last update 5-01-2010
Impact of 2010 Health Care Reform
Health Care Reform Legislation Approved
After nearly a year of hearings, heated debate, town hall meetings, polls, and votes, Congress
has passed comprehensive health care reform legislation. The Patient Protection and Affordable
Care Act is designed to effectuate fundamental reforms to the United States health
care system. The legislation is expected to produce over $400
billion from revenue raising provisions and new taxes on employers and individuals to be used to
fund a major upgrade to the American health care system.
To provide funding for the new health care provisions, the Patient Protection Act increases the
Medicare hospital insurance (HI) tax for higher-income taxpayers by an additional 0.9 percent
from 1.45 percent to 2.35 percent on earned income in excess of $200,000 for individuals and
$250,000 for families. The additional tax applies to taxpayers (other than corporations, estates,
and trusts) who receive wages or self-employment income after 2012.
In addition, the 2010 Reconciliation would impose a Medicare (HI) tax on the lesser of an
individual's net investment income or any excess of modified adjusted gross income (MAGI) for
the tax year above $200,000 and joint filers with AGI above $250,000. The 3.8 percent Medicare
contribution takes effect in 2013.
For this purpose, net investment income includes interest, dividends, royalties, rents, gain from
disposing of property, and income earned from a trade or business that is a passive activity (less
any allocable deductions). Self-employed individuals, along with estates and trusts, will also be
liable for the additional tax.
Neither of the $200,000 and $250,000 threshold amounts, nor the additional 0.9 percent
Medicare tax on earned income, nor the 3.8 percent tax on net investment income, are indexed
Distributions from qualified retirement plans, including pensions and certain retirement accounts,
will be exempt from the additional tax. For example, income from individual retirement accounts
(IRAs), 401(a) money purchase plans, 403(b) plans, and 457(b) plans will be exempt.
Under the health care legislation, individuals who are not otherwise eligible for Medicaid or
Medicare will be required to maintain minimum
essential coverage beginning after 2013. Individuals who do not maintain minimum essential
coverage will be liable for a penalty. A formula is used to calculate the penalty, taking into
account the taxpayer's household income and a flat dollar amount.
The legislation imposes a nondeductible flat dollar-amount penalty per person on individuals
without minimum essential coverage in these amounts: a penalty of $95 in 2014, $325 in 2015,
and $695 in 2016. The penalty amount is indexed for inflation thereafter. In addition, there is a
penalty based on percentage of income, 1.0 percent in 2014, 2.0 percent in 2015, and 2.5 percent
in 2016 and later years. The individual without minimum coverage is liable for the greater of
Morton, a 34-year old single, lacks minimum essential coverage in 2016 and is not exempt from
having minimum essential coverage. Morton would be liable for a penalty, the amount of which
is the greater of $695 or 2.5 percent of his modified adjusted gross income.
For individuals under age 18, or attending college, the flat-dollar penalty will be one-half of these
amounts. The flat-dollar penalty on any taxpayer for any tax year with respect to all persons for
whom the taxpayer is liable (that is, family members, generally) cannot exceed 300 percent of the
applicable dollar amount for the year.
The legislation includes a religious conscience exception, excludes undocumented individuals in
the U.S. from coverage, and provides special rules that apply to qualified members of Native
American tribes, certain hardship cases, children under age 18, and individuals who are
incarcerated. The health care package also provides for cost sharing for lower-income individuals
enrolled in qualified health insurance plans and the advance payment of cost-sharing reductions
for eligible individuals.
The health care legislation provides premium assistance tax credits and reduced cost sharing to
qualified individuals, on a sliding scale, in order to purchase minimum health care coverage. The
tax credit is designed to guarantee that qualified individuals will not spend more than a specific
percentage of their income on medical insurance premiums. Generally, these are individuals who
cannot afford minimum essential coverage based on the relationship of their income to the
federal poverty level. The health care package allows for the advanced payment of premium
assistance tax credits.
In coordination with this subsidy credit, which starts at 133 percent of the federal poverty level
(FPL), the health-care package also expands Medicaid to cover those with income less than 133
percent of FPL. The federal poverty level is determined based on family size. For example, the
subsidy range for a family of four, starting above the 133 percent level, would extend from
$29,327 to $88,000 under current levels. For single individuals, the subsidy range would extend
from $14,000 to $43,000.
The IRS will be responsible for determining eligibility for the premium assistance tax credit.
Also, these credits will be disregarded for purposes of determining eligibility for federal or
federally assisted programs.
Although employers will not be required to provide health insurance to their employees,
employers who do not provide minimum essential coverage will be liable for a nondeductible
penalty tax beginning in 2013. Employers (primarily large and mid-size employers, for these
purposes) that fail to offer minimum essential coverage during any month for which a full-time
employee has enrolled in a subsidized plan using the premium assistance tax credit or cost-
sharing reductions will also be liable for an additional penalty tax.
That penalty tax will equal the product of the applicable payment amount (with respect to any
month, 1/12 of $2,000) and the number of full-time employees employed by the employer during
such month. This penalty will apply to employers with 50 or more employees, although the first
30 employees would be subtracted from the payment calculation.
Zorn Enterprises has 51 full-time employees and does not offer its employees minimum essential
coverage. Zorn Enterprises will pay an amount equal to 51 minus 30 (or 21) times the applicable
per employee payment amount (up to $2,000 per full-time employee).
An employer who offers minimum essential coverage to its employees consisting of coverage
through an eligible employer-sponsored plan and pays any portion of the plan's costs is required
to provide free choice vouchers to its qualified employees. The free choice voucher amount is
generally equal to the monthly portion of the cost of the eligible employer-sponsored plan that
would have been paid by the employer if the employee were covered under the plan.
Employers will be required to disclose the total cost of employer-sponsored health insurance
coverage provided to their employee annually on the employee's Form W-2. Contributions to any
Archer medical savings account (MSA) or health savings account (HSA) of the employee or the
employee's spouse or salary reduction contributions to a flexible spending arrangement under a
cafeteria plan will not be included. This employer disclosure requirement begins with the Form
W-2 for the 2011 tax year.
Beginning in 2014, applicable employers will be required to report whether they offer full time
employees and their dependents the opportunity to enroll in minimum essential coverage under
an eligible employer sponsored plan and provide details regarding the coverage offered.
Applicable employers must also report the number of full-time employees for each month during
the year, and their names, addresses and taxpayer identification numbers. A person required to
file a return under the new provision is also required to furnish a written statement to the
individual with respect to whom information is reported, detailing the contents of the
The health care legislation provides a temporary tax credit beginning in 2010 to small employers
to help offset the cost of employer-provided coverage. Generally, a small employer is one with
fewer than 25 employees and average annual wages of less than $50,000 (average wages).
The credit is on a sliding scale and in 2010 through 2013, eligible employers may qualify for a
tax credit for up to 35 percent of their contribution toward the employee's health insurance
premium. In 2014 and beyond, eligible employers who purchase coverage through a state
exchange may qualify for a credit for two years of up to 50 percent of their contribution.
Qualified tax-exempt employers will be eligible for a reduced credit. Salary reduction
contributions are not counted. Employers with 10 or fewer employees and average annual wages
of less than $20,000 would be eligible for the full credit.
A number of changes will occur to health benefits provided by an employer through a cafeteria
plan. Most importantly, health flexible spending arrangements (FSAs) offered as a part of a
cafeteria plan must limit contributions through salary reductions to $2,500 beginning in 2011.
======================== WARNING =======================
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed. Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a
attorney to discuss the specific facts of your case
and the law of your state.
If you live in Louisiana and want to talk about your situation, please
call me at the number below. Fees will be charged after initial consultation.
Marvin E. Owen
3036 Brakley Drive
Baton Rouge, La 70816
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