Patient Protection & Afforable Care Act - Part III

October 7, 2010, 4:16 PM

After reading The Virginian Pilot's recent article on the Patient Protection and Affordable Care Act ("PPACA"), it is apparent that most Americans do not know what new changes are included in the PPACA. For the next several months, our posts will cover the various aspects of PPACA, among other topics, so that you have a better understanding of the new law.

The most fundamental question is how the mandates of the new law will be funded by the government. The following are the various sources of funding:

Tax on High-Cost Health Insurance ("Cadillac" Tax). The PPACA imposes a 40% nonrefundable excise tax on group insurers if the aggregate value of applicable employer-sponsored health coverage exceeds an inflation-adjusted $27,500 for family coverage ($10,200 for individual coverage) beginning in 2018. An employer-specific adjustment is made each tax period to the threshold amounts so that an employer with a workforce that is more expensive to insure due to age or gender characteristics will not be put at a disadvantage.

In the case of an employer specific adjustment based on age or gender, the threshold dollar limits for any tax period are increased by an amount equal to the differences (if any) between:

  • the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan for the type of coverage provided such an individual in such taxable period if priced for the age and gender characteristics of all employees of the individual's employer, and
  • that premium cost for the provision of such coverage under such option in such taxable period if priced for the age and gender characteristics of the national workforce
By way of example, if, in 2018, Acme Corporation's workforce is older than the average age of the national workforce, the threshold amounts that would otherwise apply to Acme's employees to calculate the excess benefit will be adjusted upwards. The amount is determined by taking the premium cost of the Blue Cross/Blue Shield standard benefit option for federal employees in 2018 priced for the age and gender characteristics of Acme's workforce in 2018, and subtracting the premium cost if the Blue Cross/Blue Shield plan were priced for the age and gender characteristics of the national workforce. Suppose the premium difference for a self-only plan is $1,000, and $2,500 for plans that are not self-only plans. $1,000 is added to the threshold amounts for employees with self-only coverage, and $2,500 is added for employees with coverage from plans that are not self-only.

More generous thresholds apply for coverage of individuals who: (i)have attained the age of 55, receive retiree coverage, and are not eligible for Medicare, or (ii) participate in a plan sponsored by an employer, the majority of whose employees are engaged in high risk professions (including law enforcement officers, firefighters, members of a rescue squad or ambulance crew, longshore workers, etc.). In either of the above cases the thresholds for the imposition of this tax will increase as follows:

  • $11,850 for individual coverage (an increase of $1,650); and
  • $30,950 for family coverage (an increase of $3,450).
Individual Mandate. Beginning in 2014, "applicable individuals" are required to obtain and maintain minimum essential health coverage for themselves and their dependents. Generally, all persons are "applicable individuals" subject to the penalty unless they fall into one of these four categories:
  1. Prisoners (incarcerated)
  2. Undocumented aliens
  3. Health care sharing ministry members
  4. Religious conscience
The PPACA permits exemptions to be granted for certain otherwise "applicable individuals" in the following areas:
  • Financial hardship,
  • Native Americans,
  • Individuals outside the U.S.,
  • Short lapses those without coverage for less than three (3) months,
  • Those for whom the lowest cost plan option exceeds 8% of an individual's income, and
  • Those with incomes below the tax filing threshold (in 2009 the threshold for taxpayers under age 65 was $9,350 for singles and $18,700 for couples).
Under the PPACA, those applicable individuals without coverage pay a tax penalty. The penalty is equal to the lesser of A or B as follows: A. The sum of the "monthly penalty" is equal to 1/12 of the greater of (i) or (ii) as follows: (i) The "flat dollar" amount up to a maximum of 300% of the applicable dollar amount (discussed below),or (ii) The applicable "percentage of income" (discussed below). B. The amount of the national average premium for qualified health plans that: (i) offer a bronze-level of coverage through an Exchange; (ii) provide the coverage for families the size of the taxpayer's family; and (iii) are offered through Exchanges for plan years beginning in the calendar year with or within which the tax year ends.

The "monthly penalty" will be phased-in according to the following schedule and the individual or the household will pay the greater of the "flat dollar" amount or the "percentage of income" as follows:

  • $95 or 1.0% of the excess of the taxpayer's household income over the taxpayer's filing threshold in 2014 (current threshold is $23,900),
  • $325 or 2.0% of the excess of the taxpayer's household income over the taxpayer's filing threshold in 2015, and
  • $695 or 2.5% of the excess of the taxpayer's household income over the taxpayer's filing threshold in 2016.
The penalty for family households is capped at three times the applicable individual penalty. The applicable flat dollar amount of any such penalty is halved for individuals under the age of 18.

By way of example, consider a family of five (5) uninsured for the entire year in 2014: four (4) are over the age of 18, one (1) is under the age of 18. The parents are jointly and severally liable for the penalty for themselves and their four uninsured dependents. The applicable dollar amount for 2014 is $95. This amount is halved for applicable individuals under the age of 18. The total penalty would be $427.50 ($95 for each of the four adults, and $47.50 for the one child). However, this flat dollar amount is limited to 300% of the applicable dollar amount, with no adjustment for individuals under 18. Thus, the family's flat dollar penalty is $285 ($95x3). The family's household income is $45,000, and their filing threshold is $23,900. Their household income exceeds the threshold by $21,100 ($45,000-$23,900). Thus, their percentage of income penalty is $211 (1% of $21,100).

In short, the family's actual penalty is the lesser of: (i) their "monthly penalty," which is $285 [the greater of $285 (the flat dollar fee) or $211 (percentage of income)] or (ii)the average national annual premium for qualified health plans that offer bronze-level of coverage for a family of five through the Exchange. The penalty amount would be included as part of the family's 2014 tax return.

Confused? You should be. The complexity of the PPACAs individual mandate and taxes on insurance companies is mind boggling.

The rest of the funding mechanisms, including the employers responsibilities under the PPACA, will be described in our next post. --T. Braxton McKee