The Tax Fallout From The Healthcare Reform Law
The health care reform law—the Patient Protection and Affordable Care Act of 2010—is intended to ensure health insurance coverage for everyone through employer-sponsored plans or state-operated exchanges. To pay for expanding coverage, the law will depend on new taxes for employers and some high-income taxpayers. Here are some of the tax implications.
Employer responsibilities.The legislation doesn’t require employers to provide health insurance. But companies with 50 or more employees will generally be subject to “play or pay rules” after 2013. Employers who fail to offer minimum essential coverage to full-time employees will be assessed a non-deductible tax penalty. There will be a $2,000 annual charge, payable monthly, for each full-time employee, but a company’s first 30 workers aren’t included.
Individual responsibilities.Individuals don’t get off scot-free, either. Beginning in 2014, a person ineligible for Medicare, Medicaid, or other government coverage will be assessed a non-deductible tax penalty for failing to obtain minimum essential coverage. The penalty is equal to the greater of: a flat dollar amount (rising to $695 over a three-year period) or a percentage of household income (rising to 2.5% during the same period). The maximum family penalty will be $2,085.
Small business credits.A small business—defined as having no more than 25 employees with annual average wages of less than $50,000—may be able to offset health insurance costs with a special tax credit. For 2010 through 2013, the maximum credit will be 35% of employer contributions. Then the credit increases to 50% of contributions for a two-year period. And employers with 10 or fewer employees who earn an average of less than $25,000 could get a 100% credit.
Additional Medicare taxes.The biggest tax whammy hits high-earners in 2013. Now, employees pay the 1.45% Medicare portion of the Social Security tax on wages and other earned income. (Self-employed people pay 2.9%.) But the health care law adds two new Medicare taxes:
1. Joint filers must pay an extra 0.9% Medicare tax on earned income exceeding $250,000 ($200,000 for single filers).
2. Joint filers must pay a 3.8% Medicare tax on the lesser of net investment income or unearned income above $250,000 ($200,000 for single filers). In other words, there will be a “payroll tax” on investment earnings. For this purpose, “net investment income” includes interest, dividends, royalties, rents, gains from dispositions of property, and passive activity income. But distributions from qualified retirement plans and IRAs are exempt.
Medical expense deductions.It’s already difficult to qualify for medical deductions on your personal tax return. But it will become even harder after 2012. Currently, you may deduct unreimbursed expenses only to the extent that the annual total exceeds 7.5% of your adjusted gross income. Starting in 2013, this threshold will be increased to 10% of AGI. But there will be no change in the current 10% threshold for those subject to the alternative minimum tax.
Flexible spending accounts.You can contribute pre-tax dollars to a flexible spending account (FSA). There’s no tax on withdrawals used to pay for qualified medical expenses. But under the new law, there will be an annual limit on how much you can put into a health care FSA. The initial ceiling will be $2,500, indexed for inflation in future years.
High-cost insurance plans.Beginning in 2018, insurers generally will have to pay a 40% excise tax if the annual premiums for a health insurance plan exceed $10,200 for individual coverage or $27,500 for family coverage. Employers will be required to disclose the value of company-provided benefits to employees on their annual W-2 forms. Although the tax burden for these “Cadillac plans” falls on insurance companies, tax costs may be passed on to consumers.
The health care law also imposes additional tax reporting requirement. Beginning in 2011, an employermust report the value of employer-provided health insurance coverage on each employee’s W-2 form. After 2013, companies will also have to file an additional report of the value of an employee’s health insurance to the federal government.
Finally, beginning in 2012, companies that pay $600 or more to corporate or non-corporate recipients will have to issue them a Form 1099-MISC listing the total payment amount.
This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.