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Health Care Reform

President Obama signed the Affordable Care Act into law on March 23, 2010.  The various provisions of the health care legislation and it's related amendments take effect at different times over several years.  Here is a quick update that covers some of the provisions in the health care reform law that have already gone into effect and those that, absent any changes, will go into effect in future years.

The following provisions have already taken effect:

  • A 10% tax is assessed on indoor tanning services.

  • Small businesses with fewer than 25 full-time employees may qualify for a tax credit for the cost of purchasing health insurance for their employees.

  • Children can remain on their parents’ insurance policies up to age 26.  Private lending for student loans is replaced with loans directly from the federal government, cutting loan fees.

  • A 50% discount on brand-name drugs for those with Medicare drug coverage helps to offset costs in the “donut hole.”

  • Over-the-counter medications can no longer be paid for with funds in health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement accounts (HRAs).

  • The additional tax on nonqualified distributions from health savings accounts (HSAs) increases from 10% to 20%.

The provisions that have taken effect during 2013 included the following:

  • FSA limits
    The amount that can be contributed to a health flexible spending account (FSA) is limited to $2,500 per year, indexed annually for inflation.

  • Medical expense deduction
    The 7.5% income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65.  Those 65 and older may continue to take an itemized deduction for medical expenses exceeding 7.5% of adjusted gross income through the year 2016.

  • Executive pay limit
    The compensation deduction for certain health insurance companies is limited to $500,000 per year for high-level executives.

  • Medicare tax increase
    The payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns.  The income threshold levels are not indexed for inflation.
    A new 3.8% Medicare tax will be imposed on unearned income for single taxpayers with income over $200,000 and married couples with income over $250,000.  Examples of unearned income: interest, dividends, royalties, rental income.

  • Medical device tax
    A 2.3% excise tax is imposed on the sale of certain medical devices.

  • Employer notices to employees
    By October 1, 2013, employers, regardless of their size, must deliver written notices with details about health insurance marketplaces, previously called exchanges, to all employees.  Also, effective October 1, 2013, notices must be given to all new hires within 14 days of their start date.
    The Department of Labor has created notice templates for employers who provide health benefits and employers that do not.

  • Creation of insuarance marketplaces
    Health insurance marketplaces, previously called exchanges, are established by states to enable people to comparison shop for coverage.

The provisions that have taken effect during 2014 include the following:

  • Coverage requirement
    The act requires most individuals to have health insurance coverage by January 1, 2014.  Individuals who are not covered by Medicare, Medicaid, or other government health insurance are generally required to maintain health insurance coverage or pay a penalty.  Penalties are calculated using a percentage of the taxpayer’s income or a flat dollar amount.  Subsidies and tax credits are available to help lower-income taxpayers pay for coverage.
    Individuals who need health insurance -- Starting in 2014, almost all individuals will need to be insured.  Individuals can purchase that insurance on your own or through the health insurance marketplaces, have it through their employer, or have it provided by government programs such as Medicare, Medicaid, the Children’s Health Insurance Program, TRICARE and veterans health insurance programs.
    Individuals can start shopping for insurance on a state health insurance marketplace now, the policies take effect until January 1, 2014.
    Individuals who do not purchase insurance -- With very few exceptions, individuals who do not buy health insurance will face a tax penalty.  For 2014 the fine is $95.00 for each adult, along with $47.50 per uninsured child under age 18, maxing out at $285.00 or 1 percent of household income that is above the tax return filing threshold (about $10,000 for an individual and about $20,000 for a couple), whichever is greater.  These penalties will increase over time.  In 2015 the cost is $325.00 per individual, along with $162.50 per uninsured child, topping out at $975.00 or 2 percent of their household income that is above the tax return filing threshold or, whichever is higher.  But the maximum penalty is limited to the cost of a bronze-level exchange plan.  So for 2015, the penalty for going uninsured cannot be more than $2,484 per person and $12,420 for a family of five or more.  And by 2016, an individual could pay $695.00 per adult or 2.5 percent of their income over the tax return filing threshold, whichever is higher.  After 2016 the penalty is adjusted for inflation.
    Without insurance, individuals also face a double whammy.  By 2016 you’d be paying almost $700.00 to the federal government and having nothing to show for it, and still have to pay their own medical bills if they are injured or become ill.
    Cost of health insurance -- The state health insurance marketplaces will offer four levels of policies –- platinum, gold, silver and bronze.  Bronze plans will have the lowest premiums, but cover only 60 percent of costs.  While Platinum will have the highest premiums, but cover 90 percent of costs.
    Those that earn up to 400 percent of the federal poverty level ($45,960.00 for an individual and $94,200.00 for a family of four in 2013) you’ll be eligible for a subsidy, which will come in the form of a tax credit.  Subsidies are based on the family's size and the taxpayer's earnings.  The less a taxpayer earns, the higher the subsidy, or tax credit.
    With the subsidies, more than half of Americans should be able to find health insurance for less than $100 a month, according to the U.S. Department of Health and Human Services, although some may choose to pay more.

  • Penalties on large employers
    Large employers (i.e., generally, those with 50 or more employees) must provide coverage for employees and their eligible family members or face penalties.

  • Credits to small businesses increase
    Tax credits increase from 35% to a maximum 50% of premiums paid by qualifying small businesses that provide coverage for their workers.  The credit available to nonprofit employers increases from 25% to 35%.

  • Health industry fee
    An annual fee is assessed on the health insurance industry, starting at $8 billion in 2014 and increasing over the following years.

Provisions scheduled to take effect in years after 2014 include the following:

  • Tax on “Cadillac plans” in 2018
    Insurance companies will be assessed a 40% excise tax on health insurance plans with annual premiums exceeding $10,200 for individual coverage and $27,500 for family coverage.  An increase in the threshold amount is allowed for retired persons who are age 55 or older (an additional $1,650 for single coverage and $3,450 for family coverage).  These increased thresholds also apply for plans that cover those engaged in high-risk occupations.

Certain provisions in the original health reform legislation have already been changed or repealed.  For example, the law originally required Form 1099 reporting for payments over $600 made to corporations.  That requirement has been repealed, and reporting is again generally required only for payments over $600 made to unincorporated businesses.

Congress may amend or repeal provisions in the health care reform law, either before their scheduled effective date or retroactively.  Or the law may survive largely intact.  Clearly, the massive law will affect every taxpayer.  For guidance in your individual and business tax planning under the often-complicated health reform legislation, contact our office.

Information concenring Health Care Reform is also available at HealthCare.gov.

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