Middle Class PPACA Taxes

Originally published in Flourishing July/August 2012

 In a landmark decision announced on June 29, 2012, the 2010 Patient Protection and Affordable Care Act (PPACA) was declared by the U.S. Supreme Court to be “constitutional”.  With this precedent, it’s hard for me to imagine any Act of Congress that couldn’t clear the bar of constitutionality; but that’s a topic for another time.  The purpose of this article is to begin to outline the costs to middle-class taxpayers of the PPACA.

First, there is the penalty—correction, the surtax—on not buying “qualifying” health insurance.  Starting in 2014 the surtax for one adult is the greater of 1% of adjusted gross income (AGI) or $95.  That minimum climbs to 2.5% of AGI or $695 in 2016. After 2016, the minimum is indexed to inflation.

Then, there is the “medicine cabinet tax”, which took effect on January 1, 2011 and prevents Americans from using their pre-tax Health Savings Accounts (HSA), Flexible Spending Accounts (FSA), and Health Reimbursement Accounts (HRA)  to purchase non-prescription, over-the-counter medicine (except insulin).

Third—and this one may come as a great surprise and disappointment to many supporters of PPACA who have “special needs” children—the new law imposes a cap of $2,500 on contributions to FSA’s.  (Currently, there is no cap.) There are thousands, if not millions, of middle-class families who now use FSA’s to pay for special needs education and treatment with pretax dollars; think Autism, for example.  The new limit takes effect in less than six months, on January 1, 2013. 

Fourth, for those who itemize their tax deductions, the threshold for allowable medical deductions is raised from 7.5% of AGI to 10% of AGI.

Fifth, beginning on January 1, 2011 under PPACA, premature, non-medical withdrawals from an HSA’s are penalized at 20%.  As you probably know, the penalty for premature withdrawals from annuities, IRA’s, 401k’s and other qualified retirement plans is 10%.

Sixth, effective July 1, 2010, Americans using indoor tanning salons have paid a 10% excise tax.

Finally, no good deed goes unpunished:  Starting in 2018, PPACA imposes a 40% excise tax on “Cadillac” health insurance plans.  A “Cadillac” plan is defined as a plan with $10,500 annual premiums for single taxpayers and $27,500 for families.  There are higher thresholds for early retirees and for those in high-risk professions.  Did you really believe that you would be able to keep the insurance you have now?

Each of these seven taxes could apply to any taxpayer, including the non-rich whoearn less than the ballyhooed family income threshold of $250,000 per year.  

But, let’s keep things in perspective.  As citizens and investors, the greatest mistake we can make is to extrapolate current events into the unforeseeable future.  Well more than half of all adult Americans are opposed to many—though not all—of the provisions of PPACA; and yet, it’s unquestionably true that our current system of paying for healthcare is broken.  As my tone surely reveals, I believe PPACA should be totally repealed and replaced; but even if that doesn’t happen, I believe the public will demand some significant changes.  

This is not the first time Congress and a “visionary” President have overreached in their efforts to solve a real problem and/or to advance a political philosophy that’s contrary to what most Americans believe.  I don’t know how this PPACA thing will work out, but I hope—indeed, I’m confident—that however it turns out, the ever-resourceful American family will be able to adapt and prosper.  Ditto, America’s great businesses.  mh

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Sources for this article include: