After three days of oral arguments in March, the Supreme Court is deciding the fate of the Pension Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA). Not only do the new laws impact health care, they contain numerous tax provisions, many of which have yet to take effect. The Supreme Court may uphold the laws, strike them down in whole or in part, or decide that the case is premature. The Supreme Court is expected to render its decision in June. In the meantime, a quick checklist of the tax provisions in the two laws reveals how extensively they impact individuals, businesses and taxpayers of all types.

Congress passed, and President Obama signed, the PPACA and HCERA in 2010. Almost immediately, several states and taxpayers challenged the laws in court. The lawsuits generally argued that Congress had exceeded its authority by requiring individuals to obtain health insurance.

The cases made their way from federal district courts to the various federal courts of appeal, which reached different conclusions. One circuit court invalidated the individual mandate; two circuit courts upheld the individual mandate and another circuit court dismissed the challenge on procedural grounds.

Supreme Court grants review
On November 14, 2011, the United States Supreme Court agreed to review the Eleventh Circuit Court’s decision in Florida v. U.S. Department of Health and Human Services. The Supreme Court stated it would examine four issues: (1) the Constitutionality of the individual mandate; (2) whether the individual mandate is severable from the PPACA; (3) whether the challenge to the individual mandate is barred by the Anti-Injunction Act; and (4) whether PPACA’s expansion of Medicaid exceeded Congress’s authority. The Supreme Court heard oral arguments in the case on March 26-28 in Washington, D.C.

Individual mandate and penalty
The individual mandate generally requires individuals to maintain minimum essential coverage for themselves and their dependents after 2013. Individuals will be required to pay a penalty for each month of noncompliance, unless they are exempt (such as individuals covered by Medicaid and Medicare). The PPACA also provides tax incentives to help individuals obtain minimum essential coverage. Beginning in 2014, individuals with incomes within certain federal poverty thresholds may qualify for a refundable health insurance premium assistance tax credit. The PPACA also provides for advance payment of the credit.

In Florida v. HHS, the Eleventh Circuit struck down the individual health insurance mandate but did not declare the entire PPACA unconstitutional. In contrast, the Sixth Circuit held that the individual mandate was a valid exercise of Congress’ power to regulate commerce (Thomas More Law Center v. Obama). The Court of Appeals for the District of Columbia Circuit also upheld the individual mandate (Mead v. Holder). The Supreme Court could find the entire PPACA unconstitutional or could find that the individual mandate is severable, thereby preserving other parts of the statute, including various tax provisions.

Tax provisions
While much attention has focused on the individual mandate, the Supreme Court may also decide the fate of many tax provisions in the PPACA and the HCERA. Among the tax provisions potentially affected by the Supreme Court’s decision are:

  • Code Sec. 45R small employer health insurance tax credit
  • 3.8 percent Medicare contribution tax on unearned income for higher income taxpayers after 2012
  • Additional 0.9 percent Medicare tax on wages and self-employment income of higher income taxpayers after 2012
  • Increased itemized deduction for unreimbursed medical expenses after 2012
  • Prohibition on over-the-counter medicines being eligible for health flexible spending arrangement (FSA), health reimbursement arrangement (HRA), health savings account (HSA), and Archer Medical Savings Account (MSA) dollars.
  • Additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses
  • Excise tax on high-dollar health plans after 2017
  • Tax credit for therapeutic discovery projects
  • Annual fees on manufacturers and importers of branded prescription drugs
  • Reporting of employer-provided health coverage on Form W-2
  • Codification of the economic substance doctrine

Anti-Injunction Act
The Supreme Court could decide that the challenge to the PPACA is premature. Under the Anti-Injunction Act, a taxpayer must wait to oppose a tax until after it is collected. The PPACA’s individual mandate and its related penalty do not take effect until 2014. The Fourth Circuit Court of Appeals found that the penalty amounted to a tax and taxpayers could not challenge the tax until it took effect (Liberty University v. Geithner).

If you have any questions about the tax provisions in the health care reform laws, please contact our office. We will be following developments as they ensue after the Supreme Court issues its decision in June.