Authored by Michelle Hobbs, Mike Schiavo and Paul Dillon
The U.S. Supreme Court rendered its third decision on the merits of the Affordable Care Act (ACA), the second on the constitutionality of the 2010 law. The court ruled the plaintiffs had no legal right to sue, otherwise known as “standing.” As a result, the justices did not opine on the constitutionality of the ACA with or without the individual mandate. It is possible another lawsuit will come along in the future to again challenge the validity of the ACA. In the meantime, the law remains, along with all of its taxes and required information reporting.
In 2012, the court held, in National Federation of Independent Business v. Sebelius (NFIB), that Congress, through the ACA penalty structure, imposed a tax on individuals that do not obtain health insurance. The Tax Cuts and Jobs Act (TCJA), passed in 2017, reduced this tax, or penalty, to zero effective for months beginning after Dec. 31, 2018. With the penalty for failure to obtain health insurance at zero under the TCJA, the individual mandate no longer raised revenue under Congress’ authority to tax. In California v. Texas, Texas and other Republican-led states plus two individuals challenged the constitutionality of the ACA and argued the mandate had become an unlawful command by the federal government requiring taxpayers to purchase health insurance. Prior to the November 2020 oral arguments in front of the Supreme Court, the 5th Circuit Court of Appeals agreed with Texas and said the individual mandate must produce revenue in order to meet Congress’ taxing authority. Furthermore, since the 2012 case also stipulated the individual mandate to purchase health insurance could not be severed from the rest of the ACA, the plaintiffs in California v. Texas argued the rest of the ACA became unconstitutional because it could not be severed from the individual mandate. California, the U.S. House of Representatives and other Democrat-led states defended the ACA and asked the court to uphold the law.
The ACA brought into existence several tax-related provisions summarized below.
The 3.8% net investment income tax. The most significant provision is the additional 3.8% net investment income tax that began in 2013. The tax applies to net investment income or the excess of a taxpayer’s adjusted gross income (AGI) above certain thresholds ($200,000 for individuals and $250,000 for joint filers), whichever is less. For this purpose, net investment income includes interest, dividends, royalties, rents, capital gains, and passive income from trade or business activities. The Biden administration is currently proposing to amend this definition to also include gross income and gain from any trades or businesses not otherwise subject to employment taxes for taxpayers with AGI over $400,000.
Additional Medicare Tax. The Medicare portion of the FICA tax increased to 2.35% from 1.45% for an individual making more than $200,000 a year and married couples making more than $250,000 a year.
Employer penalties. If an employer has fewer than 50 full-time equivalent employees (FTE), they are not subject to employer penalties related to healthcare coverage offerings but could qualify for a health insurance tax credit. For the 2021 tax year, large employers that do not offer coverage to their workforce are subject to an annual penalty of $2,700 per FTE (minus up to 30).
Large employers that do not pay at least 60% of covered healthcare expenses and require employees to contribute more than 9.5% of family household income for coverage are subject to a $4,060 penalty per FTE (minus up to 30) for the 2021 tax year.
Employer reporting requirements. Reporting of healthcare coverage continues to be required for all employers. Depending on whether employers sponsor self-coverage or fully insured health plans, or if the business contributes to a multiemployer union plan, the reporting requirements to the IRS and to employees will differ. The IRS is now issuing penalty notices for the 2018 tax year. Since the employer-related penalty amounts continue to increase and the IRS continues to enforce them, staying current with reporting requirements is essential.
For more information on this topic, we encourage you to connect with your Baker Tilly tax professional.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.