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

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

(Washington, DC) – A controversial “Medicare” tax on net investment income that was signed into law shortly after passage of the 2010 Affordable Care Act is expected to once again come under debate according to The Senior Citizens League (TSCL).  “During the battle over The Affordable Care Act, a new source of funding — a 3.8% Medicare Net Investment tax was enacted — presumably as means to strengthen Medicare funding,” says Mary Johnson, a Medicare policy analyst for The Senior Citizens League.  “But the truth is those revenues, which the Joint Committee on Taxation (JCT) estimates to be $27.5 billion for 2021, never actually made it into the Medicare Part A Trust Fund,” she says.”

When Medicare solvency is under discussion, the focus is often placed on the Medicare Part A Trust Fund (hospital insurance), which is primarily financed by payroll taxes.  The last time Medicare Part A Trust Fund was forecast to become insolvent was in 2009.  That year, the Medicare Trust Fund was forecast to become insolvent by 2017.  In 2010, Congress enacted the Affordable Care Act which changed Medicare revenues in two ways.  It added an additional payroll tax of 0.9% to the 1.45% of Medicare taxes paid by high earning individuals with wages over $200,000 ($250,00 if married).  A second provision affecting individuals with this level of income, imposed a new 3.8% tax on a portion of net investment income.  Estates and trusts can also be subject to this tax.

While the additional payroll tax went directly to the Part A Trust Fund, the 3.8% “Medicare” net investment tax was never transferred to Part A.  It wound up going straight into the U.S. General Fund where 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 additional Medicare tax on high earners, this 3.8% net investment tax was not even a specific provision of the 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 Medicare Part A or Part B Trust Fund.  That means when the funds are used for other government spending, the Medicare Trust Funds are not earning any interest from the federal government for the use of those funds.

Now Medicare Part A is projected to again become insolvent, perhaps by 2024.  Policy experts are 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 general revenue.

“It’s about time,” states Johnson.  At the time of passage of the Affordable Care Act, this tax was widely referred to as a “Medicare” tax in the media, by tax and investment professionals, and, many lawmakers sold it to the public that way.  “Now those revenues are needed by the Medicare Part A Hospital Insurance Trust Fund,” says Johnson.  Part A is three years from insolvency and faces an estimated funding gap of more than $515 billion over the next ten years.

TSCL advocates for legislation that makes affordability for Medicare beneficiaries a priority.  Medicare healthcare costs are the fastest growing cost that retired households face, and beneficiaries often shoulder a heavy financial burden.  “Cutting Medicare benefits, while shifting more costs to beneficiaries, would be the wrong way to strengthen program financing” says Johnson.


With 1.2 million supporters, The Senior Citizens League is one of the nation’s largest nonpartisan seniors groups. Its mission is to promote and assist members and supporters, to educate and alert senior citizens about their rights and freedoms as U.S. Citizens, and to protect and defend the benefits senior citizens have earned and paid for. The Senior Citizens League is a proud affiliate of The Retired Enlisted Association.  Visit for more information.