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.

Medicare Tax

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.

Comment

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.

Comment

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 for inflation.

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.

Mandatory Coverage

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 these amounts.

Example

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.

Coverage Subsidies

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.

Comment

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.

Employer Responsibilities

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.

Example

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.

Comment

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 informational return.

Small Businesses

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.

Comment

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  =======================
                      AND DISCLAIMER
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.
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