TAX CHANGES AFFECTING BUSINESSES
Employers required to offer insurance. Beginning in 2014, a “large employer” (an employer with an average of at least 50 full-time employees) that does not offer health insurance coverage for all its full-time employees, offers coverage that is unaffordable, or offers 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%, is required 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 premium tax credit or cost-sharing reduction is allowed or paid to the employee. There is no penalty if the employer doesn’t have any full-time employees who purchased health insurance through a state exchange and who received a “subsidy.”
The penalty for not offering insurance to all full-time employees during any month is equal to the number of full-time employees over 30 full-time employees for that month multiplied by one-twelfth of $2,000. The penalty for offering insurance to all full-time employees but still having at least one employee receiving a subsidy is equal to the number of employees receiving a premium tax credit or cost-sharing reduction for health insurance purchased through a state exchange multiplied by one-twelfth of $3,000. This penalty is capped at the amount that would be due under the penalty for not offering insurance to all full-time employees. These penalties are assessed monthly.
Also, beginning in 2014, employers offering “minimum essential coverage” who pay a portion of the health insurance premium will have to provide a voucher to enable a “qualified employee” to purchase insurance though the state exchange instead of purchasing insurance through the employer’s plan. The voucher would be equal to the amount of what the employer would have paid for such employee under the employer’s plan.
Tax credits. Employers with less than 25 full-time employees have a potential tax credit if they offer health insurance to their employees and pay for at least 50% of the total premium cost. To qualify for this credit, the employees must have wages that average $50,000 per year or less. For 2010 through 2013, the credit is available for an employer purchasing insurance from an insurance company. After 2013, the employer must purchase insurance through a state exchange, and the credit is only available for 2 years (not counting 2010 through 2013).
Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Further, to be counted as an employee of the employer, an employee must be working in the trade or business of the employer.
Tax on “high-cost” health plans. Beginning in 2018, insurance companies will be required to pay a 40% excise tax on employer-sponsored health coverage where the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. The tax applies to self-insured plans as well. Stand-alone dental and vision plans will not be counted for purposes of the tax. Adjustments to the premiums counted for the tax are allowed for employers with age and gender demographics that result in higher premiums. Employers are required to calculate the coverage they have which is subject to the limit and to provide statements to their insurers showing the amounts subject to the tax.
Bottom line, you should expect higher premiums.
TAX CHANGES AFFECTING INDIVIDUALS
Individual insurance requirement. The health care bill recently signed into law requires U.S. citizens and legal residents to have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in over 2014, 2015 and 2016. After 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions from this requirement include ones for financial hardship, people without coverage for less than three months, and people living outside of the U.S.
Higher Medicare taxes. “High-income” taxpayers will be subject to a tax increase on compensation and a new tax on investment income. Currently, wages are subject to a 2.9% Medicare payroll tax. Beginning in 2013, single people earning more than $200,000 per year and married couples earning more than $250,000 per year will pay an additional 0.9% tax on their wages in excess of those base amounts. Employers will be responsible for collecting the extra tax.
Also beginning in 2013, a Medicare tax will be applied to investment income. A new 3.8% tax will be imposed on net investment income of single people with adjusted gross income (AGI) above $200,000 and married couples filing jointly with AGI over $250,000. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). The new tax won’t apply to retirement accounts such as 401(k) plans.
Floor on medical expenses deduction raised. Currently, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes to the extent that those expenses exceed 7.5% of the taxpayer’s AGI. Beginning in 2013, the floor will be raised from 7.5% of AGI to 10%. The AGI floor for individuals 65 years of age and older (and their spouses) will remain unchanged at 7.5% through 2016.
Limit on reimbursement of over-the-counter medications from HRAs, HSAs, FSAs, and MSAs. Beginning in 2011, costs for over-the-counter drugs not prescribed by a doctor will not be reimbursable from a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and are not reimbursable “tax-free” from a health savings account (HSA) or Archer Medical Savings Account (MSA).
Increased penalties on nonqualified distributions. Beginning in 2011, distributions from an HSA or an Archer MSA that are not used for qualified medical expenses will be subject to a penalty of 20% of the distribution.
Health flexible spending arrangements (FSAs). Currently, there is no cap on the amounts you can contribute to an FSA through your employer’s “cafeteria plan.” After 2013, contributions to an FSA will be limited to $2,500 per year.
Excise tax on indoor tanning services. Beginning July 1, 2010, there will be a new 10% excise tax on indoor tanning services. Just think of it as a higher sales tax.
Content contributed by Wishart, Norris, Henninger & Pittman, P.A., which partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Robert Norris at 704-364-0010 or visit www.wnhplaw.com.