Health-Related Revenue Provisions in the
Patient Protection and Affordable Care Act
(P.L. 111-148)
Janemarie Mulvey
Specialist in Aging Policy
April 8, 2010
Congressional Research Service
7-5700
www.crs.gov
R41128
CRS Report for Congress
P
repared for Members and Committees of Congress
Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Summary
On March 23, President Obama signed health care reform legislation into law—the Patient
Protection and Affordable Care Act (PPACA; P.L. 111-148), some provisions of which are
amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152). PPACA
will, among other things, raise revenues to pay for expanded health insurance coverage by
imposing excise taxes and fees on industries in the health care sector, limiting tax-advantaged
health accounts, increasing the Medicare payroll tax on upper-income households and adding an
additional tax on net investment income on upper-income households. The new law will also
eliminate the tax deduction for expenses allocable to the Medicare Part D subsidy to employers.
This report summarizes the health-related revenue provisions in PPACA.
Congressional Research Service
Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Contents
Introduction ................................................................................................................................ 1
Health-Related Revenue Provisions............................................................................................. 1
Provisions Affecting Health Care Firms and Other Employers............................................... 3
Excise Tax on Health Insurance Plans ............................................................................. 3
Annual Fee on Health Insurance Plans ............................................................................ 5
Annual Fee On Pharmaceutical Companies and Excise Tax on Medical Device
Manufacturers.............................................................................................................. 5
Limitation on Deduction for Executive Compensation of Health Insurers ........................ 6
Eliminate Employer Deduction for Retiree Prescription Drug Plans Eligible for
Federal Subsidy ........................................................................................................... 6
Provisions Affecting Individuals............................................................................................ 6
Medicare Payroll Tax ...................................................................................................... 6
Unearned Income Medicare Contribution ........................................................................ 7
Tax-Advantaged Accounts and Itemized Deductions Used to Pay for Health Care
Expenses...................................................................................................................... 7
Tables
Table 1. Health-Related Revenue Provisions in PPACA as Amended by the
Reconciliation Act of 2010....................................................................................................... 2
Table 2. The 40% Excise Tax on Health Insurance Coverage ....................................................... 4
Contacts
Author Contact Information ........................................................................................................ 9
Congressional Research Service
Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Introduction
On March 23, 2010, President Obama signed health reform legislation into law—the Patient
Protection and Affordable Care Act (PPACA; P.L. 111-148), some provisions of which were
amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152).
PPACA includes a number of provisions to reform the private insurance market and expand
health insurance coverage to the uninsured. Private health insurance provisions that take effect
prior to 2014 (including some this year) include the following: ending lifetime and unreasonable
annual limits on benefits, prohibiting rescissions of health insurance policies, requiring coverage
of preventive services and immunizations, extending dependant coverage up to age 26, capping
insurance companies’ non-medical administrative expenditures, guaranteeing coverage for
preexisting health conditions for enrollees under age 19, and providing assistance for those who
are uninsured because of a preexisting condition.1 Many of the other provisions will be fully
implemented in 2014, when most individuals, large employers, and health plans are to meet
certain coverage requirements. PPACA will restructure the private health insurance market,
particularly for individuals purchasing coverage on their own (who may qualify for premium
credits) and small businesses. The new law will also expand Medicaid coverage to families with
incomes up to 133% of the federal poverty level.
To pay for expanded health insurance coverage, there are a number of health-related revenue
provisions in PPACA . These include taxes and fees on firms in the health care sector and other
employers as well as additional taxes on upper-income individuals. The new law also makes
changes to tax-advantaged health care accounts such as flexible spending and health savings
accounts. This report details the changes in tax law that will be made as a result of the health-
related revenue provisions in PPACA.
Health-Related Revenue Provisions
The health-related revenue provisions in PPACA include excise taxes and limitations on employer
deductions that would impact health insurers, health plan sponsors, and health plan
administrators. In addition, there are a number of revenue provisions that would affect workers
through modifications to current tax-advantaged accounts and deductions used for health care
spending and coverage.
Table 1 shows the implementation date and preliminary revenue projections for PPACA as
amended by the reconciliation bill. According the Congressional Budget Office (CBO) and the
Joint Committee on Taxation (JCT), these laws are projected to raise $391.7 billion in health-
related provisions over 10 years. Other revenues would come from penalties on individuals and
employers as well as other non-health related revenue provisions.2 CBO projects that the deficit
would be reduced by $143 billion over the 10-year period 2010-2019 under PPACA as amended
by the reconciliation bill. Of those savings, 63% ($90 billion) is on-budget and the remaining
1 See CRS Report R40942, Private Health Insurance Provisions in Senate-Passed H.R. 3590, the Patient Protection
and Affordable Care Act , by Hinda Chaikind et al.
2 For more information on penalties paid by employers who do not provide coverage see CRS Report R41159,
Summary of Potential Employer Penalties Under PPACA (P.L. 111-148), by Hinda Chaikind and Chris L. Peterson.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
37% ($53 billion) is off-budget, reflecting increases in the Medicare Hospital Insurance (HI),
Supplementary Medical Insurance and Social Security Trust Funds.3
Table 1. Health-Related Revenue Provisions in PPACA as Amended by the
Reconciliation Act of 2010
Effective Date,
Taxable Years
Increase in Revenues
Beginning
(FY2010-FY2019)
Provisions Affecting Firms
Excise Taxes and Fees
40% Excise Tax on High-Cost Plans
2018
$32.0 billion
Impose Annual Fee on Health Insurance
2014 $60.1
billion
Providers
Annual Fee on Manufacturers and Importers
2011 $27.0
billion
of Branded Drugs
Annual Fee/ Excise Tax on Manufacturers
2013 $20.0
billion
and Importers of Certain Medical Devices
10% Excise Tax on Indoor Tanning Services July
1, 2010
$2.7 billion
Limitation on Employer Deductions
Eliminate Deductions for Expenses Al ocable
2013 $4.5
billion
to Medicare Part D subsidy
Limit Deduction for Compensation to
$500,000 for Executives of Health Insurance
2013 $0.6
billion
Companies
Provisions Affecting Individuals
Medicare Tax
Medicare Payroll Tax 2013
$86.8 billion
Medicare Contribution on Investment
2013 $123.4
billion
Income
Modifications to Tax-Advantaged
Accounts and Itemized Deductions
Limit Health Flexible Spending Accounts
2013 $13.0
billion
(FSAs) to $2,500
Raise Penalty for Non-Qualified Health
Savings Account (HSA) Withdrawals from
2011 $1.4
billion
10% to 20%
Change the Definition of Medical Expenses
2011 $5.0
billion
for FSAs and HSAs
Raise 7.5% Floor for Itemized Medical
2013
$15.2 billion
Expenses to 10% for Those Under Age 65
Total Revenues Relating to Health
— $391.7
billion
Care
Source: Joint Committee on Taxation, March 20, 2010, JCX-17-10.
3 Congressional Budget Office, Letter to Honorable Nancy Pelosi, March 20, 2010.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Provisions Affecting Health Care Firms and Other Employers
PPACA will impose the following taxes and/or fees on health insurers, plan administrators, and
health companies:
• an excise tax on high-cost employer-sponsored health insurance;
• an annual fee on health insurance providers;
• an annual fee on manufacturers and importers of brand name pharmaceuticals;
• an excise tax on manufacturers and importers of certain medical devices; and
• an excise tax on indoor tanning services.
The new law will also limit the deductibility of compensation for health insurance executives.
While the provisions above are directly targeted toward firms in the health care sector, there is an
additional provision that will affect all employers who provide prescription drug coverage to
Medicare beneficiaries.
The following section describes the current law (where applicable), changes to the law as enacted
in PPACA and amended by the reconciliation bill.
Excise Tax on Health Insurance Plans
Under current law, an insurance company is subject to federal income tax as either a life
insurance company or as a property insurance company, depending on its mix of lines of business
and on the resulting portion of reserves that are treated as life insurance reserves. Some non-profit
insurers are exempt from federal income taxes.4 Also, employees are not taxed on the value of
health insurance coverage provided by employers.5 PPACA will impose a 40% excise tax on
health insurers and health plan administrators for coverage that exceeds certain thresholds in
2018. The thresholds are $10,200 for single coverage and $27,500 for family coverage, and
would be indexed by growth in the CPI-U plus 1% in subsequent years. Coverage for individuals
who are retired and ages 55 to 64, and workers engaged in high-risk professions, will be subject
to higher thresholds ($11,850 single and $30,950 families). Also, employees in multi-employer
(union) plans will only be subject to the family thresholds. Finally, there is also a provision to
allow employers to adjust the cost of health insurance coverage (when compared with the
thresholds) if the demographics of their workforce in terms of age and gender are different from
that of a national risk pool.6
Health insurance coverage subject to the 40% excise tax in PPACA will be broadly defined to
include not only the employer and employee premium payments for health insurance coverage
(including self-insured plans), but also premiums paid by the employee and the employer for
dental and vision coverage (if this supplemental coverage is not part of a stand-alone package). In
addition, tax-advantaged health-related accounts such as flexible spending accounts (FSAs),
4 Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of the “Reconciliation Act of 2010,”
as Amended, in Combination with the “Patient Protection and Affordable Care Act,” JCX-18-10, March 21, 2010.
5 See CRS Report RL33505, Tax Benefits for Health Insurance and Expenses: Overview of Current Law and
Legislation, by Janemarie Mulvey.
6 The national risk pool is based on the rates in the standard Blue Cross Blue Shield FEHBP health insurance plan.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
health savings accounts (HSAs), health reimbursement accounts (HRAs) and medical savings
accounts (MSAs) are also specified as health insurance coverage and included in the threshold
calculation. For these tax-advantaged accounts, the plan administrator (which is often the
employer) will be subject to the excise tax. The excise tax will be levied on each of these
components (i.e., health insurance, dental and vision, FSAs) based on their share of the total. This
share will then be applied to the amount of the total contribution that exceeds the applicable
threshold to determine the excise tax imposed on each component.
Table 2. The 40% Excise Tax on Health Insurance Coverage
In PPACA
Provisions
General Threshold Amounts
$10,200 single
$27,500 family
Insurance Coverage Subject to the Thresholds
Health Insurance Coverage (excluding
stand alone dental and vision plans)
FSAs, HSAs, Archer MSAs, and HRAs.
Alternative Thresholds
Applicable to high-risk professions and
retirees ages 55 to 64
$11,850 single
$30,950 family
Multi-Employer Plans (Unions)
Only subject to general threshold for family
coverage (even for self-only coverage)
Implementation Date
2018
Source: Compiled by CRS.
PPACA will also impose additional reporting requirements on employers providing health
insurance coverage. Specifically, employers would be responsible for
• determining the aggregate amount of health insurance coverage subject to the
excise tax,
• estimating the share of the tax allocated to the insurer and the plan administrator,
• reporting these amounts to the insurer, plan administrator and the Internal
Revenue Service, and
• reporting the total value of health insurance coverage subject to the excise tax on
the worker’s W2 form.
Employers who under-report the amount of the excise tax to be paid by insurers and plan
administrators would be subject to a penalty. The amount of the excise tax would not be
deductible from federal income taxes. According to the JCT, the 40% excise tax is projected to
raise $32 billion over a 10-year period (see Table 1).
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Annual Fee on Health Insurance Plans
As noted earlier, under current law, there are special rules for determining the taxable income of
insurance companies.7 The rules differ depending on whether the company is a life insurance or a
property and casualty insurer. PPACA will impose a fee on all health insurers based on their
market share of net premiums written and will be effective beginning in 2014.8 The share of net
premiums written subject to the fee will vary by the size of net premiums of an insurer. For
example, there will be no fee on the first $25 million of net premiums of covered entities. For net
premiums greater than $25 million and less than $50 million, 50% will be taken into account, and
100% of net premiums written in excess of $50 million will be subject to the fee. The fee will not
apply to self-insured plans and federal, state, or other government entities. There are also
additional provisions for tax-exempt insurance providers. Only 50% of net premiums for tax-
exempt insurer will be taken into account when calculating the fee. The law would also exempt
Voluntary Employee Benefit Associations and nonprofit providers for whom more than 80% of
revenues are received from public programs that target low-income, elderly, or disabled
populations.
The aggregate fee collected across all health insurers will equal $8 billion in 2014, $11.3 billion
in 2015 and 2016, $13.9 billion in 2017, and $14.3 billion in 2018. After 2018, the fee amount is
indexed to the rate of growth in premiums. According to the JCT, this fee is projected to raise
about $60 billion over a 10-year period (see Table 1).
Annual Fee On Pharmaceutical Companies and Excise Tax on Medical Device
Manufacturers
Under current law, there are excise taxes on sales by manufacturers of certain products. Certain
sales are exempt from this tax.9 PPACA will impose an annual fee on certain manufacturers and
importers of branded prescription drugs (including biological products and excluding orphan
drugs). The fee structure will be based on annual sales and will be set to reach a certain revenue
target each year. Annual revenues collected by the fee would total $2.5 billion for 2011, $2.8
billion per year for 2012 and 2013, $3.0 billion 2014 through 2016, $4.0 billion for 2017, $4.1
billion for 2018, and $2.8 billion for 2019 and thereafter. PPACA specifies that these additional
revenues should be transferred to the Federal Medicare Supplementary Insurance (Part B) Trust
Fund. According to the JCT, this fee is projected to raise $27 billion over a 10-year period (see
Table 1).
Also under PPACA, a new excise tax of 2.3% will be imposed on the sale of medical devices by
manufacturers, producers, or importers.10 This provision will exempt eyeglasses, contact lenses,
hearing aids, and any device of a type that is generally purchased by the public at retail for
individual use. The tax will apply to sales made after December 31, 2012. According to the JCT,
this excise tax is projected to raise $20 billion over a 10-year period (see Table 1).
7 Subchapter L of the Internal Revenue Code.
8 See CRS Report R40834, The Market Structure of the Health Insurance Industry, by D. Andrew Austin and Thomas
L. Hungerford, for information on market share of individual health insurance companies.
9 See Internal Revenue Code Chapter 32.
10 CRS Report R40943, Public Health, Workforce, Quality, and Related Provisions in the Patient Protection and
Affordable Care Act (P.L. 111-148), coordinated by C. Stephen Redhead and Erin D. Williams
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Limitation on Deduction for Executive Compensation of Health Insurers
PPACA will impose limits on the amount of executive compensation that is deductible by health
insurers. Specifically, health insurance providers where at least 25% of their gross premium
income is derived from health insurance plans that meet the minimum creditable coverage
requirements (i.e., covered health insurance provider) will not be able to deduct compensation
above $500,000 per year. This income threshold will include deferred compensation. This
provision will be effective for compensation paid in taxable years beginning after 2012 with
respect to services performed after 2009. According to the JCT, this limitation on executive
compensation is projected to raise $600 million over a 10-year period (see Table 1).
Eliminate Employer Deduction for Retiree Prescription Drug Plans Eligible for
Federal Subsidy
Under current law, employers who provide their Medicare-eligible retirees with prescription drug
coverage that meets or exceeds federal standards are eligible for subsidy payments from the
federal government.11 The subsidies were equal to 28% of their actual spending for prescription
drug cost in excess of $250 and not to exceed $5,000 (in 2006 dollars). These qualified retiree
prescription drug plan subsidies are excluded from the employer’s gross income for the purposes
of corporate income tax. Employers are also allowed to claim a business deduction for retiree
prescription drug expenses even though they also receive the federal subsidy to cover a portion of
those expenses. PPACA will require employers to coordinate the subsidy and the deduction for
retiree prescription drug coverage beginning in 2013. The amount allowable as a deduction for
retiree prescription drug coverage would be reduced by the amount of the federal subsidy
received. According to the JCT, this provision is projected to raise $4.5 billion over a 10-year
period (see Table 1).
Provisions Affecting Individuals
Medicare Payroll Tax
Under current law, employers and employees each pay a payroll tax of 1.45% to finance
Medicare Hospital Insurance (Part A). PPACA includes additional hospital insurance taxes on
high-income taxpayers. Specifically, PPACA would impose an additional payroll tax of 0.9% on
high-income workers with wages over $200,000 for single filers and $250,000 for joint filers
effective for taxable years after December 31, 2012. Married taxpayers filing separately are
subject to a $125,000 threshold. The additional payroll tax only applies to wages above these
thresholds. Thus, the HI portion of the payroll tax will increase from 1.45% to 2.35% for wage
income over the threshold amounts. Additional revenues from this provision are transferred to the
Medicare Hospital Insurance Trust Fund (Part A). According to the JCT, the increase in the
Medicare payroll tax is projected to raise $86.8 billion over a 10-year period (see Table 1).
11 Medicare Modernization Act of 2003.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Unearned Income Medicare Contribution
A provision that was not part of the PPACA but was later added by the reconciliation bill (Section
1402) is an additional tax on net investment income. The new law defines net investment income
to be interest, dividends, non-qualified annuities, royalties, rents, and taxable net capital gains. It
excludes distributions from a qualified annuity from a pension plan.12 Households with modified
adjusted gross income (MAGI) under these thresholds will not be subject to the investment
income tax. Specifically, effective for taxable years after December 31, 2012, the bill will impose
a tax equal to 3.8% of the lesser of (1) net investment income for such taxable year or (2) the
excess of MAGI13 over $250,000 for joint filers ($125,000 for married filing separately and
$200,000 for all other returns).
While this tax is also applicable to income from estates and trusts, the active income from trade
for self-employed and S-corporations would not be subject to the tax.14 For these entities, the tax
would apply only to passive income and income related to commodity trading. There is also a
special provisions for the application of the tax to S-Corporations who sell their businesses.
As shown in Table 1, the investment income provision is projected to raise $123.4 billion in
revenues over a 10-year period.
Tax-Advantaged Accounts and Itemized Deductions Used to Pay for Health
Care Expenses
There are a number of tax-advantaged accounts and tax deductions for health care spending and
coverage that will be affected by the revenue provisions in Title IX of PPACA (as amended by the
reconciliation bill). The following discusses these in greater detail.
Modifications to Tax-Advantaged Accounts
Under current law, flexible spending accounts (FSAs), health savings accounts (HSAs), health
reimbursement accounts (HRAs), and Medical Saving Accounts (MSAs) allow workers under
varying circumstances to exclude a certain portion of qualified medical expenses from income
taxes.15 Health FSAs are employer-established benefit plans that reimburse employees for
specified health care expenses (e.g., deductibles, co-payments, and non-covered expenses) as they
are incurred on a pre-tax basis.16 About one-third of workers in 2007 had access to an FSA.17
Each employer may set their limits on FSA contributions. In 2008, the average FSA contribution
12 As defined in IRC Sec. 401(a), 403(a), 403(b), 408, 408A, or 457(b).
13 Modified adjusted gross income is defined as adjusted gross income increased by the excess of foreign earned
income (defined in IRC Sec. 911(a)(1)) over the amount of any deductions or exclusions disallowed under IRC Sec.
911(d)(6) when determining foreign earned income.
14 Corporations may elect S-corporation status if they meet a number of Internal Revenue Code requirements. Among
other things, they cannot have more than 100 shareholders or more than one class of stock. S-corporations are tax-
reporting rather than tax-paying entities, in contrast to C-corporations, which are subject to the corporate income tax.
15 See CRS Report RL33505, Tax Benefits for Health Insurance and Expenses: Overview of Current Law and
Legislation, by Janemarie Mulvey.
16 See CRS Report RL32656, Health Care Flexible Spending Accounts, by Janemarie Mulvey.
17 Bureau of Labor Statistics, Table 24. Pretax benefits: Access, private industry workers, National Compensation
Survey, March 2007.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
was $1,350.18 PPACA will limit the amount of annual FSA contributions to $2,500 per FSA
beginning in 2013. According to JCT, this provision is projected to increase revenues by $13
billion over 10 years (see Table 1).
HSAs are also tax-advantaged accounts that allow individuals to fund unreimbursed medical
expenses (deductibles, copayments, and services not covered by insurance) on a pre-tax basis.19
Eligible individuals can establish and fund accounts when they have a qualifying high deductible
health plan and no other health plan (with some exceptions). Unlike FSAs, HSAs may be rolled
over and the funds accumulated over time. Distributions from an HSA that are used for qualified
medical expenses are not included in taxable income. While distributions that are not used for
qualified medical expenses are taxable as ordinary income and, under current law, an additional
10% penalty tax is imposed for those under the age of 65. PPACA will raise this penalty on non-
qualified distributions from 10% to 20% of the disbursed amount. According to the JCT, this
provision would raise $1.3 billion over 10 years (see Table 1).
PPACA will also modify the definition of qualified medical expenses. Under current law,
qualified medical expenses for FSAs, HSAs, and HRAs can include over-the-counter
medications. The bill would restrict this practice and exclude over-the-counter medications
(except those prescribed by a physician) as a qualified medical expense. According to the JCT,
this provision would increase revenues by $5 billion over 10 years (see Table 1).
Modify Itemized Deduction for Medical Expenses
Currently, taxpayers who itemize their deductions may deduct unreimbursed medical expenses
that exceed 7.5% of adjusted gross income (AGI). Medical expenses include health insurance
premiums paid by the taxpayer, but also can include certain transportation and lodging expenses
related to medical care as well as qualified long-term care costs, and long-term care premiums
that do not exceed a certain amount. About 7% of tax returns for tax year 2007 reported a
deduction for medical expenses.20 Taxpayers with AGI below $50,000 accounted for 52% of
those taking this itemized deduction for medical expenses.21 PPACA will increase the threshold to
10% of AGI for taxpayers who are under the age of 65, this effectively further limits the amount
of medical expenses that can be deducted. Taxpayers over the age of 65 will be temporarily
excluded from this provision and still be subject to the 7.5% limit from 2013 through 2016.
18 Mercer Human Resources Consulting, National Survey of Employer-Sponsored Health Plans 2008.
19 See CRS Report RL33257, Health Savings Accounts: Overview of Rules for 2010, by Janemarie Mulvey.
20 Internal Revenue Service, Statistics of Income, Table 1.3: All Returns: Source of Income, Adjustments, Deductions,
Credits and Tax Items, by Marital Status, Tax Year 2007.
21 Joint Committee on Taxation, Tax Expenditures: Compendium of Background Material on Individual Provisions,
December 2008.
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Health-Related Revenue Provisions: Changes Made by the Reconciliation Act of 2010
Author Contact Information
Janemarie Mulvey
Specialist in Aging Policy
jmulvey@crs.loc.gov, 7-6928
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