NCPA - National Center for Policy Analysis

ObamaCare Increases Taxes

June 6, 2013

The central provisions of the Affordable Care Act require younger and healthier Americans to buy insurance policies that will, in essence, subsidize the health care of older and sicker Americans. But one of ObamaCare's hidden taxes (a new limit on contributions to flexible spending accounts, or FSAs) will hit older and chronically ill individuals hardest, says Tom Miller, a resident fellow at the American Enterprise Institute.

Starting this year:

  • The health care law imposes a $2,500 annual cap on an individual's contribution to an FSA that is part of an employer's "cafeteria" benefits plan.
  • Such contributions, diverted directly from one's paycheck, are not subject to federal income and payroll taxes.
  • The money in an FSA can then be used to pay for qualified medical expenses such as deductibles, coinsurance and copayments, as well as services not covered by insurance.
  • This implicit "tax" on wage income that now won't be diverted pretax into FSAs is expected to raise $1.5 billion this year, and a total of $13 billion between 2013 and 2019, according to the Joint Committee on Taxation.

A 2012 study published in Forum for Health Economics & Policy examined patterns of FSA usage by income and health status from 1998 to 2008.

  • It found that of the estimated 13.9 million households nationwide with an FSA, 35 percent will be affected by the new FSA cap, with an average tax increase of $101 in 2013.
  • By 2020, an estimated 41 percent of FSA households will hit the FSA cap because medical costs will rise faster than the inflation-indexed limit on contributions.
  • The study found that among FSA-eligible households from 2004 to 2008, those who rank among the top 10 percent of contributors would have paid 66 percent of the additional tax if the cap were in place.
  • The third of taxpayers who itemize their deductions might be able to deduct a portion of their medical expenses, but those deductions do not reduce payroll taxes and they only apply to very large out-of-pocket costs such as expenses exceeding 10 percent of a taxpayer's adjusted gross income. That's up from 7.5 percent, thanks to the health care law.

Source: Tom Miller, "A Hidden Tax in ObamaCare," Los Angeles Times, May 31, 2013.


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