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Health Care Reform and Tax Changes For Individuals and Businesses

Individuals

Effective Date Item Under the New Law
Retro 2009 Exclusion for State Student Loan Repayment or loan forgiveness for health professionals The gross income exclusion for amounts received under the National Health Service Corp is modified to include any amount received by individual under any State loan repayment or loan forgiveness.
2010 Indoor tanning services excise tax For tanning services on or after July 1, 2010 a new 10% excise tax whether paid by insurance or otherwise Tax on recipients of service.
Codification of economic substance penalties For transactions after March 30, 2010, a new strict liability penalty under Code Section 6662 applies if a transaction has economic substance apart from federal income tax effects.
Eased rules for adoption credit After December 31, 2009, maximum adoption credit is increased to $13,170 per child ($1,000 increase) for both special and non-special needs adoption.
Dependent coverage Effective March 23, 2010, general exclusion for reimbursements for medical care expenses under an employer provided accident or health plan to any child of an employee who has not attained age 27 at end of tax year. Self employed are permitted to take a deduction for health insurance costs of any child of taxpayer who has not reached age 27 by end of tax year.
Identifying Affordable Coverage Secretary of Health and Human Services is required to establish a web site through which residents of any state may identify affordable coverage options in that state.
Insurance for Uninsured with Pre-Existing Conditions Establishment of temporary high risk health insurance pool program to provide insurance coverage for certain uninsured individuals with pre-existing conditions. Ends with health insurance exchanges in 2014.
2011 Limit reimbursement for OTC medications Excludes the cost of over-the-counter drugs not prescribed by a doctor from being reimbursed through a HRA, FSA and being reimbursed on a tax-free basis through a HSA or Archer MSA.
Nonqualified distributions from HSAs or Archer MSA For distributions after December 31, 2010, increases tax on distributions that are not qualified medical expenses to 20%.
2013 Limit FSAs contributions The maximum amount available for reimbursement of incurred medical expenses of an employee, dependent and other eligible beneficiaries under the health FSA for a plan year cannot exceed $2,500.
Medical Expenses Deduction Raises the floor for itemized medical deduction for unreimbursed medical expenses from 7.5% of AGI to 10%. AGI floor for individuals age 65 and older remains unchanged at 7.5% through 2016 when the 10% floor applies.
Higher Medicare Tax
  • Medicare tax remains at 1.45% for most taxpayers. Single people earning more than $200,000 and married couples more than $250,000 will be taxed an additional 0.9% (2.35% total) on the excess of those base amounts.
  • Self-employed persons will pay 3.8% on earnings above those thresholds.
  • Employers will not be responsible for determining whether a worker's combined income with spouse makes them subject to the tax.
  • Thresholds are not indexed for inflation so more people may be subject to tax in coming years.
Medicare Tax Extended to Investments Currently, Medicare tax applies only to wages and self-employment income. Effective 2013, Medicare tax will be applied to investment income. New 3.8% tax will be imposed on net investment income of single and joint filers with AGI over $200,000 and $250,000 respectively. New tax will not apply to income in tax-deferred retirement accounts such as 401K plans.
2014 Premium Assistance Tax Credit Refundable tax credit will be available for eligible individuals and families who purchase health insurance through a State-established American Health Benefit Exchange. IRS pays premium assistance directly to insurance plan. For employed individuals with insurance purchased through the Exchange, the premiums are made through payroll deductions. Credit is available for individuals and families with incomes up to 400% of federal poverty level ($43,320 and $88,200 respectively) that are not eligible for Medicaid, employer sponsored insurance or other acceptable coverage.
Individual Mandate Requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to tax penalty. Details for penalties established. Starts at $95 in 2014, $325 in 2015, $695 in 2016. Cap of $2,250 per family.
Health Insurance Exchanges To be established in each state by 2014, allows individuals to shop for insurance through exchanges.
Health Insurance Reform Health insurance companies will not be permitted to: 1) refuse to sell or renew policies due to health status, 2) exclude coverage for treatments based on pre-existing health conditions, 3) charge higher rates due to health status, gender or other factors, 4) impose annual limits on the amount of coverage an individual may receive or 5) drop coverage because individual participates in clinical trial for cancer or other life-threatening disease.
2015 Physician Value-Based Program Pay physicians based on value not volume to promote increased quality of care for Medicare beneficiaries.
Independent Payment Advisory Board Establishes board to develop and submit proposals to Congress aimed at lowering health care costs, improving health outcomes for patients, promoting quality and efficiency and expanding access to evidence-based care.

Business

Effective Date Item Under the New Law
2010 Small Business Tax Credit Provides small employers with a tax credit for nonelective contributions to purchase health insurance for employees. To qualify: 1) must offer health insurance and contribute at least half the total premium cost, 2) have no more than 25 full-time employees (FTE) and FT wages average no more than $50,000 and 3) coverage must be purchased from a licensed insurance company. Credit is 35% of business contribution to premiums through 2013. In 2014, credits will cover 50% of premiums.
Expanded Dependent Coverage Provides the exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan is extended to any child of an employee who hasn't attained age 27 as of end of tax year. Allows self-employed individuals to take deduction for health insurance costs of any child who has not attained age 27 by end of tax year.
2011 Reporting Health Coverage Costs on Form W-2 Requires employers to disclose the value of the benefit provided by the employer for health insurance coverage on the employee's annual Form W-2.
Cafeteria Plan Changes Creates a Simple Cafeteria Plan to provide a vehicle through which small businesses can provide tax-free benefits to their employees.
Employer-sponsored Plans Requirements 1) Eliminate lifetime and annual limits on benefits, 2) provide first-dollar coverage for preventative care and 3) extend eligibility coverage to employee's unmarried children who are not age 27.
2013 Fee on Health Plans For each policy year ending after September 30, 2012, each health insurance policy and each self-insured health plan will have to pay a fee equal to the product of $2 multiplied by the average number of lives covered under the policy ($1 for policy years ending during 2013). Issuer of policy or plan sponsor is liable and must pay the fee.
$500,000 Compensation Deduction Limit for Health Insurance Issuers For tax years after December 31, 2012, covered health insurance provider is not allowed a compensation deduction for an "applicable individual" (officers, employees, directors or service providers) in excess of $500,000.
Excise Tax on Medical Device Manufacturers For sales after December 31, 2012, a 2.3% excise tax applies under Code Section 4191 to sales of taxable medical devices intended for humans. Will not apply to eyeglasses, contact lenses, hearing aids and any medical device determined by IRS to be generally purchased by the general public at retail for individual use.
Eliminating Deduction for Employer Part D Subsidy Eliminates the deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees.
Limiting Health Flexible Savings Account Contributions Limits the amount of contributions to health FSAs to $2,500 per year. Can no longer use FSAs, HSAs or MSAs for over-the-counter drugs.
2014 Larger Employers Pay Penalty for No Health Coverage For businesses with at least 50 employees, the penalties vary depending on whether or not the employer offers health insurance to employees. With no coverage and at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee excluding the first 30 employees from the assessment. With coverage and at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at amount of penalty that employer would have been assessed for failure to provide coverage or $2,000 multiplied by number of full-time employees in excess of 30).
Requirement to Offer "Free Choice Vouchers" After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage will have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange. Qualified employees include those who:
- Do not participate in employer's health plan
- Required contribution for employer sponsored minimum essentail coverage exceeds 8%, but does not exceed 9.8% of household income and whose total household income does not exceed 400% of poverty line for family.
Employers providing free choice vouchers will not be subject to penalties for employees that receive a voucher.
Health Insurance Exchanges Legislation provides for Health Insurance Exchanges to be established in each state in 2014. Individuals and Small Employers will be able to shop for insurance through the exchanges. SHOP (Small Business Health Options Program) will reduce costs and increase competitive pressure on insurers. These Exchanges would include web portals with standardized, easy-to-understand information that makes comparing and purchasing health care coverage easier for small business employees and reduce administrative costs for small businesses faced with offering health care plans.
Health Insurance Reform Additional measures will be implemented, specifically health insurance companies will not be permitted to:
- refuse to sell or renew policies due to an individual's health status,
- exclude coverage for treatments based on pre-existing health conditions,
- charge higher rates due to health status, gender or other factors, geography, family size and tobacco use,
- impose annual limits on the amount of coverage an individual may receive, or
- drop coverage because an individual chooses to participate in a clinical trial or other life-threatening disease or deny coverage otherwise provided because an individual is involved in a clinical trial.
Small Business Tax Credit Second phase of small business tax credit for qualified small employers will be implemented. These employers can receive a credit for contributions to purchase health insurance for employees, up to 50% of premiums. Tax-exempt small businesses are eligible for tax credits of up to 35% of their contributions.
Qualified Health Plans Offered through Cafeteria Plans by "Qualified Employers" A reimbursement for premiums for coverage under any "qualified health plan" through an Exchange is a qualified benefit under a cafeteria plan if employer is a qualified employer (generally smaller businesses).
New Information Reporting of Employer Provided
Health Coverage
New information reporting and statement obligations apply for 1) applicable large employers required to offer their full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and 2) employers offering minimum essential coverage to employees and paying any portion of such coverage, but only if employer contribution of any employee exceeds 8% of employee's wages.
Excise Tax on Health Insurance Providers An annual fee applies to health insurance providers but does not apply for companies whose net premiums written are $25 million or less.
Accelerated Estimated Tax Payments for Large Corps Large corporations, assets of $1 billion, will have estimated tax payments due in July, August or September will be increased from 157.75% to 173.50% of payment due. The amount of the next required installment is appropriately reduced.
Eliminating Annual Limits Prohibits all employer plans and new plans from imposing annual limits on the amount of coverage and individual may receive.
2017 Large Employers May Join State Exchanges At the state's discretion, large employers, over 100 employees, may join state exchanges.
2018 Cadillac Tax on High-cost Health Plans A 40% excise tax is to be imposed on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers unless they are self-funded. Expected that employers and workers will ultimately bear this tax in form of higher premiums passed on by insurers. Places a 40% nondeductible excise tax on insurance companies and plan administrators for coverage that exceeds $10,200 for single coverage, $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover high risk professions.