Healthcare Reform 101: New Responsibilities and Taxes for Employers and IndividualsMarch 12, 2010
Healthcare reform is now law, and many employers are asking how it affects my business and employees. The first thing to keep in mind is that reform is gradual. The healthcare reforms and tax provisions in the new healthcare reform package play out over time, with some taking effect this year or next year, but others not until 2014 and beyond. However, the healthcare package imposes significant new responsibilities and taxes on employers and individuals so it is not too early to start preparing.
Affordable Care Act
Healthcare reform is actually made up of two new laws. The first is the Patient Protection and Affordable Care Act of 2010, signed by President Obama on March 23. The second is the Health Care and Education Reconciliation Act of 2010, signed by the president on March 26. The Patient Protection Act, which reflects the Senate's original healthcare reform bill, provides the overall framework for reform. The Reconciliation Act was drafted in the House to make changes to the Patient Protection Act, especially in the area of cost-sharing and in some of the revenue raisers.
The final healthcare package, unlike earlier versions, does not include an employer mandate. However, any employer with more than 50 full-time employees that does not offer health insurance and has at least one full-time employee receiving a premium assistance tax credit or cost-sharing will pay a per-employee penalty. An employer with more than 50 full-time employees that offers coverage that the government deems unaffordable or fails to meet minimum standards, and has at least one full-time employee receiving a premium assistance tax credit or cost-sharing, also will pay a per-employee penalty. Small employers with less than 50 employees will not be penalized in any case. The penalty rules take effect in 2014.
Small employers that provide health insurance coverage are eligible for a new tax credit. A sliding scale tax credit is available immediately in 2010 for qualified small employers. The IRS is expected to make guidance for the new credit a priority. If your small business offers or is thinking of offering health insurance to your workers, the credit could generate significant cost savings.
Unlike employers, individuals have a mandate under the healthcare reform package. Beginning in 2014, most individuals will be responsible for maintaining health insurance coverage for themselves and their dependents. If they do not have minimum essential coverage, they will be liable for a penalty.
The healthcare package excludes many individuals from the mandatory coverage requirement. Any individual or family who currently has coverage can retain that coverage under a "grandfather" provision. Individuals with incomes below the federal filing threshold, religious objectors, individuals covered by Medicaid and Medicare and others are also exempt.
The healthcare package provides a premium assistance tax credit and cost sharing to help make coverage more affordable. The premium assistance tax credit is calculated on a sliding scale based on the individual's income in relation to the federal poverty level. Cost sharing reduces the cost of coverage for qualified individuals. The premium assistance tax credit and cost-sharing generally will be available after 2013.
One of the principal revenue raisers to fund healthcare reform is a new excise tax on high-dollar health insurance plans. The healthcare reform package imposes an excise tax of 40 percent on insurance companies or plan administrators for any health insurance plan with an annual premium in excess of $10,200 for individuals and $27,500 for families. The excise tax applies to the amount in excess of the $10,200/$27,500 levels. The thresholds are higher for individuals in high-risk occupations and individuals over age 55. The excise tax will not kick in until 2018.
Medicare additional tax and surtax
Changes to the hospital insurance (HI)(Medicare) tax also funds healthcare reform. These changes impact higher-income individuals and families.
The healthcare reform package increases the Medicare tax by 0.9 percent for individuals who receive wages in excess of $200,000 (the threshold increases to $250,000 for married couples who file a joint federal income tax return). Additionally, the new law imposes a 3.8 percent surtax (called the Unearned Income Medicare Contribution) on investment income for individuals with adjusted gross incomes above $200,000 ($250,000 for married couples filing jointly). Investment income includes income from interest and dividends.
The additional Medicare tax on wages, and the additional Medicare contribution on investment income, take effect in 2013 so taxpayers have some time to prepare.
Flexible spending arrangements
Flexible spending arrangements (FSAs) are a very popular way to save and pay for healthcare expenses. One of the most attractive features is the ability to use FSA dollars for over-the-counter medications. The healthcare reform package ends that feature after 2010.
In 2011 and subsequent years, FSA dollars can only be used to pay for prescription medications (with some limited exceptions). In 2013, the healthcare reform package limits the amount of contributions to health FSAs to $2,500 per year. The $2,500 amount will be indexed for inflation after 2013.
The healthcare reform package also:
- Increases the AGI threshold for claiming the itemized deduction for medical expenses for regular tax purposes to 10 percent after 2012 with a delayed effective date for seniors;
- Extends dependent coverage up to age 26;
- Expands Medicaid eligibility;
- Requires states to establish insurance exchanges to help individuals and small employers obtain coverage;
- Increases the additional tax on distributions from health savings accounts (HSAs) not used for qualified medical expenses;
- Eliminates the employer deduction for Medicare Part D;
- Imposes annual fees on pharmaceutical manufacturers and health insurance providers;
- Imposes an excise tax on medical device manufacturers;
- Requires more corporate information reporting;
- Imposes new requirements on non-profit hospitals;
- Accelerates some corporate estimated income taxes in 2014;
- Imposes an excise tax on indoor tanning services;
- Codifies the economic substance doctrine; and
- Modifies the biofuel credit.
In the coming months and years, the IRS and other federal agencies will issue many new rules and regulations to implement healthcare reform. We will keep you posted on developments, and, as always, please contact us if you have any questions.