 The 2010 Health Care Act and the 2010 Reconciliation Act March 30, 2010 — President Obama signed the second part of the new Health care legislation, The 2010 Reconciliation Act into law after signing The 2010 Health Care Act into law on March 23, 2010. As we are sure you have already heard, the law makes sweeping changes in the way that Americans pay for and receive health care. While the law will have the most dramatic effects on the health care and insurance industries, individuals and business alike will feel the effects of the new law in some form or another. Since most of the provisions below will not be effective for several years, this will give the IRS and congress time to examine how the new laws will affect certain businesses and individuals. We expect many refinements and clarifications between now and when many of the main provisions of the new law ultimately go into effect. In the meantime, included below is our summary of the main provisions of the law affecting our readers including the scheduled dates on which these new provisions will go into effect.
For tax years beginning after December 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011. The adoption assistance exclusion is also increased by $1,000.
The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for non-elective contributions to purchase health insurance for their employees. The credit can offset an employer's regular tax or its alternative minimum tax (AMT) liability. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. The full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer's non-elective contributions toward the employees' health insurance premiums. The credit phases out as firm-size and average wages increase. The employer’s tax deduction for the insurance premiums paid for its employees must be reduced dollar for dollar by the amount of the credit generated. Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit, and so will not benefit from this provision.
Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer's non-elective contributions toward the employees' health insurance premiums.
Effective on the enactment date, the new law extends 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. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.
The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA).
The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.
Higher Medicare payroll tax on wages. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). The Medicare tax is levied on all of a worker's wages without limit. Beginning in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. 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. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years. Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000. Net investment income includes 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) less allocable deductions to those income items. The new tax will not apply to income in tax-deferred retirement accounts such as 401(k) plans or to distributions from certain retirement plans.
Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.
An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will be capped at $2,500 per year, and indexed for inflation after 2013.
The new law contains an “individual mandate”— a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty based on a flat amount or a percentage of household income. The penalty will be phased in from 2014 through 2016. Exemptions will be granted for financial hardship, religious objections, and other various conditions.
The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. The credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The premium assistance credit is refundable and payable in advance directly to the insurer. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income 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 to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.
For businesses with at least 50 employees, penalties can be assessed whether or not the employer offers health insurance to its employees. If the business does not offer coverage and it has at least one full-time employee that receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who does not offer health insurance will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). Employers with fewer than 50 employees aren't subject to this “pay or play” penalty.
The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). Helpful Links from the Committee of Ways and Means Ways and Means 3-page summary of the final health insurance reform legislation: http://waysandmeans.house.gov/Media/pdf/111/HCare/2010_SUMMARY.pdf Detailed timeline of when major provisions in the health care package will take place: http://waysandmeans.house.gov/Media/pdf/111/HCare/TIMELINE.pdf |
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If you have any questions about the The 2010 Health Care Act and The 2010 Reconciliation Act, please contact your RBZ representative or other appropriate advisor. We would be glad to answer any questions you may have. RBZ, LLP is one of the largest public accounting and strategic consulting firms in Los Angeles and has been providing tax services for over 35 years. We are located at 11755 Wilshire Blvd., Ninth Floor, Los Angeles, CA 90025. Phone: 310.478.4148 | Fax: 310.312.0358 | Web site: www.rbz.com |