Tax Legislation Update: Health Care Legislation Update
By Nancy Faussett, CPA
Publication Date: 08/04/2010
The Health Care and Education Reconciliation Act of 2010 was signed into law on March 30, 2010. This Act, which also amends the earlier Patient Protection and Affordable Care Act of 2010 (signed into law a week earlier on March 23, 2010), constitutes a complete overhaul of national health care and insurance programs. Individual taxpayers are naturally concerned and have been asking their tax advisers what they need to do to be prepared for the inevitable changes this legislation will bring. Significant changes are being made to the tax code and you need to be sure your clients are in compliance to avoid having them pay a penalty.
This article looks at the new rules affecting individual taxpayers and categorizes them by the year in which they become effective. (Employers will have their own set of issues.)
Effective in 2010…
First, let’s look at the principal provisions going into effect in 2010:
- Adult children under the age of 26 can be covered through their parents’ health insurance (effective 9/23/2010),
- Insurance companies may not discriminate against children who have pre-existing medical conditions,
- Medicare beneficiaries will receive a $250 payment when they reach the “donut hole” on prescription drug coverage,
- Individuals who are uninsured due to a pre-existing condition now may obtain coverage through a temporary high-risk health insurance pool (through 2013), and
- There is a temporary program for early retiree reinsurance (through 2013).
Effective in 2011…
Beginning in 2011, over-the-counter medications will no longer be considered a qualified medical expense for health Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), and Health Reimbursement Accounts (HRAs). Prescribed medications will continue to qualify.
Effective in 2013…
Beginning in 2013, there will be an additional Medicare payroll tax for high-income taxpayers. There will be both an additional 0.9% tax on earned income in excess of $200,000 for individuals ($250,000 for married filing jointly) and a 3.8% tax on unearned income. The 3.8% tax will be assessed on the lesser of:
- The excess of the taxpayer’s modified adjusted gross income (AGI) that is over the same threshold amounts as the 0.9% tax, or
- Their total net investment income.
Also, beginning in 2013, the threshold for itemized medical expense deductions is being raised to 10% of AGI (up from the current 7.5%). There will be a temporary exemption for individuals age 65 and older, terminating December 31, 2016.
And, finally, there will be a $2,500 cap (indexed for inflation in 2014) on FSA contributions starting in 2013.
Effective in 2014…
The year 2014 is probably the most important year for the provisions of the new health care legislation. By the year 2014, most individuals will be required to have a minimum amount of health insurance or pay a penalty. Anyone enrolled in Medicaid, Medicare, or some type of government insurance will be exempt. In addition, if an individual is a participant in an eligible employer-sponsored plan, that too will satisfy the requirement. Lower-income individuals may qualify for some assistance to help pay for their health insurance.
Also in 2014, large employers (i.e., those employing at least 50 full time employees) will be required to provide a minimum amount of health insurance to their employees or face paying a penalty.
And, while the public option did not make it into the final bill, state insurance exchanges will be created to offer individuals alternatives for coverage. Furthermore, private insurance companies will not be allowed to ban someone from coverage based on an illness.
As explained, individuals who fail to maintain a minimum amount of essential coverage may be liable for a penalty. This penalty will be based both on the taxpayer’s household income and a flat dollar amount. The penalty will be assessed on a monthly basis; it will be 50% of the greater of a flat dollar amount or an applicable percentage of income.
The flat dollar amount and the percentage of income will be phased in as the table below indicates:
|
Year |
Flat Dollar Amount |
Percentage of Income |
|
2014 |
$95 |
1% |
|
2015 |
$325 |
2% |
|
2016 |
$695 |
2.5% |
|
2017 & later years |
Indexed for Inflation |
2.5% |
The total penalty that can be assessed on a family cannot exceed 300% of the flat dollar penalty or the national average annual premium for the “bronze level*” of insurance exchange coverage.
*Note: The Act describes four levels of coverage for health plans. A “bronze level” plan provides coverage designed to provide benefits that are “actuarially equivalent to 60% of the full actuarial value of the benefits provided under the plan.” A plan’s actuarial value is the plan’s share of costs for its covered services, on average, for a wide group of people. So if the plan is designed to pay 60% of an individual’s costs, the enrollee would be expected to pay the other 40%. (The silver level is 70%, gold is 80%, and platinum is 90%.)
Certain individuals may be exempt from the penalty. For example, individuals whose income is below the federal income tax filing threshold are exempt. Also, if an individual’s contribution for employer-provided insurance or for the “bronze level” of insurance exchange coverage would be more than 8% of their household income, then that would also qualify for an exemption from the penalty.
Beginning also in 2014, there will be a new refundable premium assistance tax credit available, as well as reduced cost sharing, on a sliding scale for individuals who must pay premiums for health insurance. The credit will be available to taxpayers who purchase insurance through a health exchange and whose household income is at least 100% of the amount equal to the federal poverty line but not more than 400%. However, anyone eligible for an employer’s insurance program would not be eligible for the premium assistance tax credit unless either their employer’s insurance coverage fails to meet certain standards or the individual’s share of the required premium would exceed a certain percentage of their income. An employer-provided plan is not deemed to meet minimum standards of coverage if either the employer contributes less than 60% of the plan’s total costs or if the employee must contribute more than 9.5% (to be adjusted in future years) of their household income.
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