The Impact of Health Care Reform: Tax Implications

Below is an outline of the Smart Business Live webinar presentation, given by Jim Sacher on May 5, 2010. To access the full webinar click here.

Business Tax Provisions

Small Employer Tax Credit

Eligibility

• Must offer health insurance and pay at least ½ the premium cost 
• Employer must have no more than 25 FTEs
• Average annual FTE wage must not be more than $50,000

Years affected

• 2010 through 2012 for insurance purchased through a qualified insurance company
• 2013 and after, but only if purchased through a state exchange
  • Limited to two years

Amount of credit

• 35% of the employer’s nonelective contributions toward the employees’ health insurance
• 50% for years beginning after 2013
• Phase out of the credit as the employer grows in both FTEs and/or average wage
• Credit reduces the amount of the health insurance deduction
• No credit for self employed individuals, including sole-proprietors, partners and 2% shareholders of S-Corps
  • They don’t count for purposes of determining FTEs or average wages

Employer Mandate

Applicable large employers must offer health insurance or pay a penalty.

Who is a large employer?

• Any business that employed at least 50 FTEs during the preceding calendar year
• There are some rules around how FTEs are counted
• An exception if none of the employees have purchased insurance on their own through an exchange

What exactly is offering health insurance?

• Offer no coverage
• Offers minimum coverage that is unaffordable
• Offers minimum coverage, but the employer pays less than 60% of the total costs

Penalty

If no health insurance is offered, an excise tax equal to:

• The number of FTEs > 30 during the month
• Times 1/12 of $2,000
• Penalty assessed on an monthly basis

If health insurance is offered, but at least one employee receives a premium tax credit:

• The number of employees receiving a premium tax credit
• Times 1/12 of $3,000
• Capped at the penalty rate if no insurance is offered (the $2,000 penalty calculation)

The penalty provisions are effective for months beginning after 2013.

Free Choice Vouchers

• Any employer offering minimum essential coverage through an employer sponsored plan must provide qualified employees with a voucher that could be used to purchase health insurance through an exchange.
• The voucher amount is equal to the dollar value of the employer contribution to the health plan
• Qualified employees are those who opt out of the employer health plan and whose income level is below certain thresholds
• No penalties for employees receiving a voucher
• Effective for years after 2013

The “Cadillac Tax” on High-cost Health Plans

An excise tax on insurance companies that offer high-cost employer sponsored health insurance.

High-cost health insurance is a plan where the annual premium exceeds:

• $10,200 for single coverage
• $27,500 for family coverage
• Increased for any covered retirees

The tax is non-deductible. Expectation is that insurers will pass through the tax with even higher premiums.

Effective for years beginning after 2017

Individual Provisions

Individual Mandate

Tax penalty for not having health insurance:

Greater of:

• $95 (growing to $695 in 2016) maxed at $2,085 per family
• 2.5% of household income over the income threshold for tax filing

Applies to both US citizens and legal residents.

Exceptions

• Financial hardship
• Those without coverage for less than 3 months
• Those individuals for whom the lowest plan option is greater than 85 of household income
• Those below the tax filing threshold ($9,350 single / $18,700 couples in 2010)

Effective for years after 2013.

Premium Assistance Tax Credits

Tax credits for low and middle income individuals and families:

Eligibility:

• Individuals and families with income up to 400% of the federal poverty level
  • $43,320 for individual
  • $88,200 for family
  • Not otherwise eligible for Medicaid or employer health insurance
• Amount of credit
  • Based on a sliding scale of an individual’s household income and the cost of the insurance; ends when household income is 400% of the federal poverty level
• Individual provides information to the Exchange
  • Exchange certifies the person
  • IRS pays the credit amount directly to the insurance plan in which the individual is enrolled
  • For employed individuals who purchase through an exchange, premium payments are made through payroll deductions

Higher Medicare Taxes on High Income Taxpayers

Current law imposes a Medicare tax on earned income at 2.9% (1.45% each employee and employer) without a limit.

Higher income taxpayers will pay an additional 0.9% Medicare tax (2.35% total) on earned income in excess of:

• $200,000 singles
• $250,000 married filing jointly
• Not indexed for inflation

Employers not affected by cost, but must collect through witholding

• Some couples will face extra tax burden at tax filing
• Self employeds pay 3.8%

Medicare tax extends to investments

• Current law only applies the Medicare tax to wages and earned income
• New law extends the tax to net investment income.
  • The amount is 3.8% (1.45% employee+1.45% employer+ 0.9% additional).
  • All paid by the employee
  • Applies to those with AGI in excess of $200,000/$250,000
• Net investment income is:
  • Interest
  • Dividends
  • Royalties
  • Rents
  • Passive activity income
  • Gain from disposition of property (capital gains)
  • Reduced by any properly allocable deductions
  • Does not include income from tax deferred retirement accounts
  • Only on amounts in excess of the $200,000/$250,000 threshold

Effective for years after 2012.

Other Individual Tax Provisions

• Floor on medical expense deductions raised from 7.5% of AGI to 10% of AGI for years after 2012
• Exclusion of reimbursement for over-the-counter medications from HSAs, HRAs, FSAs, and MSAs for years after 2010
• Increase in penalties on non-qualified distributions from HSAs and MSAs to 20% of the disbursed amount for years after 2010
• Amounts contributed to FSAs will be limited to $2,500 for years beginning after 2012
• The exclusion from income of reimbursements for medical care under and employer sponsored health plan is extended to children of employees up to age 27
  • Also includes the exclusion for employer provided coverage
  • Effective March 31, 2010

What Can You Do Now?

• Small employers claim credit or decide to offer
• Review coverage options
• Take stock of employees for computations
• Review all employee benefits and part of broad compensation perspective