Health Care Legislation Update

Published on Friday, January 6, 2012

The Affordable Health Care Act passed into law in 2010 had a number of provisions that impact taxes for both individuals and business.  In the 18 months since the law was passed a number of these provisions have been altered, so we would like to take a minute to update where items currently stand..

Small Employer Health Credit 

Effective for 2010, employers with fewer than 25 full-time-equivalents can receive a credit of up to 35% of employee health insurance premiums paid through 2013, provided the employer covers more than 50% of the cost of the premiums. For 2014 and 2015 small firms (less than 25 full-time-equivalents) can receive a credit for employee health insurance premiums paid if they are purchased through the newly created government-regulated health insurance exchanges.

Reporting Health Insurance on W-2s

Beginning with 2012 Forms W-2, businesses that prepare more than 250 Forms W-2 must include the value of health care benefits they provide to employees on the Forms W-2. The amount is for information purposes only and is not included in the employee’s taxable income.  This provision was originally had an effective date of 2011 but was pushed back to 2012.  It has also been delayed for employers with fewer than 250 employees and the IRS has not published when it will first become effective for these employers.

Medicare Surtax

Beginning in 2013, a .9% Medicare surtax will apply to wages in excess of $200,000 for single taxpayers and $250,000 for married couples. In addition high-income taxpayers will be subject to a 3.8% surtax on the lesser of (1) their unearned income or (2) the amount by which their adjusted gross income exceeds $200,000 for single taxpayers and $250,000 for married couples. Unearned income includes interest, dividends, capital gains, annuities, royalties and rents, and does not include tax-exempt interest and retirement account distributions.

Flexible Spending Accounts

Starting in 2011 employees can no longer use health care flexible spending account funds for reimbursement of over-the-counter medication.

Beginning in 2013, employee contributions to health care flexible spending accounts are limited to $2,500 a year.

Health Savings Accounts

Beginning in 2011 the penalty for nonqualified distributions from a health savings account is doubled to 20%.

Itemized Deductions

Currently individual taxpayers receive a deduction to the extent their qualified medical expenses exceed 7.5% of their adjusted gross income.  Under the Affordable Health Care Act the floor on the deduction is increased to 10% of adjusted gross income, beginning in 2013. For taxpayers age 65 and over the floor is not increased to 10% until 2016.

Excise Tax on Cadillac Plans

Beginning in 2018 a 40% excise tax on high-cost plans will be levied on the portion of the health insurance premiums that exceed $10,200 for individual coverage and $27,500 for family plans.

Failure to Obtain Health Insurance

Individuals who have not obtained adequate health coverage by 2014 will be subject to a tax, starting at the greater of $95, or 1% of adjusted gross income and increasing to the greater of $695, or 2.5% of adjusted gross income in 2016.

Penalty for Employers’ Failure to Provide Health Insurance

Employers with more than 50 employees will be subject to nondeductible penalty of $2,000 per employer if the firm fails to offer adequate health coverage.

1099 Reporting

The original law called for expanded Form 1099 reporting which would have required businesses to send 1099 forms for all purchases of goods and services over $600 annually.  The requirement to issue Forms 1099 for purchases of goods has since been repealed.