Health Care Impact
After seemingly endless debate and complicated political maneuvers, President Obama signed the Health Care and Education Reconcilation Act of 2010 on March 25, which amended the Patient Protection and Affordable Care Act of 2010 that he signed two days earlier. Together, the two Acts make up a massive overhaul of our health care system and they tap the Tax Code and IRS to help with the execution and enforcement. We must keep in perspective the fact that many of the provisions do not take effect until future years, which make them quite vulnerable given the political environment under which they were passed. Nevertheless, the Acts contain over $400 billion in revenue raisers and new taxes, so it is important for all to understand the basics. We hope you will find this briefing helpful, but as always, we are available to answer any questions you may have.
2010 Impact
Small Business Credit: Employers with 10 employees or less are eligible for a credit of 35% of their contribution toward employee health insurance premiums. The problem is to qualify, the average annual per-employee wage for those working for the employer must be $25,000 or less, so it will exclude many businesses. The credit is available but reduced for small employers with 11 to 25 employees and average annual wages of $26,000 to $50,000. Owners are generally excluded from the definition of employee for this calculation.
10% Sales Tax on Indoor Tanning: Could this be the boon that the Florida resorts have been looking for?
New Therapies Tax Credit: $1 billion has been set aside for this credit, which is actually retroactive to 2009. It is equal to 50% of an investment that has the potential to develop new therapies to treat areas of unmet medical needs, to reduce long-term health care costs or to significantly advance the cure of cancer. The investment must be approved by the federal government as part of a new program being established.
Adult Children Coverage: A child of an employee who is under the age of 27 will be considered a dependent of the employee for purposes of the general exclusion rules for employer-provided health benefits. Therefore, the employer can cover the child tax-free even if the child is not a dependent of the employee for dependency exemption purposes.
2011 Impact
Limits on FSAs and HSAs to Prescribed Medicine: Over-the-counter medicines will be excluded as qualified medical expenses for tax-free distributions from Flexible Spending and Health Savings Accounts, unless prescribed by a health care professional. Nonqualified distributions will be subject to a new 20% penalty tax.
New W-2 Reporting: Employers will be required to disclose the value of health benefits on W-2s to give big brother (IRS) the information it needs to enforce the health insurance coverage requirement discussed below.
2012 Impact
No significant tax changes during this year….which is no surprise since it is a presidential election year.
2013 Impact
Additional Medicare Tax For Payroll: For earned income in excess of $200,000 ($250,000 married filing jointly), the Medicare tax will be raised .9% from 1.45% to 2.35%. Fortunately, employers do not have to match it. But, employers must withhold the extra amount, which could create a tax due surprise at tax return time for married employees since the withholding is only based on the employee income while the tax is based on their joint earned income. Self employed individuals will see a corresponding increase in SE tax to 3.8% on income above $200,000 ($250,000 married filing jointly).
New Medicare Tax For Investment Income: Investment income will be subject to a new 3.8% Medicare tax for those with adjusted gross income (AGI) of $200,000 ($250,000 married filing jointly). For this purpose, investment income includes interest, dividends, royalties, rents and income from passive activities. Estates and certain trusts will also be subject to the tax. What flavor tea will you order for the party?
Increased Restrictions on Medical Deductions: Deductions for medical expenses on Schedule A will generate a tax benefit only if they exceed 10% of AGI, up from 7.5%, making this deduction further out of reach for many. The adjustment does not kick in until 2017 for taxpayers (and spouses) 65 years and older.
Elimination of Deduction For Medicare-Related Subsidy: For (typically large) employers who maintain prescription drug coverage for retirees and get a subsidy for helping keep retirees off the Medicare Part D subsidy rolls, the deduction they claim in connection with the subsidy will be eliminated. An example of the impact: AT&T recently took a $1 billion noncash charge on its financial statements for the anticipated loss of this deduction.
2014 Impact
Penalty Tax For Remaining Uninsured: Individuals not eligible for Medicaid, Medicare or other government-sponsored coverage will be penalized for not carrying minimum health care coverage. Prisoners and undocumented aliens are exempt. The penalty is the greater of $95 ($395 for family) per month or 1% of income, but climbs in 2016 to the greater of $695 ($2,085 for family) per month or 2.5% of income.
Employers Required To “Play or Pay”: Employers with 50 or more full-time employees will generally be required to offer employees an opportunity to enroll in a health plan that provides minimum coverage or else pay a penalty for not doing so. The penalty can be as high as $2,000 per employee per year (although first 30 employees are “free”). Employers who offer the minimum coverage and subsidize the premiums will be required to offer “free choice vouchers” to certain low-income employees to help them buy coverage in an insurance exchange or elsewhere instead of participating in the employer plan.
Premium Subsidies: For taxpayers with household income between 100% and 400% of the federal poverty level and who are not participating in employer-provided coverage, a refundable health insurance tax credit will be available to make coverage more affordable. This income range generally equates to $11,000 and $44,000 for singles and $22,000 and $88,000 for a family of four. The credit amount will depend on income level and the amount of premiums.
2018 Impact
Tax On High-Cost Insurance Coverage: A 40 percent nondeductible tax will be imposed on insurance companies or plan administrators for any health insurance plan with an annual premium in excess of an inflation-adjusted amount: $10,200 for individuals and $27,500 for families (“Cadillac plans”).
Other
There are other less universal provisions, including fees on pharmaceuticals and health insurance providers, a 2.3 percent excise tax on medical device sales (excluding common consumer purchases such as eyeglasses and hearing aids), a deduction limit on certain compensation paid to executives of health insurance providers and an enhanced tax credit for adoptions (now refundable). There is also a new exclusion from income for certain healthcare professionals who get debt relieved by certain jurisdictions in exchange for providing services in underserved areas where there is a shortage of healthcare professionals.
We will continue to monitor this and all tax legislation. In the meantime, if there are any provisions noted above for which you need more detail, please let us know and we will be glad to elaborate.
