The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 brought major changes to be implemented over a number of years. There are implications on both individuals and employers with the IRS playing a major role in the administration and implementation of the health care reform legislation.
• A new 2.3 percent excise tax on the initial sale of medical devices by the manufacturer, producer, or importer becomes effective in 2013. The tax does not apply to eyeglasses, contact lenses, hearing aids, or any other medical device that the public generally buys at retail for individual use.
• A 3.8 percent Medicare tax on net investment income if taxpayer’s modified adjusted gross income exceeds $200,000 (or $250,000 for joint filers).
• A 0.9 percent increase to the current 1.45 percent to 2.35 percent in Medicare taxes on earned income, including net self-employment income, in excess of $200,000 (or $250,000 for joint filers). Employers will be required to withhold the additional 0.9 percent increase in Medicare taxes if an employee’s wages exceed $200,000.
• The threshold for the deduction of medical expenses will increase to 10 percent of adjusted gross income for a taxpayer who itemizes deductions. However, taxpayers or their spouses who attain age 65 before the end of 2013 will be allowed to deduct medical expenses in excess of 7.5 percent of adjusted gross income through 2016.
• $2,500 will be the new maximum salary deduction allowed for a health flexible spending account. Unless a cafeteria plan has a written plan amendment reflecting that the plan specifically prohibits salary reductions in excess of $2,500, the plan will not be a qualified arrangement and all participating employees will be taxed on their distributions.
• “Individual Responsibility Mandate” becomes effective on Jan. 1, 2014. It states that every applicable individual must obtain minimum essential coverage for themselves and their dependents or pay a tax penalty. Applicable penalties will be calculated as additional tax on the individual’s Form 1040. The penalty does not apply for months in which individuals cannot afford coverage. Coverage is unaffordable if the required contribution for a given month is greater than 8 percent of the individual’s household income for the tax year.
• By Jan. 1, 2014, each state must establish a state exchange through which qualified individuals and small business employers can obtain qualified health benefits. Individuals who purchase coverage through a state exchange may be entitled to the premium assistance credit. This credit is a refundable income tax credit available on a sliding scale to qualified taxpayers with household incomes between 100 percent and 400 percent of the federal poverty guidelines for the family size involved and who do not receive coverage through employers.
• Effective Jan. 1, 2014, applicable large employers are subject to a shared-responsibility mandate. An “applicable large employer” is an employer that employed an average of at least 50 full-time employees on business days during the previous calendar year. A full-time employee is an employee who is employed an average of at least 30 hours per week. These large employers will be required to report additional information about the existence of the employer health insurance plan to the IRS each year as well as written statements to employees. If these employers do not meet criteria for not offering coverage, they will be subject to a nondeductible penalty.
• A 40 percent nondeductible excise tax will be payable by the health insurance company and the employer on the amount of higher-cost employee health plans. In general, with certain adjustments allowed, the excise tax applies to the costs that exceed $10,200 for single coverage and $27,500 for family coverage.
Consult your tax adviser if you have any questions, as these rules are complicated and have many criteria.
• Michael J. Flood, CPA, MST, is a partner with Caufield & Flood in Crystal Lake. He can be reached at 815-455-9538 or via e-mail at Michaelf@cfcpas.com or through the website CFCPAS.com.