Health Care Reform - Tax Revisions You Need to Know
On March 23, President Obama signed the Patient Protection and Affordable Care Act into law. There is a tagalong bill (the Health Care and Education Reconciliation Act of 2010) that was subsequently enacted. Some of the major provisions of the new law include: near universal health care insurance coverage, prohibiting the denial of insurance coverage due to pre-existing conditions, creation of health insurance exchanges, offering premium tax credits and cost-sharing assistance to low and middle-income Americans, and penalties for individuals for failure to maintain coverage and penalties for businesses that do not offer coverage to employees.
This legislation is some of the most far-reaching in recent memory and impacts one-sixth of the U.S. economy. While many of the major provisions do not become effective for several years, proper planning should start now.
Although not meant to be all-inclusive, the following are significant tax provisions of the legislation:
New tax credit for small businesses providing health coverage - beginning this year, there is a new temporary, sliding-scale tax credit equal to 35% of the amount paid for employees' health coverage available for qualified small business employers (25 full-time employees or less). Employers with 10 or fewer employees and average annual wages of less than $25,000 would be eligible for the full credit.
Expansion of dependent coverage in employer health plans - effective this year, a dependent child of an employee who is under age 27 at the end of the year would be eligible for coverage under an employer's plan.
Additional Medicare tax for high-income employees - beginning in 2013, the Medicare tax rate will be increased by .9% on an individual earning over $200,000 ($250,000 for married couples filing jointly).
New surtax on unearned income - beginning in 2013, a 3.8% surtax called the Unearned Income Medicare Contribution will be imposed on net investment income of individuals, estates or trusts with income over $200,000 ($250,000 for a joint return). Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than held in a trade or business).
Enhanced reporting requirements for nonprofit hospitals - effective for taxable years beginning after March 23, 2010, nonprofit hospitals will be required to adopt written financial assistance policies. For taxable years beginning after March 23, 2012, nonprofit hospitals will be required to conduct periodic community health needs assessments. Also, the legislation adds certain consumer protection provisions to debt collection activities by nonprofit hospitals, and the IRS would be required to review a nonprofit hospital's community benefit activities at least once every three years.
Modified threshold for claiming medical expense deductions - beginning in 2013, the adjusted gross income (AGI) threshold for claiming itemized deductions for medical expenses is increased from 7.5% to 10%. For individuals (and their spouse) age 65 or older, the 7.5% AGI threshold would remain through 2016.
New penalty for remaining uninsured - beginning in 2014, individuals will have to maintain minimum essential health coverage or pay a penalty. By 2016, this penalty would be the greater of $695 or 2.5% of taxable income, and indexed thereafter.
New premium assistance tax credit for participatingin health exchanges - beginning in 2014, tax credits will be available for individuals and families with incomes up to $43,420 for an individual or $88,200 for a family of four that are not eligible for Medicaid, employer-sponsored insurance, or other acceptable coverage. The amount of the credit will be based on the percentage of income the cost of premiums represents, on a slidingscale basis.
New penalty for employers not offering coverage - beginning in 2014, employers that have at least 50 fulltime employees that do not offer health coverage for all full-time employees, offering minimum essential coverage that is unaffordable or offering minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%, would have to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. The penalty would be $2,000 per year, per employee over a 30 employee threshold.
Excise tax on high-cost employer-sponsored health coverage - beginning in 2018, a 40% non-deductible excise tax on insurance companies and plan administrators will be imposed for any health coverage plan where the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage.
New limit on health flexible spending accounts (FSA) contributions - beginning in 2013, the maximum amount of contributions to health FSAs will be limited to $2,500 per year, indexed for inflation after 2013.
Increase tax on non-qualifying health savings account (HSA) or medical savings account (MSA) distributions - beginning in 2011, the additional tax for non-qualifying HSA distributions prior to age 65 will be increased from 10% to 20% and the additional tax for MSA non-qualifying distributions will be increased from 15% to 20%.
New employer reporting responsibilities for health coverage - beginning in 2011, employers will have to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual Form W-2.
SIMPLE cafeteria plansfor small businesses - beginning in 2011, a cafeteria plan named the SIMPLE Cafeteria Plan will be established. This plan would be subject to eased participation restrictions so that small businesses could provide tax-free benefits to their employees.
New information reporting on payments to corporations - beginning in 2012, businesses paying an aggregate amount greater than $600 during the year to corporations providing property or services will be required to file an information report with each provider and with the IRS.
Adoption credit increased- beginning this year, the maximum adoption credit is increased by $1,000 to $13,170 per eligible child and is made refundable.
Codification of economic substance doctrine and imposition of penalties - effective for transactions entered into after March 23, 2010, the economic substance doctrine is codified, and enhanced penalties may be imposed. The economic substance doctrine is a judicial doctrine that has been used by the courts to deny tax benefits when the transaction generating these tax benefits lacks economic substance. The penalty amount imposed is 20% or, for non-disclosed transactions, 40% of the underpayment of tax.
HORNE's tax and health care professionals are committed to working with you as you navigate through the complex provisions of the new law. Starting to plan immediately is key. Please contact your HORNE advisor or local office today.