The Affordable Care Act (ACA), also known as ObamaCare, has made some changes in how Americans are taxed. Some taxes directly affect the cost of health insurance, and others are indirect. All of the changes to the tax law related to the ACA are intended to help fund the program and provide tax credits to eligible Americans to purchase health insurance. There has been a lot of public concern about ObamaCare taxes, and having the facts is of utmost importance.

Taxes and Fees on the Health Insurance Industry

Some of the taxes under ObamaCare are to be paid by the health insurance industry. These taxes and fees are described below.

  • Increased taxes on insurers. Health insurance companies have additional taxes to pay under the ACA. Many insurance companies, such as Blue Cross Blue Shield, disclose on their insurance quotes that these taxes have been added to consumer premiums.
  • High-Cost Excise Tax / “Cadillac Tax.” This 40% tax on high-premium plans is aimed at employers and individuals who buy superb-coverage health insurance, as well as insurance companies that provide high cost plans. The intention of this tax is to encourage the streamlining of health plans to make premiums more affordable. The intent is that if individuals who have insurance have to cover more of the costs themselves, rather than have the plan do it, they will avoid more expensive or unnecessary procedures. While this tax doesn’t go into effect until 2018, many employers are reducing benefits starting in 2014 to avoid the penalty.
  • Reinsurance Fee. ObamaCare requires insurers to contribute to a Transitional Reinsurance Program that will be in place from 2014 to 2016 to help offset costs to insurers who cover high risk individuals. The Department of Health and Human Services (HHS) will establish standards to determine high-risk individuals and a formula for payment amounts. Many insurers, including United Health Care, intend to collect the reinsurance fee from premium rates paid by customers.
  • Patient-Centered Outcomes Research Institute (PCORI) fee. This fee is intended to go toward funding comparative effectiveness research to help understand the value of various treatment options for health conditions. The fee begins in 2012 and phases out by 2019. Once again, many insurers are planning to roll this fee into their premium calculations.
  • Health Insurance Providers Fee. To ensure that funds for federal subsidies for lower-income families and individuals will be available, the ACA instituted a Health Insurance Providers (HIP) fee. This fee will be assessed on insurers beginning in 2014. The government will determine the amount of the fees based on an insurer’s total premiums that are affected by the fee.

Other Taxes and Fees

Other provisions of the ACA impact consumer health costs, but are not directly related to health insurance. Here are some of those changes.

  • Changes to the Use of FSA Funds. Flex Spending Accounts (FSAs) are a way that Americans can save some of their income pre-tax for their medical expenses. In the past, this account could be used for any medical expense, including over-the-counter drugs such as aspirin or cold medicine that you did not have a prescription for. As of 2014, however, this account is limited to only paying for prescription drugs and insulin, and only covers over-the-counter drugs with a prescription. There is also a $2,500 annual limit on the FSA (effective January 2013). This means that Americans who used an FSA will now have to use post-tax dollars for these expenses.
  • Additional Medicare Payroll Tax. The ACA imposed an additional Medicare tax on high-income individuals and families. This tax is in addition to the normal Medicare withholding. More information about who this tax applies to can be found on the IRS’ Additional Medicare Tax page.
  • Pharmaceutical Industry Fee. The IRS has imposed a fee on the manufacturers of branded prescription drugs. This fee is based on the amount of sales of branded prescription drugs.
  • Medical Device Excise Tax. Manufacturers and importers are now required to pay an excise tax on certain medical devices. The tax amount is 2.3% of the sale price of the device. There are exemptions for certain devices, such as glasses, contacts, and hearing aids. For more information on this tax, visit the IRS Medical Device Excise Tax page.
  • Indoor Tanning Services Tax. Beginning in 2010, many businesses that offer indoor tanning services were required to collect a 10% excise tax on tanning services. This tax is due on a quarterly basis and helps to fund the ACA provisions. For more information on this tax, visit the IRS Indoor Tanning Services Tax page.

The ACA causes changes to the taxes paid by Americans and American businesses. Before you believe the fears about ObamaCare tax changes, be sure to get the facts straight and understand the source and purpose of these changes. More detailed information on these Affordable Care Act taxes is available from the IRS and from individual insurers.