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Landmark Health Care Reform Act Passed

Contributor: Robert Spielman, Partner, Tax & Business

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On March 21, 2010, the House passed the massive health reform package known as the Patient Protection and Affordable Care Act. The President signed the bill on March 23. A second "corrections" bill was passed last week which will modify some provisions of the first bill and include some additional revenue raisers.

The bill will completely change the nation’s health care system and is expected to cost over $900 billion. The combined bills provide for over $400 billion in revenue raisers and new taxes on employers and individuals and will impact all segments of the health care industry. The remainder of the cost will be paid by cuts to Medicare.

Most of the key provisions are generally effective in 2014. A number of provisions have earlier effective dates. Some highlights of the bills include the following:

Penalty for remaining uninsured. Effective for tax years beginning after Dec. 31, 2013, non-exempt U.S. citizens and legal residents would have to maintain minimum essential coverage or pay a penalty. After a phase-in period, by 2016 those failing to maintain minimum essential coverage would be subject to a penalty equal to the greater of:

  1. 2.5% of household income over a threshold amount or
  2. $695 per uninsured adult in the household
Certain individuals would be exempt from the penalty including individuals who cannot afford coverage, those who are exempted for religious reasons, and those residing outside of the U.S. The penalty will be phased in and increased annually for cost of living allowances.

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Low-income tax credits for participating in health exchanges. For tax years ending after 2013, tax credits for the purchase of health insurance would be available for individuals and families with incomes up to 400% of the federal poverty level ($43,420 for an individual or $88,200 for a family of four) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. This is known as the "premium assistance credit" and is a key provision of the legislation.

Under the provision, an eligible individual enrolls in a plan offered through an exchange and reports his or her income to the exchange. The health insurance is purchased through the exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through the exchange. Based on the information provided to the exchange, the individual receives a premium assistance credit based on income and the IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays the plan the dollar difference.

Employer responsibilities. Effective for months beginning after Dec. 31, 2013 an “applicable large employer” (generally, one that employed an average of at least 50 full-time employees during the preceding calendar year) not offering coverage for all its full-time employees, offering minimum essential coverage that is unaffordable, or offering minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%, would have to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. The penalty for any month would be an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.

"Free choice vouchers." After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage would have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange.

Tax credits for small employers offering health coverage. Effective for tax years beginning after 2009, a qualified small employer would be given a tax credit for nonelective contributions to purchase health insurance for its employees. A qualified small business employer for this purpose generally would be an employer with no more than 25 full-time equivalent employees (FTEs) employed during the employer's tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. For tax years beginning in 2010 through 2013, the credit would be 35% for small employers with fewer than 25 employees and average annual wages of less than $50,000 who offer health insurance coverage to their employees. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution. The credit will be able to offset an employer’s regular tax or the AMT.

Dependent coverage in employer health plans. Effective on the enactment date, the new law would extend the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year.

Health-Related Revenue Raisers

Excise tax on high-cost employer-sponsored health coverage. For tax years beginning after Dec. 31, 2017, the bill would place a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. (Plans sold in the individual market, other than coverage eligible for the self employed individual, are excluded from this rule.)

New employer reporting responsibilities. For tax years beginning after Dec. 31, 2010, employers would have to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual Form W-2.

Additional Hospital Insurance Tax (HI) for high wage workers. For tax years beginning after Dec. 31, 2012, the HI tax rate would be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly); these figures are not indexed. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies wouldn't be responsible for determining whether a worker's combined income with his or her spouse made them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold, which includes the 2.9% regular Medicare payroll taxes and the .9% addition.

Surtax on unearned income. For tax years beginning after Dec. 31, 2012, a 3.8% surtax, called the Unearned Income Medicare Contribution, would be placed on net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return. Net investment income, which includes interest, dividends, royalties, rents, passive activity income, and capital gains, is reduced by properly allocable deductions to determine such income.

New limit on health FSA contributions. The amount of contributions to health flexible spending accounts (FSAs) would be limited to $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount would be inflation indexed after 2013.

Restricted definition of medical expenses for employer provided coverage. The new law excludes the cost of over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs). For purposes of employer provided health coverage, the definition of medicine costs deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses. These changes would be effective for tax years beginning after Dec. 31, 2010.

Increased tax on non qualifying HSA or Archer MSA distributions. The additional tax for HSA withdrawals before age 65 that are used for purposes other than qualified medical expenses would be increased from 10% to 20%. The additional tax for Archer MSA withdrawals that are used for purposes other than qualified medical expenses would be increased from 15% to 20%. Both changes are effective for distributions made after Dec. 31, 2010.

Modified threshold for claiming medical expense deductions. For tax years beginning after Dec. 31, 2012, the adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses would be increased from 7.5% to 10%. However, the 7.5%-of-AGI threshold would continue to apply through 2016 to individuals age 65 and older (and their spouses).

Deduction for employer Part D would be eliminated. The deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees would be eliminated, for tax years beginning after Dec. 31, 2012.

Industry-specific revenue raisers. The following revenue raising changes would be imposed on health related industries:

  • A new deduction limit on executive compensation would apply to insurance providers. An annual $500,000 per tax year compensation deduction limit would apply for all officers, employees, directors, and other workers or service providers performing services for or on behalf of a covered health insurance provider. The limit would apply for tax years beginning after 2012, with respect to services performed after 2009.
  • Pharmaceutical manufacturers and importers would have to pay an annual flat fee beginning in 2011. The fee will be levied according to market share.
  • Manufacturers or importers of medical devices would have to pay 2.3% of the sale price imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device. (Certain items are exempt from this tax and it is effective for taxable sales after December 31, 2012.)
  • Health insurance providers would face an annual flat fee indexed for medical inflation for later years. The fee would not apply to companies whose net premiums written are $25 million or less.
  • The indoor tanning industry would be hit with a 10% excise tax on indoor tanning services effective for services provided on or after July 1, 2010. The tax is imposed on the individual receiving the services and remitted by the person receiving payment.
  • Non-profit Blue Cross Blue Shield organizations would have to maintain a medical loss ratio of 85% or higher in order to take advantage of the special tax benefits provided.

Non-Health Related Revenue Raisers

Corporate information reporting. Businesses that pay any amount greater than $600 during the year to corporate providers of property and services would have to file an information report with each provider and with IRS effective for payments made after Dec. 31, 2011.

Codification of economic substance doctrine and imposition of penalties. The economic substance doctrine allows the courts to deny tax benefits when a transaction lacks economic substance. The manner in which the economic substance doctrine should be applied by the courts would be clarified and a penalty would be imposed on understatements. This rule will affect tax planning strategies in which tax reduction had been a principal reason for the deal structure. Violations to the codification are subject to stiff penalties of up to 40%.

Elimination of credit for "black liquor." After December 31, 2009, the $1.01 per gallon tax credit applicable for the production of biofuel would be limited to processed fuels (i.e., fuels that could be used in a car engine or in a home heating application).

Estimated taxes for large corporations. The required corporate estimated tax payments for corporations with assets of at least $1 million would be increased by 15.75 percentage points for payments due in July, August, and September of 2014.

Other Tax Changes

Simple cafeteria plans for small businesses. For tax years beginning after 2010, a new employee benefit cafeteria plan to be known as a Simple Cafeteria Plan would be established. Small businesses may now provide tax-free benefits to their employees. The Plan would also include self-employed individuals as qualified employees.

Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit would be increased by $1,000 to $13,170, made refundable, and extended through 2011. The adoption assistance exclusion also would be increased by $1,000.

New credit for new therapies. Effective for expenses paid or incurred in 2009 and 2010, a temporary credit has been created to encourage investments in new therapies to prevent, diagnose, and treat acute and chronic diseases. The credit will be equal to 50% of eligible investments and is available to small business taxpayers who do not employ more than 250 employees. This credit may be more lucrative than the Research and Development (R&D) credit because it will include the costs of assets acquired for such projects.

New exclusion for certain health professionals. Payments made under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas would be excluded from gross income, effective for tax years beginning after Dec. 31, 2008. (A separate provision would exclude from gross income the value of specified Indian tribal health benefits, effective for benefits and coverage provided after the enactment date.)

 
Contributor
Robert Spielman

Partner
Tax & Business
Melville, NY
 
 
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