The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were respectively signed into law by President Obama on March 23 and March 30, 2010. Along with this sweeping health care reform come numerous provisions affecting individuals, small business and major corporations.
The following summary contains key provisions of the legislation, which are very complex and amendments by Congress are likely. Although many changes will not take effect for several years, some tax planning opportunities and requirements become effective in 2010 and 2011.
Provisions in 2010:
Tax credit for small business employers that provide insurance. To qualify in 2010, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time employees with annual wages that average no more than $50,000. The tax credit is up to 35 percent of the employer’s contribution, increasing up to 50 percent in 2014.
New tax on tanning services. Beginning July 1, 2010, an excise tax of 10 percent will be imposed on the cost of indoor tanning services.
Adoption credit increased. Also effective in 2010, the maximum adoption credit is increased by $1,000 to $13,170 per eligible child, and has been extended through 2011. It has also been made refundable.
Mandates for health care plans effective September 23, 2010:
- All health insurance plans are prohibited from denying coverage due to pre-existing conditions, which is effective this year for children under age 19 and in 2014 for adults.
- Plans that extend coverage to dependent children must continue to offer that coverage up to age 26.
- Insurance companies are prohibited from rescinding coverage, except in cases of fraud or intentional misrepresentation of material fact.
- No discrimination based on the wages of employees.
- Small and large group market plans are prohibited from imposing lifetime limits on coverage.
- Plans must provide coverage, without cost-sharing, for preventive services and immunizations.
Provisions in 2011:
Restrictions placed on reimbursement for OTC medications. Starting in 2011, the cost of over-the-counter drugs or medical-related supplies will no longer be reimbursable through flexible spending accounts, health reimbursement accounts, health savings accounts or Archer MSAs, unless prescribed by a doctor.
Penalty tax raised on HSA distributions. Starting in 2011, distributions from health savings accounts and Archer MSAs that are not used for qualified medical expenses will be taxed at 20 percent, instead of 10 percent. This does not apply to individuals age 65 and older.
Annual fees for pharmaceutical companies. Starting in 2011, non-deductible annual fees will be imposed on branded prescription pharmaceutical manufacturers based on market share, which will raise between $2.5 billion and $4.1 billion in revenue for the federal government.
Employer-sponsored health coverage included on W-2. Beginning with tax year 2011, every employer must report the cost of employer-provided health care coverage on an employee’s Form W-2.
Provisions in future years:
Employee contributions to FSAs capped. Starting in 2013, annual employee contributions by salary reduction to a health flexible spending account will be capped at $2,500 (indexed annually for inflation). The current threshold is $5,000.
Floor on medical expense deduction raised. Starting in 2013, the threshold for deducting medical expenses will increase from 7.5 percent of adjusted gross income to 10 percent, a 33 percent increase. It is unchanged through 2016 for individuals aged 65 and older.
Deduction eliminated for subsidized retiree drug cost. Beginning in 2013, the new law reduces an employer deduction for retiree prescription drug expenses.
Additional Medicare tax for high-wage earners. Beginning in 2013, the employee portion of the Medicare tax will increase by .9 percent from 1.45 percent to 2.35 percent for individuals earning more than $200,000 annually ($250,000 if married and filing jointly).
New unearned income Medicare tax. Also beginning in 2013, high income individuals earning $200,000, ($250,000 for joint filers), along with high income estates and trusts, will incur an additional 3.8 percent tax on net investment income. Investment income generally refers to interest, dividends, capital gains, rental income, annuities and royalties.
Excise tax on sales of medical devices. Starting in 2013, a 2.3 percent excise tax will be imposed on the sale of taxable medical devices other than eyeglasses, contact lenses and hearing aids.
Tax credits for low and middle income families. Starting in 2014, the law requires states to act as coverage coordinators and establish health care insurance exchanges. Federal subsidies in the form of refundable premium tax credits will be available to individuals and families with incomes up to 400 percent of the federal poverty level, if they purchase coverage through a state exchange.
Penalty for employers not offering coverage. Starting in 2014, if an employer has at least 50 full-time employees and at least one employee receives a premium tax credit, the employer must offer them a minimum level of health insurance benefits or pay a penalty. The total penalty per year is $2,000 for each employee, excluding the first 30 employees. Employers incur this tax on a monthly basis.
Penalty to citizens not having essential coverage. Also starting in 2014, non-exempt U.S. citizens and legal residents will be required to have “minimum essential coverage” or pay a penalty. The penalty is $95 per person per year, or 1 percent of taxable household income, whichever is greater. This will rise in 2016 to $695 per person per year, or 2.5 percent of taxable income. Individuals must file a return to substantiate that they are covered.
Annual fees for health insurance providers. Starting in 2014, non-deductible annual fees, totaling billions, will be imposed on health insurance providers based on market share. These fees, increasing annually from $8 billion in 2014 to $14.3 billion in 2018, are intended to help the federal government recapture some of the benefits health insurers get as more Americans purchase health insurance.
Tax on high-cost insurance. Beginning in 2018, insurers offering high-cost employer-sponsored health care plans (“Cadillac plans”) with annual premiums costing more than $10,200 for individuals, or $27,500 for families, will incur a 40 percent excise tax. . The tax excludes stand-alone coverage for vision and dental. It is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.
Feel free to call the Laciak>cpa team at 219-864-700, or email us at info@laciak.com to discuss how these provisions may affect you or your business.
