Healthcare tax changes currently in place from the Patient Protection and Affordable Care Act of 2010
The massive healthcare legislation, which was upheld by the June 28th historic Supreme Court ruling, contains many tax provisions that go into effect at various times. The Supreme Court’s decision will allow them to remain in place or phase in going forward. Here is an overview of the current and upcoming tax changes, and what they might mean for you and your business.
Changes that took effect in 2012:
Employers Must Report Healthcare Costs to Employees
Requires employers to report to employees on their annual W-2 forms the value of employer-provided health insurance coverage (not including salary-reduction amounts contributed to healthcare flexible spending accounts).
The reporting requirement is informational only. It does not affect whether coverage is excludable from gross income under the tax code and does not affect the amount includable in income or the amount reported in any other box on Form W-2. It also does not cause otherwise excludable employer-provided healthcare coverage to become taxable.
“The purpose of the reporting is to provide useful and comparable consumer information to employees” on the cost of their coverage, according to the IRS.
Effective Date/Tax Code or Law Section/IRS Guide: Originally scheduled to begin in 2011, this provision was delayed until the 2012 calendar year on annual W-2 forms, which must generally be issued to employees by January 31, 2013. (IRS Notice 2012-9) IRC Section 6051(a)(14)
Effective Date/Tax Code or Law Section/IRS Guide: Policy years ending after September 30, 2012. IRC Sections 4375, 4376, and 4377
Changes taking effect in 2013:
Additional 0.9 percent Medicare Tax on Salaries and Self-Employment Income Earned by Higher Income Taxpayers
Right now, the Medicare tax on salary and/or self-employment (SE) income is 2.9 percent (1.45 percent is withheld from employee paychecks, and the other half is paid by the employer. Self-employed people pay the whole 2.9 percent).
Starting in 2013, an extra .9 percent Medicare tax will be charged on:
- Salary and/or SE income above $200,000 for an unmarried individual;
- Combined salary and/or SE income above $250,000 for a married joint-filing couple; and
- Salary and/or SE income above $125,000 for those who use married filing separate status.
These thresholds will not be adjusted for inflation. For self-employed people, the additional .9 percent Medicare tax hit will come in the form of a higher SE tax bill. However, the additional .9 percent will not qualify for the above-the-line deduction for 50 percent of SE tax. (The additional .9 percent Medicare tax must be taken into account for estimated tax purposes.)
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning after 2012. IRC Sections 164(f), 1401(b), 3101(b), 3102, and 6654
Additional 3.8 percent Medicare Tax on Net Investment Income Collected by High Income Folks and Trusts
Right now, the maximum federal tax rate on long-term capital gains and dividends is 15 percent. In 2013, the top rate is scheduled to go up to 20 percent as the “Bush tax cuts” expire. Starting in 2013, all or part of the net investment income, including long-term capital gains and dividends, collected by high-income folks can get hit with a 3.8 percent “Medicare contribution tax.” Therefore, the top federal rate on long-term gains for 2013 and beyond will be 23.8 percent (unless Congress acts to extend the 15 percent rate). For dividends, it will be 43.4 percent (unless Congress acts to extend the 15 percent rate).
The additional 3.8 percent Medicare tax won’t apply unless modified adjusted gross income (MAGI) exceeds: $200,000 for an unmarried individual; $250,000 for married joint-filers; or $125,000 for married filing separately. These thresholds won’t be adjusted for inflation.
The additional 3.8 percent Medicare tax will apply to the lesser of: net investment income or the amount of MAGI in excess of the applicable threshold.
Net investment income includes interest, dividends, royalties, annuities, rents, gross income from passive business activities, gross income from trading in financial instruments or commodities, and net gain from property held for investment (but not for business purposes) reduced by deductions allocable to such income.
The additional Medicare tax must be taken into account for estimated tax payment purposes.
For a trust, the extra 3.8 percent Medicare tax will apply to the lesser of: undistributed net investment income or the AGI in excess of the threshold for the top trust federal tax bracket.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning after 2012. IRC Sections 1411 and 6654
New $2,500 Cap on Healthcare FSA Contributions
Right now, there’s no tax-law limit on salary-reduction contributions to an employer healthcare FSA (although many plans impose their own annual limits). Starting in 2013, the maximum annual FSA contribution by an employee will be capped at $2,500. After that, the cap will be indexed for inflation.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning after 2012. (IRS Notice 2012-40) IRC Section 125(i)
Higher Threshold for Itemized Medical Expense Deductions
You can now claim an itemized deduction for medical expenses paid for you, your spouse, and dependents, to the extent the expenses exceed 7.5 percent of AGI. Starting in 2013, the hurdle is raised to 10 percent of AGI. But if you or your spouse is age 65 or older at year end, the new 10 percent-of-AGI threshold will not take effect until 2017. The medical deduction threshold for AMT purposes remains at 10 percent of AGI.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years after 2012 (2016 if taxpayer or spouse is 65 or older at year end). IRC Section 213(a) and (f)
No More Deductions for Retiree Drug Plan Subsidies
Employers that sponsor qualified retiree prescription drug plans are entitled to collect tax-free federal subsidies for a portion of the cost. Employers are currently allowed to deduct the full cost of retiree drug plans without any reduction for the tax-free federal subsidies. In effect, deductions are allowed for amounts that are actually paid by the government. The healthcare law reduces deductions by the amount of tax-free federal subsidies.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning after 2012. IRC Section 139A
New Excise Tax on Medical Device Manufacturers
Manufacturers have to pay a 2.3 percent excise tax on taxable sales of medical devices for humans. However, devices retailed to the general public will be exempt. The tax will not apply to eyeglasses, contact lenses, hearing aids, etc.
Effective Date/Tax Code or Law Section/IRS Guide: Sales after 2012. IRC Section 4191
New Deductible Compensation Limit for Health Insurers
Affected health insurance providers face a $500,000 per-person deduction limit on compensation paid to “applicable individuals,” which can include officers, employees, directors, and certain other service providers such as consultants.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning after 2012. IRC Section 162(m)(6)(A)
Changes taking effect in 2014:
New Penalties on Individuals without “Adequate” Coverage
In general, U.S. citizens and legal residents will be required to pay penalties if they don’t obtain “adequate” health insurance coverage.
The tentative penalty will equal the greater of: the applicable percentage of household income above the threshold that requires filing a federal income tax return; or the applicable dollar amount times the number of uninsured individuals in the household. The applicable income percentage is 1 percent for 2014, 2 percent for 2015, and 2.5 percent for 2016 and beyond.
The applicable dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016. After that, the $695 amount will be adjusted for inflation. For under-age-18 household members, the applicable dollar amounts will be 50 percent of the aforementioned amounts.
The final penalty amount for each household will be limited to 300 percent of the applicable dollar amount. For example, the maximum 2016 penalty will be $2,085 (3 times $695). However, if the national average cost of “bronze coverage” (a new term of art) for the household is less, the maximum penalty will be limited to the cost of bronze coverage.
If an affected individual is uninsured for only part of the year, the penalty will be calculated monthly using pro-rated annual figures.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning in 2014. IRC Section 5000A
New Penalties on Employers
Employers with at least 50 full-time employees that do not provide them with affordable health coverage that meets certain minimum standards will be charged a penalty if even one full-time employee purchases his own government-subsidized coverage through a state-run exchange.
Government-subsidized coverage means coverage for which a federal cost-sharing subsidy (explained below) is available.
The penalty will be $167 per month ($2,000 per year) for each employee who is not provided with “adequate” coverage for that month (even if a particular employee purchases subsidized coverage from a state-run exchange). However, no penalty is charged for the first 30 employees.
An employer can still owe penalties even when employees are offered the opportunity to enroll in a plan that provides minimum essential coverage, but one or more employees choose to instead buy subsidized coverage through a state-run exchange. In this case, the penalty is $250 per month for each applicable employee, but the total penalty cannot exceed the penalty that would be charged for outright failure to offer “adequate” coverage
Employers cannot deduct these penalties as a business expense.
Effective Date/Tax Code or Law Section/IRS Guide: Coverage months beginning in 2014. IRC Section 4980H
New ”Cost-Sharing Subsidies” for Eligible Individuals
Government paid “cost-sharing subsidies” will be provided to help individuals ineligible for Medicaid, employer-provided coverage, or other “adequate” coverage. This has been explained as a low-income benefit, but you can be eligible with income up to 400 percent of the federal poverty level.
The cost-sharing subsidy is sometimes called a “premium assistance tax credit,” because the enabling language is found in the tax code. In most cases, however, the subsidy will be paid directly to the insurer. If that doesn’t happen, the subsidy amount can be claimed as a refundable tax credit on the eligible individual’s federal tax return.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning in 2014. IRC Section 36B
More Generous Health Insurance Tax Credit for Small Employers
As explained in the 2010 changes, qualifying small employers can claim a new tax credit to help cover the cost of providing employee health coverage. For 2010-2013, the maximum credit percentage is 35 or 25 percent for tax-exempt employers. Starting in 2014, the maximum credit percentage increases to 50 or 35 percent for tax-exempt employers. However, employers must purchase qualifying health coverage from state-run insurance exchanges to be eligible for the higher credit percentages. Also, the FTE wage caps for credit qualification and calculation purchases are indexed for inflation, starting in 2014.
Effective Date/Tax Code or Law Section/IRS Guide: Tax years beginning in 2014. IRC Section 45R and Section 1421 of the healthcare legislation.
New Excise Tax on Health Insurance Providers
A new fee is imposed on health insurance providers. Each targeted company must pay an allocable portion of the total annual fee, which is $8 billion for 2014. The fee is apportioned among targeted companies based on each company’s share of applicable net premiums.
Effective Date/Tax Code or Law Section/IRS Guide: Calendar year 2014. Section 9010 of the Patient Protection Act.
Changes taking effect in 2018:
New Excise Tax on “Cadillac Health Plans”
Health insurance companies that service the group market and administrators of employer-sponsored health plans will get socked with a 40 percent excise tax on premiums that exceed the applicable threshold of $10,200 for self-only coverage or $27,500 for family coverage. For retired individuals and plans that cover employees in high-risk professions, the thresholds will be $11,850 and $30,950, respectively. These thresholds may be increased to reflect higher-than-expected inflation in health premiums. Plans sold in the individual market will be exempt, except for coverage that is eligible for the above-the-line deduction for self-employed health premiums.
Effective Date/Tax Code or Law Section/IRS Guide
For questions or more information contacted a trusted advisor at Saville, Dodgen & Company.