Advisory. The Health Care Reform Bill: How Will Its Tax Provisions Impact You and Your Business? April Impact on Employers

Transcription

1 certified public accountants business consultants Advisory April 2010 The Health Care Reform Bill: How Will Its Tax Provisions Impact You and Your Business? The recently passed Patient Protection and Affordable Care Act of 2010, followed by the Health Care and Education Reconciliation Act of 2010, will significantly change the U.S. health care system. Together, these new pieces of legislation contain numerous provisions relating to taxes, tax credits, fees, reporting requirements, and more that will affect employers, individuals, and specific industry sectors. In this advisory, for your quick reference, we provide a brief summary of selected provisions. For more information on the specific impact these new provisions will have on you, your business, and your industry, please contact your Moss Adams tax professional. Impact on Employers Small-Business Tax Credits Eligible small-business employers (as well as tax-exempt organizations) will receive a tax credit to subsidize the cost of employee health insurance. A small business is defined as one with no more than 25 employees and average annual wages of less than $50,000. In order to qualify, the employer must contribute at least 50 percent of employees health care premiums. Beginning in 2010, the maximum income tax credit is 35 percent of the small business s contribution to the employee s health insurance, increasing to 50 percent in The amount of credit is based on a sliding scale. Small businesses with fewer than 10 employees and average annual wages of less than $25,000 qualify for the maximum credit. Small businesses with between 10 and 25 employees will receive a reduced amount. Businesses can t apply the credit to certain employees for example, selfemployed individuals, 2 percent shareholders of an S corporation, or 5 percent owners of the small business and related individuals. For tax-exempt employers, the maximum credit is 25 percent beginning in 2010, increasing to 35 percent in 2014, and is allowed against payroll taxes. Reporting of Health Care Benefits Beginning in 2011, employers must include the total cost of employer-sponsored health coverage on their employees Form W-2. Simple Cafeteria Plans for Small Businesses Beginning in 2011, the new legislation allows small businesses to establish simple cafeteria plans. (For this purpose small businesses are defined as having 100 or fewer employees.) Simple cafeteria plans are excluded from general cafeteria plans nondiscrimination requirements if the plans meet minimum eligibility, participation, and

2 contribution requirements. Expansion of Form 1099 Reporting Beginning in 2012, Form 1099 reporting will include payments made to all corporations other than organizations exempt from tax under Section 501(a). As a result, businesses making payments aggregating $600 during a calendar year to a corporation will require filing a Form Additionally, payments that require reporting on Form 1099 are expanded to include gross proceeds for property and services. Medicare Part D Beginning in 2013, employers that receive a nontaxable subsidy for retiree drug costs must reduce the deduction for the drugs costs by a corresponding amount. Other Employer Reporting Requirements Beginning in 2013, large employers must prepare an information return that contains three things: certification that they ve offered employees the option to enroll in minimum essential coverage, the number of full-time employees by month, and information identifying each employee. Pay or Play Beginning in 2014, businesses with 50 or more employees that don t provide minimum essential coverage or that provide coverage that s unaffordable will be subject to a penalty. The penalty applies when an employee has enrolled in a qualified health plan (purchased through an insurance exchange) and is entitled to a premium tax credit or cost-sharing subsidy. The penalty for not providing minimum essential coverage is a monthly assessment of $ ($2,000 annually) multiplied by the total number of employees (less the first 30 employees). If the company provides health coverage but the employee is still eligible to enroll in a qualified health plan and is entitled to premium tax credit or cost-sharing subsidy, the monthly assessed penalty is $250 ($3,000 annually) per enrolled employee. Corporate Estimated Tax Payment Changes The new legislation increases estimated tax payments for corporations with assets of at least $1 billion by percentage points for payments due in July, August, or September 2014, followed by a corresponding reduction of the next payment due. High-Cost Employer Plan Excise Tax (the Cadillac Plan Tax ) Beginning in 2018, insurers will be subject to a 40 percent excise tax if the aggregate value of employer-sponsored health insurance coverage is in excess of $10,200 for an individual and $27,500 for a family. Employer-sponsored health insurance coverage can include multiple forms of insurance (fully and/or self-insured) provided by various issuers. The employer will be responsible for determining the aggregate value of all forms of insurance and communicating with each issuer as to its respective excise tax. Impact on Individuals Health Professionals Loan Repayment Retroactive to the 2009 tax year, the new legislation excludes from taxable income payments made under any state loan repayment or loan forgiveness program that promotes accessibility to health professionals in underserved areas. Health Coverage Exclusion for Children Under Age 27 Generally, employer-provided health insurance is nontaxable to an employee. Effective March 30, 2010, the income exclusion will also apply to health insurance coverage for the employee s children under age 27. Reimbursement Limitations for Over-the-Counter Medicines Beginning in 2011, reimbursements for over-the-counter medications cannot be made

3 from excludable income through a Health Reimbursement Account, Health Savings Account (HSA), Archer Medical Savings Account (MSA), or Flexible Spending Account (FSA) unless those medications are prescribed by a doctor. Tax on HSA and Archer MSA Non-Qualified Distributions Beginning in 2011, the new legislation increases the tax for premature withdrawals from HSAs (from 10 percent to 20 percent for withdrawals prior to age 65) and Archer MSAs (from 15 percent to 20 percent) used for purposes other than qualified medical expenses. Medicare Payroll Tax Increase Beginning in 2013, Medicare Hospital Insurance (HI) payroll tax on wages and selfemployment income in excess of $250,000 (for those married and filing jointly), $125,000 (for those married and filing separately), and $200,000 (for individuals) will increase by 0.9 percent. There is no change to the employer s portion of the HI payroll tax. However, employers must withhold 0.9 percent of an employee s wages exceeding $200,000 (disregarding the spouse s potential wages). As a result, amounts may not be fully withheld by the employer and must be paid by the employee. For example, a taxpayer and spouse s wages may collectively be more than $250,000 but individually be less than $200,000. In this case, the employer wouldn t withhold the HI payroll tax amount, leaving it to the employee s responsibility. Medicare Tax on Unearned Income Beginning in 2013, individuals, trusts, and estates will be subject to a 3.8 percent Medicare contribution tax assessed on the lesser of the net investment income or the excess of modified adjusted gross income over $250,000 (for those married and filing jointly), $125,000 (for those married and filing separately), and $200,000 (for individuals). In general, net investment income includes interest, dividends, annuities, royalties, rents, and passive activity earned income or gains from the disposal of property less deductions properly allocable to such income. Itemized Deduction Changes The threshold for the itemized medical deduction will increase from 7.5 percent to 10 percent beginning in For tax years 2013 through 2016, a taxpayer (or spouse) that has reached 65 will continue to apply the 7.5 percent threshold. Limit on Health FSAs Beginning in 2013, employee salary reductions for coverage under a cafeteria plan Health FSA are limited to $2,500 per taxable year. Excise Tax on Uninsured Persons Beginning in 2014, individuals must maintain minimum essential coverage or be responsible for a shared responsibility payment. The monthly payment is one twelfth of the greater of a statutorily defined flat dollar amount for each individual ($95 in 2014, $325 in 2015, and $695 in 2016 and thereafter) or a percentage of the taxpayer s household income over the threshold amount of income for filing a tax return. A taxpayer s household income includes the combined modified adjusted gross income of all individuals accounted for on the taxpayer s tax return. The flat dollar amount for each uninsured dependent under the age of 18 is 50 percent of the statutorily defined flat dollar amount. Premium Assistance Credits Beginning in 2014, the legislation provides for refundable premium assistance tax credits to help individuals purchase health insurance through a state health benefit plan. Based on the individual s income, the Treasury Department will pay the assistance credit directly to the insurance plan. The credit is available for individuals with household incomes between 100 and 400 percent of the federal poverty level. The credit is determined so that the individual pays between 2 and 9.5 percent of income for health

4 insurance. Impact on All Taxpayers Economic Substance Doctrine Codification Beginning March 30, 2010, tax understatements attributable to transactions that don t have economic substance are subject to a 40 percent penalty (20 percent if adequately disclosed). A transaction is considered to have economic substance if, apart from the federal income tax impact, it changes the taxpayer s economic position and the taxpayer has a substantial purpose for entering into the transaction. There s no reasonable cause and good faith exception to the penalty; thus, outside opinions wouldn t protect a taxpayer from imposition of a penalty if it s determined that a transaction lacks economic substance. Although not directly related to reforming health care, this provision was added to close a perceived tax loophole and act as a revenue raiser to help fund the overall health care reform legislation. Impact on Specific Market Sectors Therapeutic Tax Credit Businesses with 250 or fewer employees that make a qualified investment in acute and chronic disease research during 2009 or 2010 are eligible for a new temporary credit. Companies must apply to the Treasury Department to certify their projects. The credit amount would be equal to 50 percent of a company s qualified investments, and the credit is subject to an overall cap of $1 billion over the two-year period. Modification of the Cellulosic Biofuel Producer Credit The legislation modifies the definition of cellulosic biofuel eligible for the credit, eliminating the ability to take the credit on unprocessed fuels or black liquor. The change is effective for fuels sold or used beginning January 1, Excise Tax on Indoor Tanning Services Indoor tanning services performed on or after July 1, 2010, are subject to a 10 percent excise tax, which will be passed on to the individual consumer. Fee on Pharmaceutical Industry The legislation imposes a nondeductible annual fee on pharmaceutical manufacturers and importers beginning in The annual fee is statutorily set and apportioned among providers based on their share of the branded prescription drug market. The statutory fee is $2.5 billion in 2011, rising to $4.1 billion before falling to $2.8 billion in 2019 and later years. New Reporting Requirements for Tax-Exempt Hospitals In order for certain hospitals to maintain their tax-exempt status, they ll be required to: Conduct a community health needs assessment and make it available to the public Adopt, implement, and make available to the public a financial assistance policy Limit the amount of emergency or other necessary care charges for patients who are eligible for assistance under the policy Determine whether the individual is eligible for assistance under the financial assistance policy before engaging in extraordinary billing and collection processes The community health needs assessment must be completed once every three years, starting with tax years beginning after March The other requirements must be met starting with tax years beginning after March A hospital that fails to comply with community health needs assessment requirements will be assessed an excise tax of $50,000.

5 Fees for Health Insurance Providers For each policy ending after September 30, 2012, each health plan will need to pay a fee of $2 per policy multiplied by the number of lives covered by the policy. This fee will be used to establish the Patient-Centered Outcomes Research Trust Fund to compare clinical effectiveness research. Beginning in 2014, a nondeductible annual fee will be assessed on health insurance providers. The fee is statutorily set and apportioned among providers based on their share of net premiums written in the total health insurance market. The total statutory fee is $8 billion in 2012, rising to $14.3 billion in Health Insurance Provider Compensation Deduction Limit Beginning in 2012, health insurance providers will be subject to a compensation deduction limit of $500,000 for each employee and individual, such as an independent contractor, that provides services on behalf of the provider. Generally, a health insurance provider is an insurance company licensed to engage in the business of insurance in a state. Medical Devices Excise Tax Beginning in 2013, medical device manufacturers and importers will face a 2.3 percent excise tax on the sales price of certain medical devices. The tax doesn t apply to eyeglasses, contact lenses, hearing aids, and other devices determined by the Treasury Department to be regularly sold at retail. SUMMARY OF EFFECTIVE DATES 2009 Health professionals loan repayment Therapeutic tax credit 2010 Small business tax credits Health coverage exclusion for children under age 27 Modification of the cellulosic biofuel producer credit Excise tax on indoor tanning services Economic substance doctrine codification 2011 Reporting of health care benefits on Form W-2 Simple cafeteria plans for small businesses Reimbursement limitations for over-the-counter medicines Tax on HSA and Archer MSA non-qualified distributions Fee on pharmaceutical industry New reporting requirements for tax-exempt hospitals 2012 Expansion of Form 1099 reporting Fees for health insurance providers Health insurance provider compensation deduction limit

6 2013 Medicare Part D Other employer reporting requirements Medicare payroll tax increase Medicare tax on unearned income Itemized deduction changes Limit on FSAs Medical devices excise tax 2014 Pay or play Corporate estimated tax payment changes Excise tax on uninsured persons Premium assistance credits 2018 High-cost employer plan excise tax (the Cadillac plan tax ) The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Moss Adams LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Moss Adams LLP assumes no obligation to provide notification of changes in tax laws or other factors that could affect the information provided.