May 1, 2010
Dear Client:
March 23, 2010 and March 30, 2010 saw the signing into law of dramatic changes overhauling the health care in the United States, The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010.
Numerous tax law changes affecting both businesses and individuals are called for in the legislation. These changes are scheduled to be implemented over the next several years. A few changes are effective immediately.
Because of the confusion and concern regarding this legislation, the following outlines for you some of the changes that may affect your business as well as you and your family.
Beginning in 2011, a new Code Section 106 (f) defines “medical expenses” for purposes of reimbursements from health savings accounts, HSAs, Archer medical savings accounts, MSAs, flexible spending accounts, and health reimbursement accounts, HRAs. While the law in 2010 allows the reimbursement of over-the-counter medications this year, beginning in 2011, reimbursements are limited to items that qualify under the definition of medical expense for purpose of itemizing deductions. This includes only prescription drugs and insulin.
As a tax hint, you may want to purchase over-the-counter medications, bandages and other items eligible for reimbursement in 2010 and not wait until 2011.
Beginning in 2011, the penalty on withdrawals from HSAs and Archer MSAs for nonqualified expenses doubles from 10% to 20%. Those individuals age 65 and older remain exempt from any penalty. Whether or not the nonmedical withdrawal is subject to penalty it would be included in income.
Hint number two: If you anticipate needing funds from your account prior to age 65 for nonmedical reasons, consider making a withdrawal in 2010. You will still be assessed a 10% penalty but you avoid the additional 10% for a total of 20% which will be assessed in 2011.
Additional phased in changes:
2013 – New 2.3% excise tax on the sale of medical devices. A medical
device is a device regulated by the FDA. Exclusions from the
tax include eyeglasses, contact lenses, hearing aids, and other
devices purchased by the public at retail for individual use. This
tax will apply to the manufacturer or producer but likely will be
passed on to the consumer.
In 2013, the annual salary reduction contribution limit imposed
on Flex-Spending Accounts, FSAs, will be $2,500. The current
limit is one imposed by the employer. More out-of-pocket
medical costs will be paid with after-tax dollars in 2013.
2018 – A 40% excise tax is levied on “Cadillac” health plans. The
tax is imposed on the insurer offering deluxe plans but the
excise tax will likely be passed on to consumers. If insurers
eliminate or scale back these types of plans, consumers will
likely pay more out-of-pocket for certain health services.
Having just completed the filing season, you may be wondering about the price tag on taxes. Expect to see your federal tax bill rise sharply beginning in 2013. It may happen sooner, however the full cost of the health care package will be felt by the federal budget in 2013.
There is an additional Medicare tax imposed on wages and self-employment income of 0.9% for those with earnings in excess of $200,000 if single, $250,000 if married filing jointly, and $125,000 if married filing separately. This increase is only on the earner; there is no increase in the Medicare tax paid by the employer. Self-employed individuals cannot deduct any portion of this additional Medicare tax; this tax must be taken into account in figuring estimated taxes for the year in order to avoid underpayment penalties.
There is also an additional Medicare tax of 3.8% on the lesser of (1) net investment income or (2) modified adjusted gross income in excess of $200,000 if single, $250,000 if married filing jointly, and $125,000 if married filing separately.
Beginning in 2013, it will become more difficult to claim an itemized deduction for medical costs not covered by insurance or any other health plan. This is due to the threshold for purposes of itemized deduction for medical costs will rise to 10 percent of adjusted gross income up from the current floor of 7.5%. The 10 percent floor will continue to apply to deducting medical expenses for the purposes of the Alternative Minimum Tax.
2014, all individuals will be required to carry health coverage for themselves, their spouse, and their dependents. If you fail to carry “minimum essential coverage” you will be subject to a tax penalty that will be collected by the Internal Revenue Service. The definition of “minimum essential coverage” is slated to be created by the Department of Health and Human Services.
This penalty starts at $95 in 2014 and increases to $325 in 2015, and to $695 by 2016. The amounts are reduced by 50% for dependents under the age of 18.
Individuals whose income is below set limits will qualify for a health insurance pr4mium assistance credit to help them in paying for coverage.
Businesses are also affected by this legislation.
Beginning in 2010 and inclusive of four years, there is a small business health insurance credit for certain small employers that pay at least half the cost of their employee’s medical insurance. The maximum credit is 35% of premiums paid by the employer, but it applies only to companies with 10 or fewer employees whose average annual compensation is no more than $25,000.
Beginning in 2011, employers will have to report health care benefits on employee W-2 forms. This includes coverage paid by the employer, the employee or a combination of both. Employers will have to report on “minimum essential coverage” to the IRS on an information return
In 2014, the credit transition to a new program. It will be a maximum of 50%, but applies only to medical coverage purchased through the Small Business Health Options (SHOP) program to be created by the states for qualified small employers.
Also in 2014, employers with at least 50 full-time employees are mandated to share responsibility for health coverage. If they do not, there is an assessment payment.
A variety of other changes affecting individuals and businesses are included in the legislation:
Exclusion for employer-paid health benefits for an employee’s dependent under the age of 27. This change became effective on March 30, 2010. Beginning in 2014, group health plans will have to permit dependents to remain covered under their parent’s plan until they attain age 27.
There is an increase of $1,000 to the adoption credit/exclusion amount. This increases the limit to $13,170 for 2010 and it will be indexed for inflation for 2011.
A 10% excise tax on tanning salon services begins July 1, 2010.
Codification of the “economic substance doctrine” for transactions entered into after March 30, 2010.
Creation of simple cafeteria plans for small businesses; those with no more than 100 employees. Employers that make certain minimum contributions to these plans will automatically meet nondiscrimination requirements and avoid the need for testing for discrimination purposes.
While the Internal Revenue Service will undoubtedly play a large role in the implementation of this legislation, Commissioner Doug Shulman has committed the IRS to informing taxpayers about the tax credits available to help pay for their health coverage.
The IRS is also task with creating Form 1099’s that insurance companies will use to inform the IRS of individuals who do not carry adequate coverage. When the coverage mandate begins in 2014 and the IRS learns an individual does not have adequate coverage, a letter will be issued from the IRS about the penalty. The penalty most likely would be withheld from any tax refund owed to an individual without adequate health care and part of the tax calculation on their annual Federal Tax Return. No criminal sanctions for failure to obtain coverage or to pay the penalty for lack of coverage is proposed.
Currently, 17 state Attorney Generals have filed suit challenging the expansion of federal power to mandate health coverage and require states to set up health care exchanges as a violation of the 10th Amendment to the U. S. Constitution.
Admittedly there are many unknowns about this legislation, but rest assured that I will continue to research and learn the intricacies that will affect you, your business and your family.
I am proud of the trust you place in me as your tax professional and I am committed to working within the framework of the law in your best interests.
Sincerely,
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