A sweeping overhaul of the U.S. health care system, the Patient Protection and Affordable Care Act, widely known as ObamaCare, and its companion reconciliation act were signed into law recently. Here”™s a brief summary of the main tax provisions affecting individuals and businesses.
Business tax provisions
Key tax provisions affecting businesses include:
Penalties for failure to provide coverage. The act doesn”™t require employers to provide insurance coverage, but starting in 2014 it imposes tax penalties on certain employers that don”™t provide it. Employers with 50 or more full-time-equivalent workers (FTEs) that don”™t offer coverage and have at least one full-time employee who receives a premium tax credit are subject to an annual fee of $2,000 per FTE (not including the first 30 FTEs).
Tax credits for small businesses. Starting this year, small businesses are entitled to tax credits for purchasing group health coverage. For tax years 2010 to 2013, the maximum credit is 35 percent, provided the employer contributes at least 50 percent of the total premium or 50 percent of a benchmark premium. Starting in 2014, a maximum credit of 50 percent is available for two years for employers that purchase coverage through a state exchange and contribute at least 50 percent of the total premium. Smaller credits are available for tax-exempt businesses.
Excise tax on “Cadillac” plans. Starting in 2018, high-cost group plans will be subject to a 40 percent nonrefundable excise tax. The tax applies to annual premiums in excess of $10,200 for individual coverage and $27,500 for family coverage (excluding stand-alone dental and vision plans). The thresholds are higher ($11,850 and $30,950, respectively) for retirees and employees in certain high-risk professions. These amounts will be indexed for inflation.
Individual tax provisions
Important tax provisions affecting individuals include:
Penalties for the uninsured. Beginning in 2014, most individuals who aren”™t eligible for Medicaid, Medicare or other government-provided coverage will have to purchase minimum essential health coverage. Those who fail to do so will be hit with a penalty (with exceptions for the poor and certain others).
Premium assistance for those with lower incomes. Beginning in 2014, people with income between 133 percent and 400 percent of the federal poverty level are eligible for tax credits or cost-sharing subsidies on a sliding scale to help pay insurance premiums.
Higher taxes on the affluent. To help offset the act”™s cost, affluent taxpayers will face higher taxes. Beginning in 2013, taxpayers with more than $200,000 in earned income ($250,000 for families) will pay an additional 0.9 percent Medicare tax on the excess. In addition, those with an adjusted gross income (AGI) above $200,000 ($250,000 for joint filers) will pay a new, 3.8 percent Medicare tax on unearned income, such as interest, dividends, rents, royalties and certain capital gains. The tax doesn”™t apply to retirement plan distributions.
Also starting in 2013, the act raises the threshold for deducting unreimbursed medical expenses from 7.5 percent to 10 percent of AGI and limits contributions to flexible spending accounts for medical expenses.
This general discussion is not intended as advice to anyone. The act is complicated and likely to be modified many times, so you should discuss your particular situation with your tax adviser.
Norman G. Grill, CPA, is managing partner of Grill & Partners L.L.C., certified public accountants and consultants with offices in Fairfield and Greenwich. Reach him at N.Grill@GRILL1.com.
