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Implementing National Health Care

Taxpayers and IRS to be Challenged as Never Before

The Patient Protection and Affordable Care Act is the most sweeping social legislation ever enacted in the United States. Even the Social Security program, the federal government’s first major step into the area of social planning and the beginning of the federal “nanny state,” did not and still does not have the incredible reach of the PPACA.

The major difference between the 2 programs is that while the Social Security tax is certainly not voluntary, participation in the Social Security program is. No citizen faces any penalty for not applying for or drawing Social Security benefits. On the other hand, failure to purchase the required medical insurance for yourself and dependents under the PPACA carries substantial civil penalties.

This marks the first time in the history of the United States that the federal government has commanded citizens to purchase a product or service under penalty of law. The monetary penalty imposed for failure to buy insurance is described as a “shared responsibility payment.” Code section 5000A(b)(1). In upholding this element of the PPACA, the Supreme Court ruled that the “shared responsibility payment” is in fact a tax, which Congress has the full authority to impose under Article 1, Section 8 of the Constitution.

The net effect is that unless Congress repeals the PPACA soon, the force of this legislation will change the face of America in ways that we now can only imagine. My intent with this Special Report is not to re-litigate National Federation or second-guess the Supreme Court’s decision. My intention is to explore the one thing that social policy-makers never seem to address when passing legislation of this magnitude—and that is the impact that it has on private citizens and businesses, apart from the simple economics of the penalty.

In the case of the PPACA, that impact involves a massive expansion of the power and reach of the Internal Revenue Service, the agency chiefly responsible to enforce and administer the PPACA.

One of the key reasons the IRS has grown so large and powerful over the past several decades is that Congress continues to hand the IRS the duties of administering social programs. Now, under the PPACA, the IRS is responsible for the largest social benefit program ever implemented in the history of the nation. To do this job, the IRS estimates it will spend nearly $1 billion just through 2013 in information technology costs alone. Estimates are that it will take a minimum of 5,000 and perhaps as many of 16,000 additional IRS employees to carry out the mandates under the law.

The Act’s Key Tax-related Provisions

Although the Patient Protection and Affordable Care Act contains forty-seven tax-related provisions, just four of them promise to impose tremendous administrative burdens for the IRS and compliance nightmares for both individuals and businesses. When combined with the other forty-three, there is no telling what kind of costs the agency will incur in carrying out this massive legislation.

The four provisions in question are discussed below:

1. The Small Business Tax Credit. Since 2010, a tax credit has been available to eligible for-profit and tax-exempt “small employers” that pay at least half the cost of a single coverage (versus family coverage) health plan for their employees. A small employer is one with less than 25 full-time employees. The credit is based on the number of full-time employees and their average annual wages. The credit is targeted at small businesses and tax-exempt organizations employing low and moderate-income workers. Code section 45R. There is a phase-in provision that reduces the credit as the number of employees increases. The full credit is available to employers with less than 10 full-time employees and less than $25,000 in average annual wages. Employers with 25 employees or whose average annual wages are $50,000 or more get no credit. Code section 45R(c).

2. The Premium Tax Credit. Beginning in 2014, the Act creates a “refundable tax credit” payable to individuals for the purchase of health insurance under a qualified health plan. A refundable credit is one where you can get more money back from the government than you actually paid in taxes. An example is the Earned Income Tax Credit. The premium tax credit is available to eligible individuals and families with incomes below a specified threshold (subject to income phase-outs). This is the chief means by which the federal government will subsidize the purchase of health insurance for targeted individuals. The insurance must be purchased through an “exchange.” Under the PPACA, the states are required to create insurance “exchanges” through which consumers not subject to an employer-provided plan may purchase health insurance. If a state does not set up an exchange, the Act allows the federal government to create one within that state. States may also join together to create regional exchanges. The exchange must be either a government agency or a non-profit entity. Code section 36B.

3. The Individual Responsibility Requirement. Beginning in 2014, individuals will be required to purchase and maintain “minimal essential health care coverage” for themselves and their dependents. The definition of “minimal essential coverage” is set by statute and therefore is subject to congressional whim. See code section 5000A(f). Failure to purchase such care will subject the individual to an annual penalty, which the statute refers to as a “shared responsibility payment.” Code section 5000A(b). This has often been referred to as the “individual mandate” in that Congress has mandated that individual citizens purchase an insurance product that meets federal guidelines. Such a mandate is unprecedented in American law. There is no other example in U.S. history where the government required a person, as a matter of law, to purchase a specific product or service or risk civil penalties.

The penalty is equal to the greater of:

  • $695 per person per year, up to a maximum of $2,085 per family, or
  • 2.5 percent of “household income.” Code section 5000A(c).

The percentage amount is actually phased-in over 3 years. Beginning in 2014, the percentage is 1 percent. Beginning in 2015, the percentage is 2 percent. For years after 2015, the percentage jumps to 2.5 percent. The gross applicable penalty is pro rated to apply on a monthly basis “for any month during which any failure” to have adequate coverage exists. Code section 5000A(c)(2). The penalty amount must be computed by the taxpayer and reported on his tax return.

The law makes several exceptions to the individual mandate. They are:

  • Members of a recognized religious group who have historically been exempt from Social Security taxes under code section 1402(g)(1), or those who are involved in a “health care sharing ministry”
  • Persons who are not lawfully present in the United States
  • Persons who are incarcerated. Code section 5000A(d)

Section 5000A also provides exemptions from the “shared responsibility” penalty under the following circumstances:

  • Persons with a hardship waiver
  • Those who cannot afford coverage
  • Those with income below the tax return filing requirement
  • Members of an Indian tribe
  • Those who are not covered for a period of less than three months. Code section 5000A(e)

4. The Employer Requirement. Also beginning in 2014, employers with 50 or more full-time employees that do not offer “minimum essential health insurance coverage” to all of its employees “and their dependents,” or offer unaffordable coverage, will be liable for a penalty. The penalty applies if even just “1 full-time employee” qualifies for a subsidy to purchase insurance through an exchange. The penalty is referred to as the employers’ “shared contribution” to national health insurance. Code section 4980H(a). The penalty for failure to provide minimum essential health care as defined by Congress is calculated in 2 ways. The first applies to employers who offer no insurance to their employees. In that case, a maximum of $2,000 per employee per year (reduced by 30 employees) is assessed against the employer. Code section 4980H(a). Thus, the penalty is not tied to the number of employees who are eligible to purchase coverage from an exchange. If even 1 employee is eligible to purchase coverage from an exchange, the maximum penalty applies to all employees (reduced by 30). For example, a company with 50 employees could face a penalty of $40,000, which is $2,000 per employee, for a total of 20 employees (total workforce of 50 “reduced by 30”). Code section 4980H(c)(2).

The second calculation applies in cases where the insurance offered by the employer is such that the employee nevertheless qualifies to purchase insurance from an exchange. In that case, the penalty is $3,000 per employee who qualifies to purchase insurance from an exchange. Thus, if the employer has 50 employees but only 5 of them qualify to purchase insurance from an exchange, the maximum penalty is $15,000 (5 x 3,000). Code section 4980H(b). The penalty is “assessable” in the same manner as all other employment tax penalties under the tax code. In that sense, the IRS does not have to offer the employer an opportunity to review and contest the determination prior to assessing the penalty. The IRS may assess the penalty and provide a notice and demand for payment to the employer. Any appeals that may exist come into play only after assessment and collection begins. Code section 4980H(d).

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