May
7, 2010
Dear
Client:
We
are writing to give you an overview of tax law changes recently enacted by
health care reform legislation and how it affects individuals, and small and
large businesses. Together, the “Patient
Protection and Affordable Care Act” and the “Health Care and Education Reconciliation
Act” establish a mandate for most
Individuals
Individual mandate. The new law contains an
“individual mandate”—a requirement that U.S. citizens and legal residents have
qualifying health care coverage or be subject to a tax penalty after 2013.
Under the new law, those without qualifying health care coverage will pay a tax
penalty of the greater of: (a) $695 per year per person, up to a maximum of
three times that amount ($2,085) per family, or (b) 2.5% of household income
over the threshold amount of income required for income tax return filing. The
penalty will be phased in according to the following schedule: $95 in 2014,
$325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in
2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016.
Beginning after 2016, the penalty will be increased annually by a
cost-of-living adjustment. For tax years ending after December 31, 2013,
non-exempt
Premium assistance tax credits for purchasing health insurance. The
health care legislation provides tax credits to low and middle income
individuals and families for the purchase of health insurance. Specifically,
for tax years ending after 2013, the new law creates a refundable tax credit
(the “premium assistance credit”) for eligible individuals and families who
purchase health insurance through an Exchange. The premium assistance credit,
which is refundable and payable in advance directly to the insurer, subsidizes
the purchase of certain health insurance plans through an Exchange. The Health
Care Act requires each state to establish an “American Health Benefit Exchange”
(“Exchange”) by January 1, 2014 and requires insurers to provide qualified
health plans (QHPs) to
be sold on these Exchanges. The goal is for individuals to get affordable,
quality health insurance by enrolling in a QHP through an Exchange.
The
premium assistance credit will be available for individuals and families with
incomes up to 400% of the federal poverty level ($43,320 for an individual or
$88,200 for a family of four, using 2009 poverty level figures) that are not
eligible for Medicaid, employer sponsored insurance, or other acceptable
coverage. The credits will be available on a sliding scale basis.
Higher Medicare taxes on high-income taxpayers.
High-income taxpayers will be subject to a tax increase on wages and a new levy
on investments.
Higher Medicare payroll tax on wages. The
Medicare payroll tax is the primary source of financing for Medicare’s hospital
insurance trust fund, which pays hospital bills for beneficiaries, who are 65
and older or disabled. Under current law, wages are subject to a 2.9% Medicare
payroll tax. Workers and employers pay 1.45% each. Self-employed people pay
both halves of the tax (but are allowed to deduct half of this amount for
income tax purposes). Unlike the payroll tax for Social Security, which applies
to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is
levied on all of a worker’s wages without limit. Under the provisions of the
new law, which takes effect in 2013, most taxpayers will continue to pay the
1.45% Medicare hospital insurance tax, but single people earning more than
$200,000 and married couples earning more than $250,000 will be taxed at an
additional 0.9% (2.35% in total) on the excess over those base amounts.
Self-employed persons will pay 3.8% on earnings over the threshold. The
additional 0.9% tax will not generate an income tax deduction for
self-employment taxes.
Medicare payroll tax extended to investments. Under
current law, the Medicare payroll tax only applies to wages. Beginning in 2013,
a Medicare tax will, for the first time, be applied to investment income. A new
3.8% tax will be imposed on net investment income of single taxpayers with AGI
above $200,000 and joint filers over $250,000. Net investment income is
interest, dividends, royalties, rents, gross income from a trade or business
involving passive activities, and net gain from disposition of property (other
than property held in a trade or business). Net investment income is reduced by
properly allocable deductions to such income. However, the new tax won’t apply
to income in tax-deferred retirement accounts such as 401(k) plans. Also, the
new tax will apply only to income in excess of the $200,000/$250,000
thresholds. So, if a couple earns $200,000 in wages and $100,000 in capital
gains, $50,000 will be subject to the new tax.
Floor on medical expenses deduction raised
from 7.5% of adjusted gross income (AGI) to 10%. The new
law raises the floor beneath itemized medical expense deductions from 7.5% of
AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI
floor for individuals age 65 and older (and their
spouses) will remain unchanged at 7.5% through 2016.
Limit reimbursement of over-the-counter medications from HSAs,
FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not
prescribed by a doctor 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), effective for tax years beginning after Dec. 31,
2010.
Limit health flexible spending arrangements (FSAs) to $2,500. Effective
for tax years beginning after Dec. 31, 2012, allowable contributions to health
FSAs will be capped at $2,500 per year and will be indexed for inflation after
2013.
Dependent coverage in employer health plans.
Effective on Mar. 30, 2010, the new law extends the 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 as of the
end of the tax year. In addition, self-employed individuals are permitted to
take a deduction for the health insurance costs of any child of the taxpayer
who has not attained age 27 as of the end of the tax year.
Excise tax on indoor tanning services. Effective
July 1, 2010, a 10% excise tax will be imposed on indoor tanning services.
Liberalized adoption credit and adoption assistance rules. For tax
years beginning after Dec. 31, 2009, the adoption tax credit is increased by
$1,000, made refundable, and extended through 2011. The adoption assistance
exclusion is also increased by $1,000.
Small
Businesses
Tax credits to certain small employers that provide insurance. The new
law provides small employers with a tax credit (i.e., a dollar-for-dollar
reduction in tax) for nonelective contributions to purchase health insurance
for their employees. The credit offsets both an employer’s regular tax and its
alternative minimum tax (AMT) liability.
Small business employers eligible for the credit. To
qualify, a business must offer health insurance to its employees as part of their
compensation and contribute at least half the total premium cost. The
full amount of the credit is available only to an employer with 10 or fewer
full-time equivalent employees (“FTEs”) and whose employees have average annual
full-time equivalent wages from the employer of less than $25,000. Employers
with more than 10 FTEs or annual full-time equivalent wages of $25,000 or more
may qualify for a reduced credit. No credit is available if the business has
more than 25 FTEs or more than $50,000 of average annual full-time equivalent
wages from the employer.
Years the credit is available. The credit is initially
available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying
health insurance for claiming the credit for this first phase of the credit is
health insurance coverage purchased from an insurance company licensed under
state law. For tax years beginning after 2013, the credit is only available to
an eligible small employer that purchases health insurance coverage for its
employees through a state exchange and is only available for two years. The
maximum two-year coverage period does not take into account any tax years
beginning in years before 2014. Thus, an eligible small employer could
potentially qualify for this credit for six tax years, four years under the
first phase and two years under the second phase.
Calculating the amount of the credit. For tax
years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50%
for tax years beginning after 2013) of the employer’s nonelective contributions
toward the employees’ health insurance premiums. The credit phases out as
firm-size and average wages increase.
Special rules. The employer is entitled to an
ordinary and necessary business expense deduction equal to the amount of the
employer contribution minus the dollar amount of the credit. For example, if an
eligible small employer pays 100% of the cost of its employees’ health
insurance coverage and the amount of the tax credit is 50% of that cost (i.e.,
in tax years beginning after 2013), the employer can claim a deduction for the
other 50% of the premium cost.
Self-employed
individuals, including partners and sole proprietors, two percent shareholders
of an S corporation, and five percent owners of the employer are not treated as
employees for purposes of this credit. There is also a special rule to prevent
sole proprietorships from receiving the credit for the owner and their family
members. Thus, no credit is available for any contribution to the purchase of
health insurance for these individuals and the individual is not taken into
account in determining the number of full-time equivalent employees or average
full-time equivalent wages.
Most small businesses exempted from penalties for not offering
coverage to their employees. Although the new law imposes
penalties on certain businesses for not providing coverage to their employees
(so-called “pay or play”), most small businesses won’t have to worry about this
provision because employers with fewer than 50 employees aren’t subject to the
“pay or play” penalty.
Large
Businesses
Who is subject to the employer mandate? Only an
“applicable large employer,” defined as someone who employed an average of at
least 50 full-time employees during the preceding calendar year, is subject to
the requirement to offer coverage. In counting the number of employees for
purposes of determining whether an employer is an applicable large employer, a
full-time employee (meaning, for any month, an employee working an average of
at least 30 hours or more each week) is counted as one employee and all other
employees are counted on a pro-rated basis. However, even an employer with 50
or more employees isn’t subject to the penalty for not offering coverage if the
employer doesn’t have any full-time employees who are 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. In other words, if an employer doesn’t have any full-time employees
who have a lower income that might qualify him or her to receive a subsidy when
purchasing a health plan in the proposed health insurance exchange, the
employer will not pay a “pay or play” penalty. The excise tax, or penalty is
nondeductible.
Penalty for employers NOT offering coverage. Effective
January 1, 2014, an applicable large employer who fails to offer its full-time
employees and their dependents the opportunity to enroll in minimum essential
coverage under an employer-sponsored plan for any month is subject to a penalty
if at least one of its full-time employees is certified to the employer as
having enrolled in health insurance coverage purchased through a state exchange
with respect to which a premium tax credit or cost-sharing reduction is allowed
or paid to the employee. The penalty for any month is an excise tax equal to
the number of full-time employees over a 30-employee threshold during the
applicable month (regardless of how many employees are receiving a premium tax
credit or cost-sharing reduction) multiplied by one-twelfth of $2,000. For
example, if an employer fails to offer minimum essential coverage and has 60
full-time employes, ten of whom receive a tax credit for the year for enrolling
in a state exchange-offered plan, the employer will owe $2,000 for each
employee over the 30-employee threshold, for a total penalty of $60,000 ($2,000
multiplied by 30 (60 minus 30)). This penalty is assessed on a monthly basis.
Penalty for employers that OFFER coverage but have at least one
employee receiving a premium tax credit. Effective
January 1, 2014, an applicable large employer who offers coverage but has at
least one full-time employee receiving a premium tax credit or cost-sharing
reduction is subject to a penalty. The penalty is an excise tax that is imposed
for each employee who receives a premium tax credit or cost-sharing reduction
for health insurance purchased through a state exchange. For each full-time
employee receiving a premium tax credit or cost-sharing subsidy through a state
exchange for any month, the employer is required to pay an amount equal to
one-twelfth of $3,000. The penalty for each employer for any month is capped at
an amount equal to the number of full-time employees during the month
(regardless of how many employees are receiving a premium tax credit or
cost-sharing reduction) in excess of 30, multiplied by one-twelfth of $2,000.
For example, if an employer offers health coverage and has 60 full-time
employees, 15 of whom receive a tax credit for the year for enrolling in a
state exchange-offered plan, the employer will owe a penalty of $3,000 for each
employee receiving a tax credit, for a total penalty of $45,000. The maximum
penalty for this employer is capped at the amount of the penalty that it would
have been assessed for a failure to provide coverage, or $60,000 ($2,000
multiplied by 30 (60 minus 30)). Since the calculated penalty of $45,000 is
less than the maximum amount, the employer pays the $45,000 calculated penalty.
This penalty is assessed on a monthly basis.
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, the value of which could be applied
to the purchase of a health plan through the Insurance Exchange. Qualified
employees would be those employees: who do not participate in the employer’s
health plan; whose required contribution for employer sponsored minimum
essential coverage exceeds 8%, but does not exceed 9.8% of household income;
and whose total household income does not exceed 400% of the poverty line for
the family. The value of the voucher would be equal to the dollar value of the
employer contribution to the employer offered health plan. Employers providing
free choice vouchers will not be subject to penalties for employees that
receive a voucher.
Small Business
Health Care Tax Credit: Frequently Asked Questions
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We hope this information is helpful. If you would like more
details about these provisions or any other aspect of the new law, please do
not hesitate to call our office or visit our website at http://www.goslingcpa.com/HealthReform2010.html.
Very truly yours,
Gosling & Company, P.C.
Certified Public Accountants
IRS Circular 230 Disclosure: To
ensure compliance with requirements imposed by the IRS, we inform you that any
U.S. federal tax advice contained in this communication (including any
attachments) is not intended or written to be used, and cannot be used, for the
purpose of (i) avoiding penalties under the Internal Revenue Code or (ii)
promoting, marketing or recommending to another party any transaction or matter
addressed herein or in any attachment hereto.
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Calendar
of Health Care Reform Law Provisions |
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2010 |
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* Dependent coverage
available for dependents under age 27 who are not covered by another
employer-sponsored plan |
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* Small employer (less
than 50 full-time equivalent employees) health insurance credit available for
making contributions to buy health insurance for its employees |
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* Maximum adoption credit
and adoption exclusion are increased by $1,000 to $13,170 per child |
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* 10% excise tax imposed
on any indoor tanning service |
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2011 |
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* W-2 must include cost
of employer-provided health insurance |
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* Costs for
over-the-counter drugs not prescribed by a doctor not allowed to be reimbursed
through a flexible-spending account, health reimbursement account, or an
Archer Medical Savings Account |
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* Small employers
(average 100 or fewer employees prior 2 years) may establish simplified
cafeteria plans for their employees |
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2012 |
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* Requirement to file
information returns (1099’s) for payments to corporations of $600 or more |
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2013 |
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* Flexible-spending
account contributions limited to $2,500 |
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* Additional Medicare tax
of .9% on wages and self-employment income over $250,000 for joint filers
$125,000 for married filing separate filers, and $200,000 for all others |
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* 3.8% Medicare tax
imposed on investment income of high income filers |
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* Floor on unreimbursed
medical expenses deducted raised from 7.5% of adjusted gross income to 10%
(Remains unchanged for people age 65 and older) |
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2014 |
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* Individuals not
carrying health insurance begin paying a graduated penalty * Large employers not
offering affordable health insurance coverage must pay penalty |
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* Employers offering
minimum coverage and paying a portion of that coverage must provide qualified
employees with "free choice" voucher |
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* Exchanges made
available to individuals and small businesses |
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* Refundable tax credit
("premium assistance credit") available to qualifying taxpayers who
get health insurance coverage through a state-established American Health
Benefit Exchange |
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* Qualified health plans
may be offered through cafeteria plans by qualified employers |
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2017 |
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* Floor on unreimbursed
medical expenses for people 65 & older increased to 10% |