Taxes and the Affordable Care Act

Tax penalties for failure to comply with the individual mandate raised $4 billion for the government in 2018, the final year it was in effect.

On the employer side, companies with 50 or more employees faced paying $2,000 (non-deductible and indexed for inflation) per full-time employee for not offering health coverage. This fee is known as the employer-shared responsibility payment and will be set at $2,900 in 2025, which is a decrease from the 2024 per-employee payment of $2,970.

Additional Repeals of ACA Taxes

Three additional provisions, the Cadillac tax, the medical device tax, and health insurer fees, were repealed as part of the short-term continuing spending resolution referred to as the Further Consolidated Appropriations Act, which passed in December 2019.

These key taxes raised considerable revenues, significantly more than the individual mandate penalties, for the government to partially offset the additional costs incurred due to the ACA. Here’s where these items stand as of 2021.

Cadillac Tax

The Cadillac tax was a 40% tax on employer-issued health insurance that exceeded certain thresholds. The high-end premium health insurance plans impacted by the Cadillac tax were those at or above the 85th percentile of health insurance benefits (approximately $11,200 for individual coverage or $30,100 for family coverage).

The intention behind the tax was to discourage unnecessary or unreasonable use of medical services by individuals with generous health insurance coverage. Unsurprisingly, it wasn’t popular with major employers, patient advocates, labor unions, or healthcare companies, many of whom banded together to create the Alliance to Fight the 40.

The Joint Committee on Taxation estimated that repealing the Cadillac tax would reduce government revenues by $197 billion between 2020 and 2030.

The tax was delayed twice before being repealed. In 2015, Congress delayed the implementation of the Cadillac tax from 2018 to 2020. In 2018, it was delayed again until 2022. In December 2019, it was officially repealed as of the 2020 tax year.

Health Insurer Fees

Health insurance providers were initially charged an annual fee due to the industry benefiting from more customers as a result of a larger portion of the population having health insurance coverage. The annual fee and the medical device tax were designed to help defray the cost of the ACA’s expanded health insurance coverage.

This fee applied to insured medical, dental, and vision plans. It was based on a health insurer’s market share of the industry. It took effect in 2014 but was suspended for both 2017 and 2019, although it continued to apply for the 2018 calendar year. It also applied for the 2020 calendar year but has been repealed as of 2021.

Medical Device Tax

The medical device tax failed to lower healthcare costs for consumers but increased costs and burdens on the healthcare sector as a whole. The medical device tax was a 2.3% excise tax on the price of medical devices sold in the U.S. There was bipartisan support in favor of repealing the medical device tax permanently.

The impact on the medical device industry was substantial. Between 2013 and 2015, 29,000 jobs were lost in the medical device industry, 22,000 of which were estimated to be solely due to the tax. Medical device companies postponed investments in research and development (R&D)—85% of companies in the industry reported they would reinstate previously foregone R&D investments when the tax was permanently repealed.

It was in effect from 2013 to 2015 but was suspended by Congress in 2016 through 2019, before being permanently repealed for the tax year 2020. The Joint Committee on Taxation estimates that repealing the medical device tax and health insurer fees will reduce government revenues by $151 billion over the next 10 years.

ACA Taxes That Survived

Medical Deduction Threshold Tax

The ACA brought with it a $15 billion tax on individuals who take a deduction based on having high medical bills. The old threshold of deductible medical expenses exceeding 7.5% of AGI was replaced with a threshold of 10% from 2013 to 2016. Americans aged 65 and over were exempt from this higher threshold.

The TCJA reinstated the former threshold of 7.5% of AGI for tax years 2017 and 2018. The Further Consolidated Appropriations Act in December 2019 also extended the lower 7.5% AGI threshold for tax year 2022.

Health Savings Accounts Caps

The ACA placed an annual contribution limit on health savings accounts (HSA) as well as flexible spending accounts (FSAs). These caps are updated annually to account for inflation.

Medicine Cabinet Tax

One ACA tax estimated at $5 billion, called the medicine cabinet tax, also outlined that U.S. adults could not use HSAs, FSAs, or health reimbursement pretax dollars to buy nonprescription, over-the-counter medicines.

This provision was permanently repealed as of the 2020 tax year as part of the CARES Act. Certain over-the-counter medications and products, as well as menstrual care products, are now eligible for HSA and FSA reimbursement without a prescription.

Indoor Tanning Tax

This tax, which went into effect in July 2010, placed a 10% excise tax on U.S. indoor tanning salons. While it was expected to bring in $1 billion in new tax revenues during the first four years, the tax has since been deemed a failure, raising just over $367 million in its first four years.

It also contributed to the demise of the indoor tanning salon industry, which proponents of the provision still count as a public health win. The tax is still in effect as of 2022.

Medicare Tax

The 0.9% Medicare surtax applied to wages and self-employment income over $200,000 for individuals and $250,000 for married couples remains unaffected by subsequent suspensions and repeals, as it would be unpopular to repeal an additional tax on high earners that funds Medicare.

Net Investment Income Tax

The 3.8% ACA tax on net investment income applies to unincorporated taxpayers (basically individuals, estates, and certain trusts) who have a modified adjusted gross income (MAGI) above these annual income levels:

• $250,000 in the case of married taxpayers filing a joint return or a surviving spouse
• $125,000 in the case of a married taxpayer filing separately
• $250,000 for a qualifying widow(er) with a dependent child
• $200,000 for everyone else, except estates and trusts, where the threshold is equal to the highest amount at which the maximum tax rate begins

These rates are not indexed for inflation. The tax is still in effect as of 2022.

Additional Legislative Changes

The American Rescue Plan Act of 2021 brought significant changes to the Affordable Care Act. These changes aimed to expand access to affordable healthcare coverage during the COVID-19 pandemic. ARPA increased premium subsidies for individuals and families purchasing insurance through the ACA’s marketplaces, making insurance more affordable and extending subsidies to middle-class households.

ARPA also ensured that low-income individuals could access zero-premium plans, provided temporary COBRA subsidies for job loss-related coverage, and offered incentives for Medicaid expansion in states that hadn’t already done so. Additionally, the law extended the dependent coverage age to 26, and the open enrollment period for marketplace plans was lengthened, making it easier for more Americans to obtain health insurance and reducing the number of uninsured individuals.

Other recent changes to the Affordable Care Act were also announced by the U.S. Department of Health and Human Services (HHS) in April 2022. These changes are part of the Biden-Harris Administration’s ongoing effort to strengthen and build on the ACA.

One of the major policies announced is the advancement of Standardized Plan Options, which will simplify the consumer shopping experience by establishing standardized plan options for issuers offering Qualified Health Plans on HealthCare.gov. It is important to note that both the ARPA and changes by HHS largely do not affect taxes but still contribute to the overall evolution of the ACA.

The Bottom Line

People may not realize it, but amidst all the controversy about how the ACA was rolled out, a resulting trove of taxes has since dramatically impacted the financial lives of many Americans. For as long as the ACA remains the law, be sure to consult a tax specialist to minimize any financial harm.