Tax Implications of Health Care Reform Presented by: Art Sparks, CPA Partner Certified Public Accountants
Summary
Summary The Patient Protection and Affordable Care Act (PPACA) and the companion Health Care and Education Reconciliation Act (HCERA) are designed to effectuate fundamental reforms to the U.S. health care system. Basically, almost all individuals not covered by Medicaid or Medicare will be required to obtain health care coverage or pay penalties. Employer plans will generally satisfy the universal coverage requirement.
Summary Lower-income individuals would generally receive a credit or voucher to help pay for health insurance, which can be used at one of the American Health Benefits Exchanges that are required to be established by every state. Employers electing not to offer qualifying coverage would be subject to an additional tax to help finance the health care coverage for their employees. Pursuant to PPACA, the IRS is responsible for overseeing a significant part of the health care reform.
An Overview Primary thrust of PPACA and HCERA is health insurance reform. However, tax law change is a major component. First Internal Revenue Code (IRC) provides carrots to individuals and businesses in the form of tax breaks. Second IRC provides sticks in the form of penalties on individuals and businesses that do not obtain or provide health coverage for themselves or their businesses. Third IRC is used to raise revenue to help pay for the overall cost of health insurance reform. Fourth IRC places many filing requirements on health insurance providers. Fifth Burdens placed on the IRS to help enforce the components of this legislation.
Health Care Individual Mandates Failure to carry health insurance Beginning in 2014, individuals must make a shared responsibility payment if they do not have health insurance for themselves and their dependents. Premium assistance credit Beginning in 2014, taxpayers with household income between 100% and 400% of the federal poverty line can qualify for a refundable health insurance premium assistance credit. Medical deduction threshold For tax years beginning after 12/31/12, the threshold for the itemized deduction of unreimbursed medical expenses is increased from 7.5% of AGI to 10% of AGI. Exception persons over the age of 65 through 12/31/16.
Health Care Individual Mandates Over-the-counter medicines Qualified medical expenses for purposes of the rules on HSAs, Archer MSAs, health FSAs and HRAs no longer include over-the-counter medicines and drugs. HSA and MSA distributions The additional tax on distributions not used for qualified medical expenses is increased to 20% effective for distributions made after December 31, 2010. Additional health insurance tax For tax years beginning after 12/31/12, individuals are subject to an additional hospital insurance tax on wages and self-employment income in excess of $200,000 ($250,000 in the case of joint returns) of.9%.
Health Care Individual Mandates Medicare tax on investment income For tax years beginning after 12/31/12, a 3.8% Medicare tax is imposed on a portion of the net investment income of individuals, estates and trusts.
Health Care Business Mandates Large employers responsibility for health coverage For months beginning after 12/31/13, large employers who fail to comply with requirements concerning health coverage for full-time employers are subject to a penalty tax. Small employer health insurance credit For years beginning in 2010 through 2013 an eligible small employer may claim a tax credit for premiums it pays toward health coverage for its employees. Free choice vouchers Repealed effective 4/15/12
Health Care Business Mandates Health FSAs offered through cafeteria plans For tax years beginning after 12/31/12 health FSAs offered as part of a cafeteria plan must limit contributions through salary reductions to $2,500. Simple cafeteria plans Certain small employers may choose to provide a simple cafeteria plan for their employees, under which the nondiscrimination rules of a classic cafeteria plan are treated as satisfied.
Health Care Business Mandates Economic substance doctrine The common-law economic substance doctrine has been codified. A transaction has economic substance only if 1) the transaction changes in a meaningful way the taxpayer s economic position, and 2) the taxpayer has a substantial business purpose for the transaction. A 20% penalty applies if transaction fails this test; 40% for undisclosed transactions. Effective now. Cadillac health plans A 40% excise tax will be imposed on insurers to the extent that the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount starting in 2018.
Specific Provisions Individuals Penalty for Failing to Carry Health Insurance Beginning in 2014: Must make shared responsibility payment if do not have minimum health insurance for themselves and their dependents. Generally, all persons are applicable individuals and subject to the penalty payment with the exception of: Prisoners Undocumented aliens Health care sharing ministry members Religious conscience
Specific Provisions Individuals Health Insurance Premium Assistance Refundable Credit Beginning in 2014: Individuals who purchase qualified health care coverage through an American Health Benefit Exchange with household income between 100% and 400% of the federal poverty line qualify for a refundable health insurance premium assistance credit. By January 1, 2014, each State must establish an American Health Benefit Exchange and Small Business Health Options Program to provide qualified individuals and qualified small business employers access to qualified health plans.
Specific Provisions Individuals Additional Medicare tax on wages and self-employment income Beginning after December 31, 2012: Medicare tax on every taxpayer is raised from 1.45% to 2.35% with respect to wages and/or earned income in excess of $200,000 ($250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing separately). The obligation to withhold the additional tax is only imposed on the employer if the employee receives wages from the employer in excess of $200,000. If the additional tax is not withheld by the employer, the employee is responsible for paying the tax. However, penalties will apply at the employer level.
Specific Provisions Individuals The new HI tax applies to self employment income in excess of the same limits. The one-half of self-employment taxes that are deductible to an individual on self employment income does not include the new HI tax. Observation: The new HI tax will likely create planning opportunities including utilizing Sub S flow through income and increased payments into retirement plans and other allowable fringe benefit plans not subject to the Medicare tax.
Specific Provisions Individuals Medicare Contribution Tax on unearned income Beginning after December 31, 2012: 3.8% Medicare tax is imposed on the lesser of an individual s net investment income or modified AGI in excess of $200,000 ($250,000 in the case of a joint return and surviving spouse, and $125,000 in the case of a married taxpayer filing separately). Estates and trusts are also subject to the 3.8% unearned income Medicare contribution tax on the lesser of (1) their undistributed net investment income for the tax year, or (2) any excess of their AGI over the dollar amount at which the highest tax bracket for estates and trusts begins for the tax year.
Specific Provisions Individuals Net Investment Income The excess of the sum of the following items less any otherwise deductions properly allocable to such income: Gross income from interest, dividends, annuities, royalties and rents unless derived in the ordinary course of any trade or business. Other gross income from any passive trade or business. Net gain included in computing taxable income that is attributable to the disposition of property other than property held in any trade or business that is not a passive trade or business. Net investment income does not include: Excluded gain from the sale of a principal residence Retirement benefit distributions Tax exempt income Veterans benefits
Other Topics of Interest Anticipated income tax rate changes Individual income tax brackets: 2012 10%, 15%, 25%, 28%, 33% and 35% 2013 10%, 15%, 25%, 28%, 33%, 35% and 39.6% 2012 Capital Gains rates: 0%,10% and 15% 2013 Capital Gains rates: 0%, 15% and 20%
Specific Provisions Businesses An assessable payment is imposed on an applicable large employer that: Fails to offer to its full-time employees the opportunity to enroll in minimum essential coverage, and Has at least one full-time employee who has been certified to the employer as having enrolled for that month in a qualified health plan through a Health Insurance Exchange with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid for the employee. An applicable large employer is an employer who employed an average of at least 50 full-time employees during the preceding calendar year. Effective 2014. The assessable payment is not deductible for income tax purposes.
Specific Provisions Businesses Small Employer Health Insurance Credit An eligible small employer may claim a 35% tax credit for premiums it pays toward health coverage for its employees in tax years beginning in 2010 through 2013. An eligible small employer is an employer with no more than 25 full-time employees and the average annual compensation of these employees is not greater than $50,000. The credit is reduced by 6.667% for each full-time employee in excess of 10 employees and by 4% for each $1,000 that average annual compensation paid exceeds $25,000.
Specific Provisions Businesses Small Employer Health Insurance Credit In tax years that begin after 2013 an employer must participate in an insurance exchange in order to claim the credit. The deduction for premiums paid is reduced by the amount of the credit.
Specific Provisions Businesses Excise Tax on High Cost Employer-Sponsored Health Coverage A 40% excise tax is imposed on health coverage providers starting in 2018 to the extent that the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount. Cadillac health plans. The dollar limits for determining the tax thresholds are: $10,200 for an employee with self-only coverage $27,500 for an employee with coverage other than selfonly coverage
Health Care Reporting Employers are now required to disclose the aggregate cost of employer-sponsored health insurance coverage provided to their employee s on Form W-2. Effective for the Form W-2 for the 2012 tax year and more than 250 W- 2s issued. Beginning in 2014, every person who provides minimum essential health care coverage to an individual during a calendar year is required to file a return with the IRS reporting such coverage. This will be a new form issued by the IRS and must contain information specific to each primary insured. The same information must be provided to the insured.
Health Care Reporting Beginning in 2014, certain large employers (at least 50 full-time employees on business days during the year) will be required to report to the Secretary of the Treasury whether they offer full time employees and their dependents the opportunity to enroll in minimum essential coverage. A person required to file a return under these rules is also required to furnish a written statement to each full time employee whose name is required to be reported on the return.
Compliance Compliance, including new elevated reporting requirements just increased in level of importance. The IRS is not only increasing the number of agents, but also creating focused and specialized groups. One such group is the new High Net Worth group. You may not have been audited in a long time. Expect to be audited soon.
Appendix A Effective Dates for Patient Protection & Affordable Care Act, Health Care & Education Reconciliation Act
Tax Changes Relating to Universal Health Coverage Mandate Penalty for remaining uninsured Phased in. Beginning for years ending after December 31, 2013 Low-income tax credits for participating in health exchanges Beginning for years ending after 2013 Employer responsibilities For months beginning after December 31, 2013 Tax credits for small employers offering health coverage Beginning after December 31, 2009 Dependent coverage in employer health plans Effective March 30, 2010
Health-Related Revenue Raisers Excise tax on high-cost employer-sponsored health coverage For years beginning after December 31, 2017 Other new employer reporting responsibilities for health coverage For periods beginning after 2013 Additional Hospital Insurance Tax (HI) for high wage workers For tax years beginning after December 31, 2012 Surtax on unearned income For tax years beginning after December 31, 2012 New limit on health FSA contributions For tax years beginning after December 31, 2012 Restricted definition of medical expenses for employer provided coverage
For Reimbursement of Expenses Incurred with Respect to Years Beginning After December 31, 2010 Increased tax on non-qualifying HSA or Archer MSA distributions For years beginning after December 31, 2010 Modified threshold for claiming medical expense deductions For tax years beginning after December 31, 2012 Deduction for employer Part D is eliminated For years beginning after December 31, 2012 Codification of economic substance doctrine and imposition of penalties For transactions incurred after March 30, 2010
Appendix B The Path to Health Care Coverage
1913 wasn't a very good year. 1913 gave us the income tax, the 16th amendment and the IRS. Who knows what 2013 will bring
Art Sparks, CPA 731.885.3661 asparks@atacpa.net Questions?