April 30, 2010 Healthcare Bill’s Tax Effect The debate over the future of the US health insurance and healthcare industry ended last month with the passage of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Despite lively debate and opinions from all sides, businesses and individuals will now have to begin to understand how this $1 trillion plus/2400 page bill will affect their industry, their healthcare and their personal and business tax obligations. We will address the latter. Congress staged these provisions over the next several years. These stages will front-load the increase in tax collections and spread the mandates and other fiscal impacts in order to give time for the federal and state government, health insurers and healthcare providers to adapt their current practices to conform to the Healthcare Bill’s mandates. 2010 Despite widespread belief that healthcare coverage is now mandatory, mandatory health insurance coverage does not take effect until 2014. $250 rebate to Medicare beneficiaries who are in the “donut hole”. Coverage for young persons until age 26 through their parents’ health insurance begins. As companies renew their existing health insurance policies, new policies must cover children with preexisting conditions. New policies cannot kick employees out of the plan if they become sick. The policies must cover preventive checkups without requiring employee co-pays. Lifetime limits on medical costs are no longer allowed. Businesses must provide the same coverage for all employees and cannot offer richer benefits to the executives or equity owners without doing the same for employees. The ceiling on adoption credit goes to $13,170 from $12,170. Thereafter, it is indexed for inflation. Employers of less than twenty-six employees and average annual wages for each employee of $50,000 or less may be eligible for a partial credit for the cost of health insurance provided to employees. These health insurance credits can offset an employer’s regular or AMT liability on its 2010 tax return. Tanning salons will be subject to a 10% tax effective July 1, 2010. Spray on tanning services are not subject to the tax. Any financial transaction (not just healthcare) that does not meet the new “Economic Substance” test will be subject to a 20-40% penalty if there was not adequate disclosure. An additional 16,000 IRS Agents will be hired to enforce the law. 2011 The 28% reimbursement of over the counter medications from Medical Savings Accounts, Health Savings Accounts, and Flexible Spending Accounts is eliminated. Employer must report the cost of applicable employer sponsored health coverage on Form W-2 for information purposes only. Taxpayers participating in Health Savings Accounts and Medical Savings Accounts must pay a 20% (up from 10-15%) tax on amounts not used for qualified health expenses. Small businesses will be able to offer a tax-free SIMPLE employee benefit Cafeteria Plan for employees. Brand name drug manufacturers and importers will pay an additional $2,500,000,000 in annual taxes. Small employers can offer long-term care plans with automatic enrollment and payroll deductions unless the employees opt out. 2012 Businesses that pay any amounts greater than $600 during the year to Corporate providers of any property and services will have to file an information report (1099) with each provider and the IRS. Current law requires only non-corporate providers to be subject to the information reporting. 2013 Schedule A deductible floor on medical expense deductions increases from 7.5% to 10% of AGI. Taxpayers over the age of 65 will keep the 7.5% limit until 2016. “Medical Devices”, including X-ray machines, MRIs, heart defibrillators and various other equipments and supplies are subject to a 2.3% excise tax. Annual Flexible Spending Account amount is limited to $2,500 per year. Elimination of subsidy for employers that maintain prescription drug coverage for retirees who are eligible for Medicare Part D. New additional Medicare tax on wages equal to .9% on wages exceeding $250,000 on joint returns, $125,000 on married filing separate returns or $200,000 on single or head of household returns. The tax is on the employee only, but employers will be required to withhold it. New added Medicare tax of 3.8% on the lesser of net investment income or the excess of the taxpayers’ modified AGI over the thresholds of the previous paragraph. 2014 Employer and individual mandate to buy health insurance begins. Both self-employed and W-2 employees must purchase individual policies if their employer does not provide coverage. For low-income individuals, a premium assistance credit is available. Businesses with 50 or more employees must provide health coverage or pay a $2,000 penalty per employee (over a 30 employee threshold). Penalties for noncompliance with the individual mandate range from the greater of i) $ 95 or 1% (2014) ii) $325 or 2% (2015) iii) $695 or 2.5% (2016 and thereafter) of the taxpayer’s household income over the threshold amount for filing a tax return for the taxpayer’s filing status. For years after 2016, the penalties are indexed for inflation. The applicable tax credit percentage for the small business tax credit for the cost of health insurance provided to employees increases from 35% to 50% of premium paid. Insurers will be required to start reporting certain health insurance coverage information to the IRS. 2018 A 40% excise tax will apply to employers who offer health insurance plans with a threshold cost to an individual of at least $10,200 and a cost for family coverage of at least $27,500 (Cadillac plans). Future threshold amounts will be increased by the health cost adjustment percentage (to be determined) and increased by the age and gender of the employee (to be determined). In General The foregoing will generally increase the demand for more information reporting and tax audits, and hence, our services. As always, if you have any questions about these or any other matters, do not hesitate to call me. Remember, We’re Here For You!!