Funding for the Affordable Care Act comes from several separate streams rather than a single tax. Who pays for the Affordable Care Act, in practice, is a mix of high-income households paying two surtaxes, large employers paying penalties when they don’t offer qualifying coverage, brand-name drug manufacturers paying an annual industry fee, insurers paying marketplace and research fees, the federal government redirecting Medicare savings, and enrollees paying premiums that federal subsidies partly cover. Several taxes written into the original law have since been repealed, leaving the remaining sources to carry more of the weight.
High-Income Households
Two surtaxes fall on higher earners. The Additional Medicare Tax adds 0.9 percent to wages and self-employment income above $200,000 for single filers and $250,000 for married couples filing jointly, on top of the regular 1.45 percent Medicare tax.1Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax Your employer starts withholding the extra 0.9 percent once your wages from that job pass $200,000 in the calendar year, regardless of filing status or a spouse’s income.2GovInfo. 26 CFR 31.3102-4 – Special Rules Regarding Additional Medicare Tax If withholding doesn’t cover the full liability, because a couple’s combined wages exceed $250,000 but neither job alone crossed $200,000, the balance is settled at filing.
The Net Investment Income Tax adds another 3.8 percent on investment income for taxpayers above the same thresholds. It applies to capital gains, dividends, rental income, royalties, and certain other passive income, and it is owed on the lesser of net investment income or the amount by which modified adjusted gross income exceeds the threshold.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Unlike the wage surtax, no one withholds it; you pay when you file. A household above both thresholds can face a combined 4.7 percent surtax on income over the line.
Neither threshold is indexed for inflation, so more taxpayers cross into these brackets over time as wages and returns grow.
Large Employers That Don’t Offer Qualifying Coverage
Businesses with 50 or more full-time equivalent employees must offer health coverage that meets minimum standards to their full-time workers and dependents.4Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage When one of these applicable large employers falls short and at least one full-time employee enrolls in marketplace coverage with a premium tax credit, the IRS assesses a penalty. Two scenarios trigger different amounts.
An employer that offers no coverage at all owes a base penalty of $2,000 per year for each full-time employee, minus the first 30. With inflation adjustments, that figure reaches roughly $3,340 per employee for the 2026 calendar year. An employer that offers coverage but the coverage is unaffordable or below minimum value owes a base penalty of $3,000 per year for each full-time employee who actually receives a marketplace subsidy, adjusted to roughly $5,010 per employee for 2026. These payments give large employers a financial reason to remain a primary source of coverage for working adults.
Brand-Name Drug Manufacturers
Manufacturers and importers of branded medications pay an annual fee to the federal government. The total collected industrywide is set by statute at $2.8 billion per year for 2019 and every year after, divided among companies according to their share of branded drug sales to programs like Medicare and Medicaid.5eCFR. 26 CFR Part 51 – Branded Prescription Drug Fee Companies with more than $5 million in qualifying sales are covered. The fee is not deductible as a business expense, which raises its effective cost.
Insurers and Self-Insured Employer Plans
Insurers that sell plans on the ACA marketplace pay a user fee to cover the exchange’s operating costs. For the 2026 benefit year, insurers on the federally facilitated marketplace pay 2.5 percent of monthly premiums, and insurers on state-based marketplaces using the federal technology platform pay 2.0 percent.6Centers for Medicare & Medicaid Services. HHS Notice of Benefit and Payment Parameters for 2026 Final Rule CMS also finalized lower alternative rates of 2.2 percent and 1.8 percent that apply if enhanced premium tax credit subsidies are extended through 2026. These fees are built into premiums, so marketplace enrollees indirectly carry part of the cost.
A smaller charge, the Patient-Centered Outcomes Research fee, funds research into the effectiveness of medical treatments. Insurers pay it on the policies they issue, and employers with self-insured plans pay it directly. It’s calculated per covered life, adjusted annually; for plan years ending between October 1, 2025, and September 30, 2026, the amount is $3.84 per covered life.7Internal Revenue Service. Patient-Centered Outcomes Research Trust Fund Fee Questions and Answers
Redirected Medicare Spending
A large share of ACA funding is not new revenue at all. The law reduced payment rates to private Medicare Advantage plans, which had historically received higher per-enrollee payments than traditional Medicare, and channeled the savings into marketplace subsidies and other ACA programs.
The law also slowed the annual payment updates for hospitals and other providers in Medicare, factoring in expected productivity gains rather than cutting payments outright. That slower growth compounds into substantial savings over time, allowing part of the ACA’s coverage expansion to be paid for from efficiency inside existing programs.
Medicaid Expansion: Mostly the Federal Government
For adults newly eligible under the ACA’s Medicaid expansion, federal law sets the federal matching rate at 90 percent for 2020 and every year after. The federal government pays 90 cents of every dollar spent on this population and the state covers the remaining 10 cents.8Office of the Law Revision Counsel. 42 USC 1396d – Definitions That rate followed a step-down from 100 percent federal funding in the first three years of expansion. The federal share comes from general Treasury funds rather than from a dedicated ACA tax.
Enrollees Themselves
Monthly premiums paid by people enrolled in marketplace plans are the direct revenue that keeps private insurers operating in the exchanges. Enrollees also share costs at the point of care through deductibles, copayments, and coinsurance.9HealthCare.gov. Cost-Sharing Reductions
For many enrollees, the federal government covers a large share of the premium through the premium tax credit, available to households with income between 100 and 400 percent of the federal poverty level.10Office of the Law Revision Counsel. 26 USC 36B – Refundable Credit for Coverage Under a Qualified Health Plan The credit is paid directly to the insurer each month, reducing what you owe out of pocket.
If you take advance premium tax credits and your actual income turns out higher than your estimate, you may need to repay some or all of the excess when you file. For plan years before 2026, repayment was capped for households below 400 percent of poverty. Starting with the 2026 plan year, those caps no longer apply, and you must repay the full excess regardless of income.11CMS: Agent and Brokers FAQ. Are There Limits to How Much Excess Advance Payments of the Premium Tax Credit Consumers Must Pay Back Reporting income changes during the year keeps your credit accurate and lowers the risk of a repayment bill.
Taxes That Used to Help Pay but No Longer Do
Several revenue sources originally built into the ACA have been eliminated, narrowing the funding base.
- The health insurance provider fee, an annual charge on insurers based on their share of net premiums written, was permanently repealed for years after 2020.12Internal Revenue Service. Tax Provisions for Other Organizations
- The 2.3 percent medical device excise tax was suspended by moratorium starting in 2016 and permanently repealed by the Further Consolidated Appropriations Act, 2020.13Internal Revenue Service. Medical Device Excise Tax
- The excise tax on high-cost employer plans, often called the Cadillac Tax, would have imposed a 40 percent tax on employer coverage above certain thresholds. It was repeatedly delayed and repealed by the same 2020 appropriations act before it ever took effect.
- The individual mandate penalty originally required most people to carry coverage or pay a fine. The Tax Cuts and Jobs Act of 2017 reduced the penalty to $0 starting in 2019, leaving the coverage requirement on the books without any revenue attached.14Office of the Law Revision Counsel. 26 USC 5000A – Requirement to Maintain Minimum Essential Coverage
With those pieces gone, the ACA now leans more heavily on the high-income surtaxes, the branded drug fee, Medicare spending adjustments, and the premiums that enrollees pay alongside federal subsidies.