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May 2010 Health Care Reform: Overview of Tax, Insurance ProvisionsThe Patient Protection and Affordable Care Act will impact most Americans with respect to taxation and health care, and it will affect how employers deal with health care insurance for their workersAfter a year of intense public debate, controversy and political log-rolling, on March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, which sets in motion a massive overhaul of America’s health care system. Whether you are for or against it, this landmark legislation will result in a monumental shift in how health care is delivered in this country. When it is fully phased in (scheduled to occur in 2018), the legislation will provide health care coverage to some 32 million uninsured people and make it more affordable for millions more by:
Obviously, this is not a cheap undertaking. The 10-year price tag is estimated to be $938 billion, which is largely paid for through significant tax increases on higher income taxpayers, Medicare reimbursement savings, and various revenue raisers targeting specific health-related industries. Also, as is often the case, many of the carrots and sticks designed to persuade people to act appropriately (i.e., to get or provide health insurance coverage) reside in our tax system. Namely, small employers are provided tax credits to encourage them to provide employee health coverage. Large employers are assessed excise taxes to discourage them from not providing employee health coverage (or providing unaffordable or inadequate coverage), while individuals are assessed excise taxes to discourage them from opting out of coverage. This article briefly summarizes some of the tax and non-tax provisions affecting individuals and small to midsized businesses. The key points are generally discussed in chronological order of implementation. Provisions Effective in 2010 Small Employer Health Insurance Tax Credit. Effective this year and going through 2013, the health reform legislation provides a new tax credit for small employers that purchase health insurance for their employees. To qualifying for this new credit, an employer must:
Generally, to qualify for the credit, the employer must pay the same percentage (at least 50%) of all its employees’ premiums. However, under a transition rule for 2010 only, an employer can qualify even if it pays differing percentages of different employees’ premiums, as long as all of the employer payments are at least 50% of each employee’s premium (based on single – i.e., employee-only – coverage). Also, premiums paid in 2010 before the health reform legislation was enacted can qualify for the credit. The credit generally equals 35% of the amounts paid by the employer during the year for employee coverage. However, the full amount of the credit is available only for employers that employ 10 or fewer FTE employees and have average annual FTE wages of less than $25,000 for the year. Also, no credit is allowed for premiums paid on behalf of partners, sole proprietors, 2% shareholders of an S corporation, 5% owners of the employer, and dependents of these individuals. Other limitations may apply as well. The small employer health insurance credit will be claimed on the employer’s income tax return. It can offset regular income taxes and alternative minimum tax. Any unused credit can be carried back for one year (but not before 2010) and forward for 20 years to offset future taxes. Note: In 2014 and later, eligible small employers that purchase coverage through a state-run insurance exchange (which the health reform legislation requires states to establish) will be eligible for a tax credit for two years of up to 50% of their contribution. Also, the wage limits will be indexed beginning in 2014. Effective in 2011 Over-the-Counter Medicine. Under pre-health reform law, health plans – including health flexible spending accounts (FSAs), health reimbursement accounts (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs) – could reimburse, on a tax-free basis, the cost of medicine, regardless of whether it was prescribed by a doctor. On the other hand, only medicine (other than insulin) that required a doctor’s prescription was deductible for income tax purposes (as an itemized deduction). Beginning in 2011, only insulin and doctor-prescribed medicine qualifies for tax-free reimbursement through a health FSA, HRA, HSA, or Archer MSA. Thus, as with the itemized deduction for medical expenses, non-prescribed medicine (other than insulin) will not qualify for tax-free reimbursement. 2011: Increased Tax on Non-Qualifying HSA and Archer MSA Distributions. Beginning in 2011, the additional tax for HSA withdrawals, made before the owner turns age 65, that are not used for qualified medical expenses is increased from 10% to 20%. Similarly, the additional tax for post-2010 Archer MSA withdrawals that are not used for qualified medical expenses is increased from 15% to 20%. 2011: SIMPLE Cafeteria Plans Available for Small Employers. Starting in 2011, a new cafeteria plan, known as a SIMPLE Cafeteria Plan, will be available to small employers that employed an average of 100 or fewer employees during either of the two preceding years. Basically, the SIMPLE Cafeteria Plan and the benefits it provides (including group term life insurance, self-insured medical expense reimbursements and dependent care assistance) will be treated as meeting the applicable nondiscrimination rules if it satisfies certain minimum eligibility, participation and contribution requirements. This should make it simpler for small employers to provide tax-free benefits to their employees. Effective in 2012 1099 Expansion. To generate revenues to help pay for health care reform, beginning in 2012 businesses will be required to issue a Form 1099 to all providers of services or merchandise – including corporations – where the total year’s payments to a provider exceeds $600. The mandate aims to collect lost revenue from companies that under-report on their tax returns. The provision is expected to raise $17 billion over 10 years. Critics of this little-publicized requirement argue that the compliance cost to the private sector will outweigh the additional tax that the IRS collects. Effective in 2013 High-Wage Workers. The employee portion of the health insurance (HI) tax rate will be increased by 0.9% for employees who earn wages over $200,000 ($250,000 for married couples filing jointly or $125,000 for married filing separate). Similarly, an additional HI tax of 0.9% will be imposed on self-employment income in excess of $200,000 ($250,000 for married couples filing jointly or $125,000 for married filing separate) reduced (but not below zero) by wages taken into account in determining the FICA tax with respect to the taxpayer. 2013: New 3.8% Surtax on Unearned Income. Taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for a joint return or $125,000 for married filing separate) will be subject to a 3.8% surtax (called the Unearned Income Medicare Contribution) on net investment income. Specifically, the tax equals 3.8% of the lesser of the following two amounts:
The tax also applies to estates and trusts. In this case, the tax is 3.8% of the lesser of (a) undistributed net investment income or (b) the excess of AGI over the dollar amount at which the highest estate and trust income tax bracket begins. 2013: Increased Medical Expense Deduction Threshold. The threshold for the itemized deduction for medical expenses for regular income tax purposes will be increased from 7.5% of AGI to 10% of AGI. However, for 2013 through 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before the end of the tax year, the increase won’t apply and the threshold will remain at 7.5% of AGI. Thus, the 10% threshold won’t apply to seniors and their spouses until after 2016. 2013: New Limit on Health FSA Contributions. The maximum amount that an individual can contribute to an employer-provided health flexible spending account (FSA) will be $2,500 per year. Note, however, that health FSA plans can (and typically do) limit contributions to an amount that is less than $2,500 per year. Therefore, this change may have little or no impact on you. 2013: Deduction for Retiree Drug Coverage Eliminated. Many large employers provide prescription drug coverage for their Medicare Part D-eligible retirees, the cost of which is subsidized by the U.S. Department of Health and Human Services. This subsidy is excluded from the company’s income, and, under pre-health reform law, it did not reduce the deduction otherwise allowed for the payment. Starting in 2013, this is no longer true; the subsidy will reduce the allowed deduction. (As a result of this change, several large companies have already announced that they are reconsidering providing this retiree benefit.) Effective in 2014 Penalty for Not Having Health Insurance Coverage. Beginning in 2014, most U.S. citizens and legal residents will have to maintain health care coverage or pay a penalty based on their household income and the number of uninsured individuals in the household. The penalty per household will generally be capped at $285 for 2014, $975 for 2015, and $2,085 for 2016. Individuals who, based on their household income, can’t afford coverage under their employer-sponsored health plan are exempted from the penalty, as are individuals who reside outside the U.S. and those with certain religious beliefs. This penalty was provided as a means to entice individuals to obtain health insurance coverage. Payment of the penalty does not entitle them to any health insurance coverage. 2014: Health Care Cost-Sharing Subsidies (or Tax Credits) Available to Low-Income Individuals. A cost-sharing subsidy (or tax credit) will be provided to low-income individuals to help cover their health insurance costs. Basically, individuals and families with incomes up to 400% of the federal poverty level (for 2009, $43,320 for an individual or $88,200 for a family of four) who are not eligible for Medicaid, employer-sponsored insurance or other acceptable coverage will be able to obtain cost-sharing subsidies or tax credits that can be used to reduce premiums for health insurance obtained through the newly established state-run insurance exchanges. 2014: Penalty for Employers Not Offering Affordable or Adequate Health Insurance Coverage. Large employers not offering health insurance coverage for all full-time employees, or offering unaffordable or inadequate health insurance coverage, will have to pay a penalty if any full-time employee uses a tax credit or cost-sharing subsidy to purchase health insurance through a state-run insurance exchange. A large employer is, generally, an employer that employed an average of at least 50 full-time employees during the preceding calendar year. Any penalty paid under this provision is not deductible as a business expense. 2014: Free Choice Vouchers. Employers that have a health plan (or arrangement) under which they pay a portion of their employees’ health insurance coverage will have to provide a voucher to certain low-income employees who don’t participate in the employer’s plan. The voucher will be equal to the amount the employer would have contributed to the employer-offered health plan if the employee had participated, and it can be applied to purchase health insurance through a state-run insurance exchange. Effective in 2018 Excise Tax on High-Cost Employer-Sponsored Health Coverage. The last piece of the Health Reform legislation kicks in for 2018 when a non-deductible excise tax will be levied on “Cadillac plans" – basically, health plans with annual premiums exceeding $10,200 for single coverage and $27,500 for family coverage. However, higher thresholds will apply for retired individuals age 55 and older and for plans that cover employees engaged in high-risk professions. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns to insurers indicating the amount subject to the excise tax. Conclusion Clearly, not all of the important provisions of such a massive piece of legislation as the Patient Protection Act can be communicated in a brief article, but we hope that this discussion provides you with an adequate overview. For specific information on how the Act will apply to you and/or your company, please contact your Schmidt Westergard & Company professional. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |