The U.S. Supreme Court ruled Thursday to uphold the federal health-care reform law, voting in favor of a mandate that requires most individuals to buy health insurance or pay a penalty. In a 5–4 vote, the Court said that the mandate is constitutional when viewed as a tax.

The law’s “requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it or to pass upon its wisdom or fairness,” Chief Justice John Roberts wrote for the majority.

The court also upheld the Patient Protection and Affordable Care Act’s proposal for states to expand Medicaid to cover more residents, but limited Congress’s ability to penalize states that choose not participate. In the decision, the Court said, “Nothing in our opinion precludes Congress from offering funds under the Affordable Care Act to expand the availability of health care, and requiring that states accepting such funds comply with the conditions on their use. What Congress is not free to do is to penalize States that choose not to participate in that new program by taking away their existing Medicaid funding.”

Despite reports that some members of Congress plan to strategize a repeal, the law continues to move forward. Implementation is a multi-year process and some clients can expect to see new taxes.

Provisions to be implemented in 2013

  • New Medicare surtax. The law provides for a 3.8% Medicare surtax on net investment income.
    Medicare Surtax Table

    Explore some examples of how the surtax will be calculated.

  • Additional Medicare payroll tax. At the same income thresholds, an extra payroll tax of 0.9% will take effect that will increase the tax to 2.35% of salary, from 1.45%.
  • Limited deduction on medical expenses. The law increases the threshold for deducting medical expenses on the federal income tax return from 7.5% of adjusted gross income (AGI) to 10% of AGI.
  • Excise tax on medical devices. Sale of medical devices is subject to an excise tax of 2.3%. Items sold at retail to consumers are excluded.

Provisions to be implemented in 2014

  • Individual mandate. The individual mandate requiring those without insurance to obtain it or pay a penalty takes effect in 2014.
  • Employer mandate for businesses to provide insurance. Larger businesses with 50 or more employees will be required to offer health insurance coverage or to pay a fee.
  • Health-care exchanges. States will have to establish health-care exchanges providing individuals and businesses an opportunity to buy affordable health insurance.
  • Subsidies available for low-income individuals. This provision expands Medicaid benefits to cover those with incomes less than 133% of the federal poverty level and, based on federal poverty guidelines, provides subsidies to help individuals obtain health insurance.

Opportunities and next steps for financial advisors

  1. Educate clients and prospects about key facets of the law
    The Court’s decision will likely prompt more interest from clients and prospects on specific aspects of the law. Some may have paid little attention to the details if they felt the Court was going to overturn the law or certain of its provisions. Putnam’s investor education piece, A look at health-care reform and its impact on investors, provides details key provisions of the law.
  2. Present tax-smart strategies for 2012
    Clients who may be subject to the additional 3.8% Medicare surtax on net investment income or the 0.9% extra payroll tax may want to consider strategies for accelerating income or long-term capital gains into 2012 (after consultation with a qualified tax professional). For example, clients may want to consider Roth IRA conversions before the end of the year. Putnam’s investor education piece, Ten income and estate tax planning strategies for 2012, is a great way to connect with clients and prospects now.
  3. Position municipal bonds to taxpayers in higher brackets
    Considering the potential for higher tax rates next year as the Bush-era tax cuts expire combined with new 3.8% investment income surtax, taxpayers in higher tax brackets may want to explore municipal bonds for a greater portion of their portfolios. For example, clients in the highest tax bracket may see their tax rates on (taxable) bond interest increase from 35% to 43.4% next year. On a relative basis, tax-free municipal bond income will be more attractive.