Banyan Administrators have been providing us with beneficial information about several different aspects of the Health Care Reform and how it affects us. Over the next months and years, employers will be faced with numerous changes, many of which require regulatory clarification. Banyan will continue to keep us up to date and on target with decisions that affect our plans.  Over the next few weeks, Banyan will be providing answers to many questions regarding Medicare and how the reform will affect you. We are sure you will find the information valuable.

If you missed the first article in this series that was posted last week, click here.

The following information is provided by Banyan Administrators:

Arguably the greatest volume of reforms through the Patient Protection and Affordable Care Act (“Affordable Care Act”) signed into law on 03/23/2010 involve Medicare. Some of the provisions are direct reforms to Medicare while other provisions of the Affordable Care Act may have an indirect, but intentional, impact on the program. The following Q&A will give you an overview of the reforms to the Medicare program and how they are all intended to work together.

1.  What is the future of Medicare?

What could not have been foreseen in 1965 when Medicare was created was that the United States was coming to the end of the post-World War II “Baby Boom”. More “Baby Boomers” are reaching Medicare eligibility than are being replaced in the work force by younger workers.  With Medicare being funded by FICA taxes, at some point, it mathematically becomes impossible to fund all the benefits for all the Medicare enrollees.

Currently, there are 3.9 workers paying taxes into Medicare for every Medicare enrollee. As the baby boomer generation retires, the number of workers paying taxes into Medicare will shrink to 2.4 by 2030. Beginning in 2008, Medicare first began spending more in benefits than it was receiving in tax funding. Life expectancies continue to increase meaning Medicare enrollees will continue receiving benefits for a longer period of time. Medical inflation continues to rise increasing costs. Many dire predictions are made regarding the solvency of the Medicare program. Some “doom and gloom” estimates are that Medicare will be insolvent by the end of the decade. Others predict that Medicare will still be an option when they retire, however, what it will look like and at what age they will be able to enroll in the program remains to be seen.

2.  So how does the Affordable Care Act reform Medicare?

Primarily, the Affordable Care Act reforms the Medicare program in three ways:

  • FICA Tax Changes
  • Medicare Part D Reforms
  • Medicare Advantage Reforms

3.  What are the FICA tax changes? 

The major change is an increase in the FICA tax rate on wages for high-income earnings. Effective with the 2013 tax year that begins on 1/1/2013, employees earning over $200,000 annually (and $250,000 for married couples filing jointly) will see their withholding percentage increased from 1.45% to 2.35%. The employer contribution will remain at 1.45%. This 0.90% increase in the FICA tax withholding percentage is estimated by the Congressional Budget Office to generate $87 billion in additional tax revenues over a ten year period.

In addition for the 2013 tax year, there will also be an assessment on unearned income for higher-income taxpayers. Unearned income includes capital gains, dividends, interest, annuities, royalties, and rents. The tax is 3.8% of the individual’s net investment income for the year or the amount of the individual’s modified adjusted gross income. What this means is that some individuals may be below the $200,000 annual compensation limit and not subject to the higher FICA tax rate, but, due to their amount of unearned income they may be subjected to the 3.8% tax either due to their net investment income or after adjusting their gross income.

Combined with FICA tax rate change, these two tax changes are estimated to generate an additional $210 billion in tax revenues over the next ten years. Combined, this is the single largest funding mechanism of the Affordable Care Act.