Two years ago next month, the 111th United States Congress passed and President Barack H. Obama signed into law two major pieces of

legislation that forever changed the national health care landscape in the United States. This health care reform consists of two separate statutes: the Patient Protection and Affordable Care of 2010, as amended, commonly know as PPACA and the Health Care and Education Reconciliation Act of 2010, commonly known at HCERA.

Both statutes work jointly as a health care package to ensure that every American has affordable health care by the year 2018. The provisions of the Acts are timed to take effect over several years, from 2010 through 2018. For example, the ten percent excise tax on indoor tanning took effect on July 1, 2010. By 2012, all health insurers and group plans must provide a plain English summary of benefits and coverage to their insured. The individual mandate – requiring universal, qualified health insurance such as through a state health care exchange – is deferred until 2014. By 2018, insurance companies offering high-cost health plans (so-called “Cadillac” plans that offer employee-only coverage costing more than $10,200 for the year and family coverage costing more than $27,500 for the year) will be subject to a forty percent excise tax.

Total health care for all Americans comes at a high price. Reportedly, the Acts contain over $400 billion in revenue raisers over the next ten years, but the exact cost remains unclear. What is clear, however, is that there will be new taxes on employers and new fees on insurers, health-related industries, and (most significantly) new taxes on individual taxpayers (including those operating closely held businesses such as partnerships, limited liability companies, S corporations, and sole proprietorships). As shown below, a 3.8 percent unearned income Medicare contributions tax as well as a 0.9 percent hospital insurance tax is imposed on higher-income taxpayers. Although these two taxes affect different types of income differently (that is, investment income versus wage income), the threshold for these high tax bracket taxpayers is roughly delineated at the lesser of net investment income or $250,000 in wages for joint filers.

Since many middle-class Americans (especially owners of small businesses, independent contractors, the uninsured or underinsured, and the self-employed) will be affected by the terms of the individual mandate contained in the Acts and which takes effect in 2014, now is the time for them to tax plan.

Under the individual mandate, penalties are imposed on taxpayers who fail to secure minimum essential health care coverage for themselves and their dependents. The penalty is tied to the tax year. For 2014, the penalty is the greater of $95 or one percent of income for individuals; for 2015, the penalty is the greater of $325 or two percent of income for individuals. For 2016, the penalty is $695 or 2.5 percent of income for individuals; after 2016, the penalty of $625 is indexed for inflation with each adjustment rounded down to the lowest multiple of $50. By 2016, the penalty imposed will be substantial. For a family of four with an income of $89,400, the yearly penalty will be $2,235 (or 2.5 percent of income). However, there are several limitations (such as caps to individual and family liability for the penalties) as well as exemptions (such as financial hardship and religious objections) to the individual mandate and to its penalties.

The IRS will play a key role in collecting these taxes and in determining exemptions from them and for ensuring employer compliance with various provisions of the Acts. As an initial phase of information and collection, the Form W-2 (showing individual wages, withholding, and other information) will be modified for tax year 2012 to require employers to report the value of health insurance provided to their employees. And, thereafter, the IRS will assess any penalties due under the individual mandate. As there are restrictions on the manner in which the IRS may collect these penalties (the agency cannot use liens or levies to collect any unpaid penalties or refer the penalty deficiency for criminal prosecution), it will probably collect the penalties by offsetting income tax refunds – as it does for most other tax liabilities. Thus, taxpayers who use wage over-withholding on their W-4s and the resulting income tax refunds as savings mechanisms could see their savings cut by failing to obtain the required health care insurance.

Yet, any enforcement of the Acts, and particularly, the individual mandate, is subject to the current constitutional challenge before the United States Supreme Court. As with most recent landmark legislation in the last 50 years – the Civil Rights Act of 1964 for instance – Congress predicated these two Acts on the enumerated power of the Commerce Clause of the U.S. Constitution (Article I, Section 8, Clause 3) regulating commerce “among the several States.”

The opponents of the Acts claim that Congress cannot force taxpayers to enter interstate commerce by requiring them to have health insurance, and further claim that obtaining (or not obtaining) health insurance is a privacy decision over which the government should have no control and certainly not a decision over which Congress can impose a pecuniary punishment.

The proponents of the Acts counter that not having health insurance is an economic burden on commerce and on other taxpayers who have made the responsible choice to financially prepare for the inevitable illness. As evidence, the proponents cite increasing costs of health care nationally and the indisputable involvement of the health insurance and health-care providers in interstate commerce (and the need to regulate same) as the grounds for validity.

Oral argument before the Supreme Court on the constitutionality of the Acts is scheduled for March – almost two years from enactment – and a decision from the Court is expected in June.

Lynn Jenkins, Esq. is a practicing attorney, a UNH graduate student, and is enrolled in the University’s Masters of Taxation program. She is designated as a registered tax return preparer (RTRP) by the Internal Revenue Service, and is a Master Tax Advisor at the H&R Block office in Orange. She would be happy to review your state and federal income tax returns for past and present years. She can be reached at (203) 799-2966. Call her to use this FREE SERVICE to students, faculty, and the UNH community.