The Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act overhauls the U.S. health care system and affects nearly all taxpayers, many employers, and many elements of the health care industry. This massive overhaul contains a host of tax changes, many of which are both complex and novel. To compound the challenge, the tax changes go into effect over a number of years – ten if two retrocactvely effective tax changes are counted and nine if they are not.
Below is a timeline of the tax changes and a concise summary of each new tax provision.
Tax Changes Retroactively Effective to 2009
Exclusion for Certain Forgiven Student Loans. Effective beginning tax years after Dec. 31, 2008, a new, retroactive federal income tax exclusion for student loan amounts paid off or forgiven under certain state loan repayment/forgiveness programs intended to increase the presence of healthcare professionals in underserved areas.
Investment Credit for Therapeutic Discovery Projects. For expenses paid or incurred after Dec. 31, 2008, there is a new 50% nonrefundable investment tax credit for qualified investments in qualifying therapeutic discovery zones. A total of $1billion is allocated to such projects during the 2009 through the 2010 period. The credit is available to companies having 250 or fewer employees.
Tax Changes Taking Effect in 2010
Tax Credit for Small Employers (including Nonprofit organizations.) For tax years beginning after December 31, 2009. Eligible small employers (ESE) are entitled to a tax credit for making nonelective contributions to buy health insurance for its employees.
An ESE generally is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, 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 more information from the IRS: Small Business Healthcare Tax Credit: Frequently Asked Questions.
Expanded Dependent Coverage in Employer Health Plans. Effective March 30, 2010. The general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan is extended to any child of an employee who hasn’t attained age 27 as of the end of the tax year. This change also applies to the exclusion for employer-proved coverage under accident or health plan for injuries or sickness for such a child.
A parallel change applies for voluntary employees’ beneficiary associations (VEBAs) accounts. If you’re self-employed and pay your own coverage, you may also take the deduction for health insurance costs of any child who has not attained age 27 by the end of the tax year.
Eased Rules for Adoption Tax Breaks. For tax years beginning in 2010. The maximum adoption credit is increased to $13,170 per eligible child, a $1,000 increase, for both non-special needs adoptions and special needs adoptions.
The adoption credit is made refundable so it can be collected in full even if you don’t owe federal income tax.
The maxium exclusion for employer-provided adoption assistance aslo increased to $13,170 per eligible child, a $1,000 increase.
New Qualification Requirements for Nonprofit Hospitals. For tax years after March 23, 2010. Applies to any organization that operates at least one hospital facility. Requirements include: conducting, implementing and widely publicizing a community health needs assement; adopting and implementing a written financial assistance policy; and adopting and implementing a nondiscriminatory policy to provide emergency medical treatment to individuals.
Excise Tax on Tanning Services. Effective on services performed on or after July 1, 2010. A new 10% excise tax is imposed on any indoor tanning service, whether paid for by insurance or otherwise.
Codification of Economic Substance, Impositon of New Penalties. For transactions entered into after March 30th, 2010. A 20% penalty may be assessed on tax underpayments, understatements, and refunds and credits attributable to transactions that are dissallowed because they lack economic substance. (The transaction has economic substance if it changes a meaningful way the taxpayer’s econmic position and the taxpayer has a substantial porpose for entering into the transaction.) The penalty is increased to 40% if the taxpayer doesn’t adequately disclose the relevant facts affecting the tax treatment in the return or a statement attached to the return.
New Loss Ratio Rule for Health Organizations. For tax years beginning after Dec. 31, 2009. Health organizations whose medical loss ration is below 85% cannot take advantage of certain tax provisions including treatment as a stock insurance company.
Tightened rules for Cellulosic Biofuel Producer Credit. For fuels sold or used on or after Jan. 1, 2010. The cellulosic biofuel producer credit is not available for fuels with significant water, sediment, or ash content, such as “black liquor.”
Tax Changes Taking Effect in 2011
W-2 Must Include Cost of Employer-Provided Health Insurance. For tax years beginning after Dec. 31, 2010. An employer must disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer.
No More Tax-Free Reimbursements for Non-Prescription Drugs. Effective for tax years beginning after Dec. 31, 2009. The cost of over-the-counter medicines can’t be reimbursed with excludible income through a health flexible spendidng arrangement (FSA), health reimbursement account (FHRA), health savings account (HSA) or Archer MSA, unless the medicine is prescribed by a doctor.
Stiffer Penalty on Nonqualified HSA and MSA Withdrawals. For disbursements made during tax years starting after Dec. 31, 2010. Additonal tax on distributions from an HSA that are not used for qualified medical expenses is increased from 10% to 20% of the disbursed amount, and the additional tax on distributions from an Archer MSA that are not used for qualified medical expenses is increased from 15% to 20% of the disbursed amount.
New Simple Cafeteria Plans for Small Employers. For years beginning after Dec. 31, 2010. Small employers (average of 100 or fewer employees) may provide employees with a “simple cafeteria plan.” Under such a plan, the employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program.
New Fee on Drug Companies. For calendar year 2011, each manufacturer or importer of branded prescription drugs must pay an annual fee which will be credited to the Medicare Part B trust fund. The $2.5 billion fee is apportioned among the covered entities each year based on each entity’s relative share of branded prescription drug sales in the preceding year.
Tax Changes Taking Effect in 2012
New Form 1099 Reporting Requirment for Business Payments for Property. For payments made after 2011. Businesses that pay any amount greater than $600 during the year to non-tax-exempt corporate providers of property and services will have to file a 1099.
Tax Changes Taking Effect in 2013
Increased Hospital Insurance (Medicare) Tax for High-Earning Workers and Self-Employed. For tax years beginning after 2012. Additional 0.9% hospital insurance tax applied to wages received in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases. The additional 0.9% hospital tax also applies to self-employment income for the tax year inexcess of the above figures.
Additional 3.8% Medicare Tax on Unearned Income of Higher Income Individuals. For tax years beginning after Dec. 31, 2012. An unearned income Medicare contribution tax is imposed on individuals, estates, and trusts.
For an individual, the tax is 3.8% of the lesser of either the net investment income or the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouce, $125,000 for a married individual filing a separate return, and $200,000 for all others.)
For surtax purposes, gross income doesn’t include excluded items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gain from the sale of a principal residence.
Higher Threshold for Deducting Medical Expenses. For tax years beginning after Dec. 31, 2012. Unreimbursed medical expenses will be deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGE) for the tax year. (Previously medical expenses exceeding 7.5% were deductable.)
If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and a 10% floor applies for tax years ending after Dec. 31, 2016.
New $2,500 Cap on Healthcare FSA Contributions. For tax years beginning after Dec. 31, 2012. For a health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year can’t exceed $2,500.
Deduction Eliminated for Retiree Drug Coverage. For tax years beginning 2012. Employers that sponsor qualified retiree prescription drug plans are eligible for subsidy payments for a portion of the cost. Employers are currently allowed to deduct the full cost of the retiree drug plans without any reduction for the tax-free federal subsidies. In effect, deductions are allowed for amounts that are actually paid by the government. The healthcare law reduces deductios by the amount of tax-free federal subsidies.
Fee on Health Plans. For each policy year ending after Sept. 30, 2012. Each specified health insurance policy and each applicable self-insured health plan will have to pay a fee equal to the product of $2 ($1 for policy years ending during 2013) multipied by the average number of lives covered under the policy. The issuer of the health insurance policy or the self-insured health plan sponsor is liable for and must pay the fee.
$500,000 compensation Deduction Limit for Health Insurance Issuers. For tax years beginning after Dec. 31, 2012. For services performed during that year, a covered health insurance provider isn’t allowed compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000.
Excise Tax on Medical Device Manufactures. For sales after Dec. 31, 2012. A 2.3% excise tax applies to sales of taxable medical devices intended for humans. The excise tax, paid by the manufacturer, producer, or importer of the device, won’t apply to eyeglasses, contact lenses, hearing aids and any other medical device determined by the IRS to be of a type that is generally purchased by the general public at retail.
Tax Changes Taking Effect in 2014
New Penalties on Employers. For coverage months beginning in 2014. A large employer (generally, one with at least 50 full-time employees) that doesn’t provide their employees with affordable health coverage (coverage with a premium required to be paid by the employee that is 9.5% or less of the employee’s household income) or offers minimum essential coverage (plan’s share of total allowed cost of benefits is less than 60%) must pay a penalty if any full-time employee purchases his own government-subsidized coverage through a state-run exchange.
Employers cannot deduct these penalties as business expenses.
Individuals without Health Insurance Face a Penalty. For tax years beginning in 2014. Nonexempt U.S. citizens and legal residents must pay a penalty if they do not maintain minimum essential coverage, which includes government sponsored programs, eligible employer-sponsored plans, plans in the indivudual market, certain grandfathered group health plans and other coverage as recognized by HHS in coordination with the IRS. There are a number of exceptions, such as one for certain lower-income individuals.
Some Employers Must Offer “Free Choice” Vouchers for Basic Coverage. Effective for periods after Dec. 31, 2013. Employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage must provide qualified employees with a “free choice” voucher whose value can be applied to purchase of a health plan through an Insurance Exchange.
Qualified employees are those who do not participate in the employer sponsored plan; whose required contribution for employer sponsored minimum essential coverage (if they did participate in the plan) exceeds 8%, but does not exceed 9.8% of household income; and whose total household income does not exceed 400% of the poverty line for the family.
Refundable Tax Credit for Low or Moderate Income Families Buying Health Insurance. For tax years ending after Dec. 31, 2013. A new refundable tax credit (the “premium assistance credit”) applies to qualifying taxpayers who get health insurance coverage by enrolling in a qualified health plan through a State-established American Health Benefit Exchange.
“Qualified Health Plans” May Be Offered Through Cafeteria Plans by “Qualified Employers”. For tax years beginning after Dec. 31, 2013. A reimbursement (or direct payment) for the premiums for coverage under any “qualified health plan” through a health insurance Exchange is a qualified benefit under a cafeteria plan if the employer is a qualified employer (generally, smaller businesses). In very broad terms, a qualified health plan is one that meets certain certification requirements, provides “an essential health benefits package,” and is offered by an insurer meeting detailed requirements. And a health insurance “Exchange” is a federally supervised marketplace for health insurance policies meeting specific eligibility and benefit criteria, to be made available not later than Jan. 1, 2014, to qualifying individuals and employer groups of graduated sizes.
New Information Reporting of Employer Provided Health Coverage. For periods beginning after Dec. 31, 2013. New information reporting and related statement obligations apply for (1) certain applicable large employers required to offer their full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and (2) offering employers (those offering minimum essential coverage to employees and paying any portion of the such coverage, but only if the required employer contribution of any employee exceeds 8% of the employee’s wages).
Excise Tax on Health Insurance Providers. For calendar years beginning after Dec. 31, 2013. An annual fee applies to health insurance providers. The aggregate annual flat fee for the industry (e.g., $8 billion for 2014) will be allocated based on a health provider’s market share of net premiums written for a U.S. health risk for calendar years beginning after Dec. 31, 2012.
Accelerated Estimated Tax Payments for Large Corporations. The estimated tax payment due for large corporations (assets of at least $1 billion at the end of the previous tax year) in July, August, or September 2014 is increased from 157.75% to 173.50% of the payment otherwise due, and the amount of the next required installment is appropriately reduced.
Tax Changes Taking Effect in 2018
Excise Tax Applies to High-Cost Emplooyer Provided Health Coverage. For tax years beginning after Dec. 31, 2017. A 40% nondeductible excise tax will be levied on insurance companies and plan administrators for employer-sponsored health coverage to the extent that annual premiums exceed $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.
Timeline for Tax Changes in Health Care Reform Legislation
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