On March 23, 2010, the Patient Protection and Affordable Care Act (PPAC) was signed into law, followed by the signing of the Health Care and Education Reconciliation Act (HCERA) of 2010 on March 30, 2010. This “follow on” bill modified the PPAC and added a number of tax increases, thus embarking on the Congressional overhaul of the U.S. health care system.
Barring legislation, the Bush tax cuts will expire after this year. This will increase the top individual tax rate to 39.6 percent in 2011, increase the tax rate on capital gains to 20 percent and tax dividends as much as 39.6 percent. When these tax increases are combined with those resulting from health care reform taking effect in 2013, the top tax rate for individuals will be 40.5 percent for wages and other earned income, 43.4 percent for interest and dividends and 23.8 percent for capital gains.
Since many of the important provisions and almost all of the tax increases take effect in 2013 and later, it may be several years before the real impact of the legislation is felt.
Here is a summary of some key provisions:
Certain small employers with less than 25 employees and an average annual wage of less than $50,000 will be eligible for a tax credit for non-elective contributions to purchase health insurance for their employees.
The age of unmarried children who qualify for dependent coverage increases to 26 beginning after March 30, 2010.
Certain small businesses can provide a new employee benefit cafeteria plan (SIMPLE Cafeteria Plan) that provides tax-free benefits to employees, including self-employed individuals.
Nontaxable over-the-counter drug reimbursements from medical spending accounts are eliminated, unless prescribed by a physician.
Penalties on disqualified medical expense withdrawals from health savings accounts are increased to 20%.
Employer-sponsored health insurance coverage must be reported on the employees’ W-2s (informational only). This was originally scheduled to begin in 2011.
Businesses that pay any amount greater than $600 during the year to corporate or non-corporate providers of property and services will be required to file an information report with each provider and with the IRS.
Individuals are subject to an additional 0.9-percent Medicare tax on earned income in excess of $200,000 ($250,000 for joint returns).
Individuals with adjusted gross income (AGI) above $200,000 ($250,000 for joint returns) are subject to a new 3.8% Medicare tax on investment income, which includes dividends, interest, royalties, rents, gains, and passive activity income, but excludes distributions from retirement plans.Spending limits for flexible spending accounts are reduced to $2,500 (indexed for inflation).
The threshold for itemized medical expense deductions is increased 7.5% of AGI to 10% (beginning in 2017 for individuals age 65 or older).
Employers with 50 or more employees that fail to offer qualifying medical insurance to a full-time employee who has enrolled in a subsidized plan using the premium assistance tax credit or cost-sharing reductions will be subject to a tax of $2,000 per employee. Additional penalties may apply if waiting-period restrictions are imposed.
Individuals not otherwise eligible for Medicaid, Medicare, or other government-sponsored coverage will be subject to penalties if they do not maintain qualifying medical insurance. The penalty will phase in, reaching the greater of $695 or 2.5 percent of income in 2016.
Premium assistance tax credits and reduced cost-sharing will be available to qualified individuals on a sliding scale.
A 40-percent nonrefundable excise tax will be imposed on group insurers if annual premium payments exceed an inflation-adjusted $10,200 for individual coverage and $27,500 for family coverage (so-called “Cadillac plans”).
The Act is the most significant domestic policy legislation passed in the last 40 years. It imposes new compliance obligations on businesses and increases tax and other costs for both businesses and individuals. Without doubt, there will be Congressional tinkering with the law as time goes on.