction for unreimbursed medical expenses from 7.5% of adjusted gross income (AGI) to 10% of AGI for regular income tax purposes (generally takes effect in 2013; for some taxpayers it is delayed until 2017);
  • A 10% tax on amounts paid for indoor tanning services (already in effect);
  • A requirement that employers disclose on each employee’s annual Form W-2, Wage and Tax Statement, the value of the employee’s health insurance coverage sponsored by the employer (takes effect this year).

For a fuller discussion of the opinions in the case and a list of the various tax provisions, see “Supreme Court Upholds Health Care Law” in the Journal of Accountancy.

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Sally P. Schreiber, J.D., is a senior editor in the AICPA’s magazines and newsletters group. She contributes to The Tax Adviser and Journal of Accountancy as well as the Corporate Taxation Insider and Tax Insider newsletters. Alistair M. Nevius, J.D., is editor-in-chief, tax, for the AICPA's Magazines and Newsletters team.