After over a year of debates and domination of the news, healthcare reform was signed into law by President Obama. What does that mean for you? We have highlighted key tax provisions that were included in the Patient Protection and Affordable Care Act as well as the proposed provisions of the Health Care and Education Tax Credits Reconciliation Act of 2010.
Individuals would be responsible for maintaining a minimum standard of health insurance beginning in 2014. Penalties equivalent to the greater of a stated flat fee and a stated percentage of household income would be assessed on individuals failing to maintain the minimum coverage standard.
The flat fee penalty is $95 per individual in 2014 escalating to $695 per individual in 2016. The household income percentage is 1% in 2014, 2% in 2015, and 2.5% each year thereafter. The fee is capped at 300% of the applicable flat fee amounts in a given year, and for individuals under age 18 or in college, the flat fee penalty is one-half of the “standard” penalty amount. Taxpayers below the tax return filing threshold are exempt from the minimum coverage penalty.
Premium tax credits are available for qualifying individual taxpayers. Available credits are based on income and family size with qualifying household income stated as a percentage of the federal poverty level for the applicable family size.
Dependent children will be permitted to remain on their parents’ insurance plan until their 26th birthday.
Also effective for years starting in 2011, over-the-counter drugs not prescribed by a doctor will be excluded from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA).
Limits on the flexible spending account contributions will be capped at $2,500 per year after 2012. This limit will be indexed for inflation for years after 2013. Nonqualified distributions from health savings account penalties will increase from 10 percent to 20 percent and Archer MSA’s will increase from 15 to 20 percent.
Employers are required to provide minimum healthcare coverage to their employees. Small employers (fewer than 50 employees), however, are exempt from the mandatory coverage requirement. The penalty for not providing this coverage is $167 per employee for each month the employee was not provided minimum coverage. Employers will be required to file information returns with the IRS providing the information necessary to determine whether the minimum coverage standard has been met.
Businesses with less than 25 employees and average annual wages less than $40,000 may be entitled to tax credits up to 35% of employer paid health insurance premiums.
Effective in 2011, employers will be required to disclose the value of employer-provided health insurance to employees annually on Form W-2.
The most prominent funding source for healthcare reform is the broadening of the Medicare tax base for higher income taxpayers beginning in 2013. Earned income greater than $200,000 ($250,000 for families) would be subject to an additional 0.9% Medicare tax. Unearned income, including interest, dividends, royalties, rents, certain capital gains, and income from passive investments, would be subject to a new 3.8% Medicare tax. Taxpayers with income less than $200,000 ($250,000 for joint filers) would be exempt from the assessment on unearned income.
Additionally, insurance companies would incur a 40% excise tax on high-cost insurance commonly known as Cadillac plans, premiums that exceed $10,200 a year for individuals and $27,500 a year for families. Even though this tax is not on employers themselves unless they are self-funded, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.
Other funding sources include market segment fees aimed at medical device companies, health insurance providers, and other healthcare-related industries; greater IRS scrutiny of the community benefit activities of not-for-profit hospitals; and an increase in the deductible medical expense income threshold from 7.5% to 10% for individual taxpayers (effective in 2013 for taxpayers under age 65 and 2017 for taxpayers 65 and older.)
We are here to help. We will continue to update you on any additional information as soon as it is available. Please contact us at 417-881-0145 if you have any questions.
By Shelly Toft, CPA, The Whitlock Company