The “Medicare Tax” That Never Made It To The Medicare Trust Fund

By Mary Johnson, editor

The last time the Medicare Part A Trust Fund (hospital insurance) was forecast to become insolvent was in 2009. At the time, the Part A Trust Fund was forecast to become insolvent by 2017. Lucky for us that never happened — in 2017 at least. Congress enacted the 2010 Affordable Care Act which changed Medicare taxes in two ways. It added a 0.9% surtax to the amount of Medicare payroll taxes paid by high earning individuals with wages over $200,000 ($250,000 if married). This was on top of the 1.45% that workers currently pay on their wages. A second provision affecting the more affluent, imposed a 3.8% tax on a portion of net investment income. Estates and trusts can also be subject to this tax.

Since the passage of the Affordable Care Act in 2010, it was my understanding that the 3.8% tax on net investment income was intended to fund the Medicare Part A Trust Fund, in much the same way a portion of the taxes on Social Security benefits are earmarked for the Part A Trust Fund.

But I was wrong.

The 3.8% “Medicare” net investment tax has never been received by the Medicare Part A Trust Fund, but has wound up going straight into the U.S. General Fund. That means it could be appropriated for any government spending!

According to the Federal Register "Amounts collected under section 1411 are not designated for the Medicare Trust Fund." The Joint Committee on Taxation in 2011 stated that’s because “No provision is made for the transfer of the tax imposed by this provision from the General Fund of the United States Treasury to any Trust Fund.”

In fact, unlike the surtax on high earners, this 3.8% net investment tax was not even a specific provision of Affordable Care Act. It was a provision of a separate bill, the Health Care Education and Reconciliation Act of 2010 which was passed about two days after the Affordable Care Act. By setting up the revenues so that they would flow to the General Fund, Congress by-passed earmarking those revenues for the Medicare Part A or Part B Trust Fund. That also means that, when those revenues are used for other purposes, the Medicare Trust Funds are not earning any interest from the federal government for the use of those funds.

Now Medicare Part A is facing insolvency once again, this time around 2024. Health policy experts are now proposing that the revenues raised by the 3.8% net investment income tax should be “re-directed” to the Part A Trust Fund rather than the federal government’s general revenue.

It’s about time. At the time of its passage, the Affordable Care Act, was labeled a “Medicare” tax and sold to the public that way. Now it is needed by the Medicare Part A Hospital Insurance Trust Fund. Part A is less than five years from insolvency and faces an estimated $515 billion funding gap over the next ten years. The Joint Committee on Taxation (JCT) estimates that this tax will raise approximately $27.5 billion in revenue in 2021 alone.

TSCL believes that Medicare healthcare costs already cause many beneficiaries to shoulder a heavy financial burden in retirement. Cutting Medicare benefits, while shifting more costs to beneficiaries, would be the wrong way to strengthen program financing.


Supreme Court: Mandate Penalty is Tax, Jeanne Sahadi, CNN Money, June 28, 2012.
Net Investment Income Tax, Federal Register, accessed on June 6, 2009.
Tax Provisions in the Health Reconciliation Act, Journal of Accountancy, March 25, 2010.