Patient Protection and Affordable Care Act - 2013 Tax Provisions

July 2013

Below is an overview of some of the new taxes and limitations scheduled to go into effect in 2013, as part of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. Individuals or businesses should consult with the IRS or a tax advisor concerning proper reporting and payment related questions.

Medical Device Tax (Effective January 1, 2013)
- An excise tax of 2.3% will be imposed on the sale of any taxable medical device.
- The House passed H.R. 436 to repeal the medical device tax on June 7, 2012.

Medicare Tax Increase (Effective January 1, 2013)
- The Medicare Part A (hospital insurance) tax rate on wages will be increased by 0.9% (from 1.45% to 2.35%) on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly.
- A 3.8% assessment will be imposed on “unearned” income (including real estate transactions) for some taxpayers. This also applies to modified adjusted gross income over $200,000 single and $250,000 married. 

Limiting Flexible Spending Accounts (Effective January 1, 2013)
- Beginning on January 1, 2013, a new cap of $2,500 a year will be placed on the amount of contributions made to a flexible spending account (FSA) for medical expenses.
- The $2,500 limit will be indexed for cost-of-living adjustments for plan years beginning after December 31, 2013.
- Under prior law, there was no limit on the amount of contributions to an FSA unless the employer imposed one. 

Employer Retiree Drug Subsidy (RDS) Deduction Elimination (Effective January 1, 2013)
- The federal tax-deduction for employers who receive the Medicare Part D retiree drug subsidy payments will be eliminated.
- The retiree drug subsidy was established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) to encourage employers to continue offering prescription drug benefits to their retirees to prevent retirees from seeking benefits through Medicare Part D. PPACA retains the drug subsidy but it eliminates the employer’s ability to deduct the amount of the subsidy.

State Notification Regarding Exchanges (Effective January 1, 2013)
- States must declare to the Secretary of Health and Human Services (HHS) their ability to operate an “American Health Benefit Exchange” by November 16, 2012, and HHS will issue approval for exchange operations by January 1, 2013.
- PPACA requires exchanges to be operational by January 1, 2014; however, open enrollment in the exchanges will begin October 1, 2013.

Medicare Disproportionate Share Hospital Payment Cuts (Effective October 1, 2013)
- Previously, Medicare provided additional funding to hospitals that serve a high population of low-income patients, which was indented to helped preserve access for Medicare beneficiaries.
- These payments, called Medicare Disproportionate Share Hospital (DSH) payments, will be reduced by 75 percent beginning on October 1, 2013.

Medicaid Disproportionate Share Hospital (DSH) Payment Cuts (Effective October 1, 2013)
- State Medicaid programs are required to make DSH payments to qualifying hospitals that serve a high Medicaid and low-income population. PPACA will reduce states’ Medicaid DSH allotments beginning on October 1, 2013.
- PPACA requires aggregate reductions in Medicaid DSH allotments equal to $500 million in fiscal year 2014, $600 million in fiscal year 2015, $600 million in fiscal year 2016, $1.8 billion in fiscal year 2017, $5.0 billion in FY2018, $5.6 billion in FY2019, and $4.0 billion in FY2020.
- The HHS Secretary is required to develop the methodology by which allotments are reduced, but this has yet to be published.

* Individuals or businesses should consult with the IRS or a tax advisor concerning proper reporting and payment related questions