Health Care in the Wake of the Supreme Court Decision

In June, the U.S. Supreme Court decided that the Patient Protection and Affordable Care Act of 2010 was constitutional. The basis for its decision: that the penalty for not carrying health coverage starting in 2014 (called the individual mandate) is really a tax and that this taxing power is within Congress’s authority.

Effect of the decision

What does this mean for you? Provisions of the law that have already taken effect continue to be effective. These include:

• The ability to cover children up to age 26 on a parent’s health plan
• The 20% penalty on nonmedical withdrawals from health savings accounts
• The limit on disbursements from flexible spending accounts (FSAs), health savings accounts (HSAs), and health reimbursement accounts (HRAs) to prescription drugs and over-the-counter medications with a doctor’s prescription.

New tax rules starting in 2013

The way that Congress plans to pay for extended health coverage is to raise taxes. Here are the key tax rules set to take effect under this law in 2013:

• Higher adjusted gross income threshold of 10% for itemizing medical expenses not covered by insurance (those 65 and older continue to use the 7.5% threshold until 2016).
• Reduced limitation on flexible spending accounts (FSAs) of $2,500 per year (adjusted for inflation after 2013). Before the law, it was up to employers, not the tax law, to cap annual contributions to FSAs.
• Additional Medicare tax of 0.9% on wages and self-employment income over $200,000 ($250,000 for joint filers). For affected individuals, the additional tax will be withheld from employees’ paychecks; self-employed individuals will have to make larger estimated tax payments.
• Additional Medicare tax of 3.8% on net investment income for those with AGI over $200,000 ($250,000 for joint filers). This additional tax will be paid on Form 1040 (and should be factored into estimated taxes).

New tax rules set for 2014

This is the year in which the individual mandate—the linchpin of the entire law—is set to become effective. It means that you will be required to carry health coverage—through your employer, Medicare, Medicaid, private insurance, or a state health exchange. Those who are low income but do not qualify for Medicaid or have other coverage will receive government assistance with paying premiums through a tax credit.

Those who opt not to carry coverage will pay a penalty, which we now know is a tax that will be collected by the IRS.

Planning now

Because of the political climate and the upcoming November election, the rules set to take effect could be changed dramatically or repealed entirely. Stay tuned!