SCOTUS: Patient Protection and Affordable Care Act a Represents a Tax

July 5, 2012 | By: TaxCure Staff

ppaca health insurance taxWhen the Patient Protection and Affordable Care Act (PPACA) was passed in 2010, challenges to its constitutionality began wending their way through the courts almost immediately. It wasn’t a surprise when the United States Supreme Court announced that it would take the case since the PPACA was such a hot-button issue.

Recently, the Supreme Court released its ruling on the matter, with a majority opinion written by Chief Justice John Roberts. Many pundits predicted that parts of the law would be struck down, and the item of largest interest was the individual mandate requiring all individuals to have health care coverage – or be financially penalized.

In the end, though, only the provision that allowed the federal government to sanction states over a failure to participate in Medicaid expansion was deemed unconstitutional. All other parts of the law were upheld, including the mandate penalties. Chief Justice Roberts wrote that these penalties constitute a tax and that Congress is well within its rights when it comes to taxing authority.

So, What Does this Tax Entail?

For those who have some time of health coverage already, this doesn’t change a whole lot (except for higher-income earners, who will see an increase in Medicare taxes) in terms of taxation. If you have coverage, you don’t have to pay the penalty. If you don’t have coverage, though, you might have to pay a penalty, starting in 2014.

Originally, the penalty isn’t very onerous. The penalty is figured based on how many months during the year you are uninsured. If you are uninsured less than three months of the year, you won’t be assessed a penalty. Additionally, the penalties have caps. In 2014 the cap is $285 per family ($95 for a single adult), or 1% of income, whichever is greater. In 2015, the cap rises to $975 ($325 for singles), or 2% of income. In 2016, the cap will be $2,075 ($625), or 2.5% of income.

Some families and singles are likely to weigh the penalty against the cost of insurance and decide it’s cheaper to just be uninsured and pay the penalty. In fact, the Congressional Budget Office estimates that about four million people will just pay the penalty. This is very practical as well since you can buy insurance once you get a major illness since insurance companies cannot discriminate against those with “preexisting conditions.”

You will begin a receiving form, much like a 1099 form, from your insurance provider in 2014, verifying that you have the required minimum health coverage. You will send that form in with your tax return. If you don’t have the form, the IRS will send you a letter requesting proof of insurance, or that you pay the penalty. Failure to pay the penalty, though, will not result in any criminal charges, nor will it result in tax levies or liens against your property. For the most part, the only recourse the IRS will have in getting the money if you don’t pay the penalty is to hold part or all of your income tax refund.

You can read about some of the other taxes with the PPACA we detailed out last year.

Are Some People Exempt from the Penalty?

As you might expect, there are some exemptions to the penalty. First of all, the members of some religions won’t be required to buy health insurance – or pay the penalty for noncompliance.

Additionally, there is an income test as well. The PPACA comes with subsidies for those who can’t afford insurance premiums. However, if, after federal subsidies and the employer contribution, your premiums would still exceed 8% of your income, you can be exempt from the requirement and the penalty.