The ruling has left standing all tax provisions within the Patient Protection and Affordable Health Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA). The PPACA and HCERA add to or amend numerous sections of the Internal Revenue Code, resulting in the largest set of tax law changes in more than 20 years. Some of the tax provisions have already taken effect and some are just on the horizon, taking effect on January 1, 2013.
This article provides some highlights of key provisions impacting both individuals and businesses.
Individual Tax Provisions
Individual Mandate
The PPACA requires most individuals to obtain acceptable health insurance coverage or pay a penalty beginning in 2014. The penalty is calculated by taking the greater of a flat dollar amount and a calculation based on the percentage of the taxpayer's household income. The annual flat dollar amount is assessed per individual or dependent without coverage and is scheduled to be phased in over three years ($95 for 2014; $325 for 2015; and $695 in 2016 and subsequent years, indexed for inflation after 2016). Individuals under the age of 18 are assessed at one-half of these amounts.
The flat dollar amount is compared to a percentage of the taxpayer's household income. The applicable percentage is 1 percent for 2014, 2 percent for 2015, and 2.5 percent for 2016 and future years. The penalty is equal to the greater of the flat dollar amount or the percentage of household income, and cannot exceed the national average of the annual premiums of a "bronze level" health insurance plan offered by a health exchange.
Premium Assistance Tax Credit
Beginning in 2014, eligible lower-income individuals who obtain coverage under a qualified health plan through an insurance exchange may qualify for a premium assistance tax credit.
Medical Deduction Threshold
Starting in 2013, the threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5 percent of adjusted gross income (AGI) to 10% of AGI for regular tax purposes. However, individuals age 65 and older before the end of the tax year are exempt from the increased threshold through 2016.
Additional Medicare Tax
Effective in 2013, an additional 0.9 percent Medicare tax is imposed on wages and self-employment income of higher income individuals. The additional Medicare tax applies to individuals with compensation in excess of $200,000, married couples filing a joint return with compensation in excess of $250,000, and married couples filing separate returns with compensation in excess of $125,000. Other facts about the new tax include:
- Unlike the general 1.45 percent Medicare tax on wages, this tax is on the combined wages of the employee and employee's spouse.
- Employers are obligated to withhold the additional 0.9 percent if the employee earns $200,000 or more.
- Applies only to the employee's portion of employment taxes, even for self-employed persons.
- Tax is subject to underpayment penalties on employee's individual income tax return.
- None of the above-mentioned threshold amounts are indexed for inflation.
Medicare Tax on Investment Income
Also effective in 2013, the PPACA imposes a 3.8 percent Medicare tax on unearned income. The tax is imposed on the lesser of an individual's net investment income for the tax year or modified AGI in excess of $200,000 ($250,000 for married couples filing a joint return and $125,000 for married couples filing a separate return).
"Net investment income" includes interest, dividends, annuities, royalties, rents, gains from the sale of property not used in an active business, and other gross income attributable to a passive activity. It excludes non-taxable income and distributions from qualified retirement plans (e.g.; pensions, IRAs, and 401(k) plans).
The tax is imposed on the lesser of (1) net investment income; or (2) the excess of modified AGI over the threshold amount ($200,000/$250,000/$125,000 noted above). The threshold amounts are not indexed for inflation.
Limits on Health Flexible Spending Arrangements (FSAs)
Starting in 2013, the maximum amount available for reimbursement of incurred medical expenses under a health FSA for a plan year cannot exceed $2,500, down from a $5,000 limit. The $2,500 limitation is adjusted annually for inflation in subsequent years.
Additional Tax on HSA/MSA Distributions
Beginning in 2011, the additional tax on distributions from a health savings account (HSA) or Archer medical savings account (MSA) that are not used for qualified medical expenses was increased to 20 percent of the disbursed amount (increased from 10 percent and 15 percent, respectively).
Restrictions on Use of HSA and FSA Funds
Starting in 2011, amounts paid for over-the-counter medications are no longer reimbursable from HSAs, MSAs, and FSAs.
Business Tax Provisions
Shared Responsibility for Employers
Starting in 2014, the PPACA's employer shared responsibility provisions specify that an applicable large employer (one who on average employed 50 or more full-time equivalent employees during the preceding business year) will be subject to a penalty when the employer has at least one full-time subsidy eligible employee who purchases health insurance through a state exchange. There are two instances when the penalty may apply:
- If an employer fails to offer minimum essential coverage, the penalty is equal to the number of full-time employees, minus 30, multiplied by $2,000; or
- If an employer offers coverage, but it is deemed either unaffordable or below minimum value (a plan that pays at least 60 percent of benefits), the penalty is equal to the lesser of (1) the number of full-time employees, minus 30, multiplied by $2,000; or (2) the number of full-time subsidy-eligible employees multiplied by $3,000.
Small Employer Health Insurance Tax Credit
Starting in 2010 and through 2013, small businesses (defined as businesses with 25 or fewer full-time equivalent employees and average annual wages of $50,000 or less [excluding owners]) are eligible for a credit of up to 35 percent of non-elective contributions the business makes on behalf of its employees for insurance premiums. The credit is scheduled to increase to 50 percent after 2013, and an employer must participate in an insurance exchange in order to claim the credit. The credit terminates after 2015.
Form W-2 Reporting
Starting in 2012, employers required to file 250 or more Forms W-2 are also required to disclose the aggregate cost of applicable employer-sponsored health coverage on each employee's respective Form W-2. Reporting is optional for employers who file less than 250 Forms W-2.
Cafeteria Plans
Effective in 2014, a qualified health plan offered through a health insurance exchange is a qualified benefit under a cafeteria plan of a qualified employer.
SIMPLE Cafeteria Plans for Small Businesses
Effective in 2011, an eligible small employer (employed 100 or fewer employees on average during either of the last two business years) is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan. These provisions allow small employers to retain potentially discriminatory benefits for highly compensated and key employees while allowing other employees to enjoy the benefits of a cafeteria plan.
Medical Device Excise Tax
Starting in 2013, HCERA imposes a 2.3 percent excise tax on the sale of certain medical devices. The tax applies to sales of any medical device intended for humans except eyeglasses, contact lenses, hearing aids, and medical devises generally sold at retail to the public for individual use.
Excise Tax on High-Cost Employer Plans
Effective in 2018, a 40 percent excise tax is to be imposed on insurers on the excess benefit of high cost employer-sponsored health insurance (also known as a "Cadillac tax"). The threshold amount is $10,200 for individual coverage and $27,500 for family coverage, adjusted for inflation in subsequent years.
Next Steps
After much uncertainty, we now have some direction on the future of health care reform. We expect more information and guidance from the IRS regarding how some of these provisions will be implemented. If you would like to learn more about how health care reform might affect your personal finances or the finances of your business, please contact your SLSF relationship partner. We can help you determine the impact on your taxes and evaluate strategies to help minimize your tax liability.
