Obamacare Survives Under Power of Taxation

In the Supreme Court's decision in National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566 (June 28, 2012), the Court determined the constitutionality of the most controversial provision of the Patient Protection and Affordable Health Care Act of 2010 (P.L. 111-148, also known as "Obamacare").  The individual mandate that requires all people have health insurance or pay a penalty was held constitutional and valid under the power of taxation.  In the majority opinion, Chief Justice Roberts states, "It is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance."  National Federation, 132 S.Ct. at 2608.  Justice Roberts went on to explain that while the federal government does have the power to tax those without health insurance, neither the Commerce Clause nor the Necessary and Proper Clause would protect a mandate that compelled people to purchase health insurance. National Federation, 132 S.Ct. at 2573. Although the Supreme Court's decision addressed only the individual mandate, the Court upheld the Act's other provisions with some limits on Medicaid expansion.

While the Supreme Court's decision has been praised by some, opponents have vowed to repeal the Act.  Ultimately the use of a tax to influence behavior is not particularly controversial or innovative.  In my opinion, one of the most interesting aspects of taxation is the ability to utilize a tax to influence a change in behavior.  If the Act does withstand attempts at repeal, it will be interesting to gauge the effectiveness of the tax on those without health insurance as the mandate is implemented.  The new health care reforms are generally to take effect in 2014 (some are effective sooner, while some not until 2018), though the results of the November election may affect the implementation schedule and determine the Act's future validity.

In prior commentaries I have addressed a few new significant provisions added by the Act and it is worth a reminder here of these upcoming changes:

• Group Health Plans:  Under IRC Section 6051(a)(14), employers are required to disclose the value of group health insurance coverage to employees on Form W-2.  This new requirement is optional for the 2012 tax year.   Additionally, under new IRC Section 4980I, which is effective January 1, 2018, plan administrators or insurers will be charged a 40 percent excise tax if the total value of employer-sponsored health coverage is above a certain limit ($10,200 per individual; $27,500 per family).  For further discussion, see "Group Health Plan Reporting Requirements:  Delays, Rumors, Cadillacs Under Attack," (Sept. 9, 2011).
• Deductible Compensation Limits:  IRC Section 162(m)(6) would apply only to "covered health insurance providers" to limit the tax deduction these health care insurers may take with respect to compensation for services paid to all current and former employees, and most independent contractors, to $500,000 per year.  The limitation is applicable for tax years beginning after 2012, but compensation earned starting in 2010 that is deductible after 2012 is also subject to the limitation.  For further discussion, see "IRC § 162(m)(6):  A Game Changer in the Healthcare Insurance Arena," (Dec. 6, 2011).

RELATED LINKS: For additional information and insight, see:

• Lexis Tax Advisor - Federal Code IRC §§ 162(m); 4980I; and 6051(a)(14).
• Lexis Tax Advisor - Federal Topical §§ 1B:2A.02; 1B:4C.22[2]; and 1B:4C.11[5].
• Harvey L. Frutkin, 1-1 Taxation of Executive Compensation:  Planning and Practice 1.09A (Matthew Bender 2011).

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