Health Care Reform Could Cost You

Far from being the last word, the Supreme Court’s decision on the health care reform law set off a flurry of activity. States, employers and insurers are scrambling to prepare for the next phases of the law’s rollout, even as Republican lawmakers ramp up efforts to repeal it. Expect the law to become a major election issue.

In the meantime, many states that delayed setting up health insurance exchanges are moving ahead to meet tight deadlines. These markets, where people seeking individual or small-group coverage can buy policies and apply income-based subsidies to their costs, must be up and running by 2014. However, governors of a few states, including Florida and Louisiana, have said they will not set up exchanges, in effect leaving the task to the feds. Those states also balked at expanding Medicaid coverage, which the Supreme Court ruled they could do without penalty. Here’s what to expect:

Changes in employee benefits. In 2013, employers must limit your pretax contributions to flexible spending accounts to $2,500 per year (down from $3,000 to $4,000 for many employers) and provide a summary of benefits during open enrollment. Employers must also report the cost of health benefits on your 2012 W-2—for information only. Benefits will still be nontaxable.

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New taxes. Starting in 2013, taxpayers who have a modified adjusted gross income of $200,000 or more ($250,000 for joint filers) will pay a 3.8% tax on certain kinds of investment income, such as interest, dividends, capital gains, rent and royalties (municipal bond interest doesn’t count). The surtax applies either to the investment income or to the amount of AGI exceeding the threshold, whichever is less. For example, if your joint income is $300,000 and you have $5,000 of investment income, you’ll pay the tax on the $5,000. But if your investment income is $50,000 and your joint AGI is $260,000, you’ll pay the tax on $10,000 of the investment income. You will also pay an additional 0.9% Medicare tax on income exceeding the AGI threshold.

Future impacts. By 2014, everyone must buy insurance or pay a penalty tax, and you can no longer be rejected or charged more because of your health. Young, healthy people buying on their own are likely to pay more than they do now. In states that now allow different rates based on gender, males will generally see premiums rise and females could see some decreases when rates go unisex.

For most people who are covered by large employer-based plans, premiums are expected to increase at about the same pace as they have been, with a slight additional increase because of plan or administrative costs related to reform.

Families earning up to $92,200 for a family of four will qualify for subsidies to help pay for coverage. Small firms will determine whether it’s less expensive to provide coverage or let workers buy insurance on the exchanges. Individuals may perform a similar calculation, opting to pay the penalty if premiums are too high. That could lead to more unhealthy people in the risk pool (who are likely to decide coverage is worth it), boosting costs for everyone.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.