Tax Effects Of Health Care Reform On Individuals & Businesses

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Given that one of the most drastic reforms to our nation’s health care system is likely to take place sometime during the coming year, it is important for individual and corporate taxpayers to have a firm understanding of the potential effects that reform will have on them. While the bills currently in the House of Representatives and Senate do not begin changing the way health care is offered and provided until 2013 or 2014, many of the tax changes will begin immediately and need to be accounted for.

Currently, the House has passed one bill, while the Senate just recently passed its own bill as of this article’s publishing. Now, both bills will be sent to a joint committee where the areas of disagreement between the House and the Senate will be ironed out and amended, with a final draft being sent back to each body for a final vote. The bill will then be sent to the president for his signature if the final draft passes both the House and Senate.

However, given the large areas of disagreement between various provisions of the House and Senate bills, it may take some time before the bill is ready for President Obama’s signature. Furthermore, the recent Senate election in Massachusetts broke the Democrat’s filibuster-proof, 60- vote majority, and any changes to the original version of the Senate bill (such as those through the joint committee with the House) will now require at least one Republican vote. However, the House could also vote to pass the Senate’s recently passed bill “as is” with no changes, though Speaker Nancy Pelosi has indicated she likely does not have the votes for such a strategy.

Also, there has been discussion about using a process called “reconciliation,” which is a Senate measure used to pass bills or congressional items that are budget focused. Bills passed in this manner must typically reduce the federal budget over their effective period or be “budget neutral,” per the Byrd rule.* In order to pass an item under reconciliation, only a 51-vote majority is required. Use of the reconciliation process would allow the Democrats to pass health care reform in piecemeal form through the Senate, provided that each respective portion does not increase the federal budget. This would allow for passage of items such as the restriction against discrimination for preexisting conditions, state health insurance exchanges and Medicare spending reductions.

While politically contentious, the reconciliation process has been used 19 times in the Senate since 1980, 10 times by Democrats and nine times by Republicans, and helped pass items such as welfare reform in 1996, state health insurance programs for children in 1997 and approximately $1 trillion of President Bush’s estimated $2.48 trillion in tax cuts over his recent eight-year term. If the Senate passed a bill via reconciliation, that bill (or bills), would then need to be approved by the House accordingly, at which time it would be sent to President Obama for his signature.

As the bill has yet to reach its final stages, now may represent the last opportunity individuals and businesses will have to contact their respective senator or representative to communicate support or concern regarding specific provisions of each bill, or a final blended version of both bills that is eventually put to a vote.

This article will focus on the two bills currently proposed in the House and Senate respectively, as the bills were originally issued and not accounting for any changes or amendments. Specifically, the bills are the House Leadership bill, “Affordable Health Care for America Act” (H.R. 3962) (the “House bill”), and the Senate Leadership bill, “Patient Protection and Affordable Care Act” (H.R. 3590) (the “Senate bill”). While important, issues such as the public option, health insurance exchanges, coverage of illegal immigrants and federal money for abortions will be ignored, as this article focuses specifically on the tax effects of the currently proposed health care reform.

Comparison Of Respective Key Areas Of Reform

Both the House and Senate bills agree in many areas, particularly regarding changes to the general means by which private insurance is provided. However, there are a number of areas in which they differ that are specifically tax-related, including an individual mandate to purchase insurance, requirements for employer provided insurance and changes to the tax laws that will help finance the cost of the bills themselves. These areas are broken down in more detail in the following sections.

Individual Mandate

Both the House bill and the Senate bill include a mandate that all individuals purchase health insurance meeting basic federal requirements for coverage. However, they differ as to the means by which penalties will be applied if coverage is not obtained.

The House bill will levy a tax penalty equivalent to 2.5 percent of adjusted gross income in excess of the insurance coverage thresholds included in the bill, which currently stand at $9,350 for a single person and $18,700 for couples. The penalty will be capped at the average premium for an individual or family under the basic plans available on the applicable Health Insurance Exchange. The penalty will begin in 2013.

The Senate bill will levy a tax credit fee of $750 per person, up to $2,250 per family, for failing to purchase basic health insurance. The fine will be phased in beginning with the 2014 tax year, starting at $95, and increasing to $350 for 2015 and $750 for 2016 and the years thereafter. No fine will be imposed if the cost of the cheapest plan on the applicable exchange exceeds eight percent of household income. The $750 fine will also be indexed annually after 2016.

Both bills provide exceptions for financial hardship and religious objections, while also including poverty waivers for certain income levels.

Employer Related/Provided Insurance

There are drastic differences between the two bills with regards to the requirements for employer related and provided health care insurance.

The House bill specifically requires employers to provide health care insurance to their employees if their annual payrolls are above $500,000. Employers are required to cover a certain percentage of the lowest annual premiums for a policy available on the applicable health insurance exchange that meets minimum federal requirements. Employers must cover 72.5 percent of an individual’s premiums or 65 percent of the premiums for a family.

The penalty for failing to offer coverage is up to eight percent of the company’s total payroll, though it is phased in at two percent to six percent for companies with payrolls between $500,000 and $750,000. Companies with payrolls in excess of the $750,000 ceiling are subject to the full eight-percent penalty. Employers who offer insurance must automatically enroll all new employees in the lowest cost premium plan available, unless the employee explicitly opts out.

The Senate bill does not specifically require employers to provide health insurance coverage, but rather subjects them to a fine if the company employs more than 50 people and any of its employees acquire insurance via one of the new exchanges by using premium tax credits. The fine is equivalent to the lesser of $3,000 for each employee receiving a credit, or $750 per full-time employee. Employers with 50 employees or less are exempt from the fine, and if an employer has 200 or more employees, it must automatically enroll all employees in its insurance plan unless the employees opt out.

About Luke Hansen 1 Article
Luke Hansen is a transactional tax Analyst and is responsible for preparing the transactional tax plans and assessments that are presented to clients. He has earned his Master of Laws (LLM) in Taxation (with honors), specializing in corporate taxation and estate planning, as well as his Juris Doctor from The John Marshall Law School.


  1. I found this article and noticed that there are no updates since the reconciliation bill passed. I have been keeping up with Health Care reform and particularly its impact on small businesses. I would love to write an article for you or have my website featured if you feel it beneficial for your readers.

    Sincerely, Jane Ames

    • Hi Jane. I’ll be sending you an email shortly with information on how to become an author for the magazine. We’re always looking for new authors!

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