CARL WATTS & ASSOCIATES

January 21, 2013

www.carlwatts.com
office@carlwatts.com
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The Patient Protection and Affordable Care Act (H.R. 3590) and the Reconciliation Act (H.R. 4872) were, as you know, passed by Congress and signed by the President in March 2010; in June 2012 the Supreme Court upheld the Affordable Care Act’s constitutionality.

The Affordable Care Act (ACA), which is now law, is considered to represent the most significant regulatory overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965.

The law will impact virtually every American, including individuals who need government assistance to afford health insurance, people who purchase their own insurance individually, small business owners, seniors eligible for Medicare, and large employers who provide coverage as a job-related benefit.

ACA contains multiple provisions and many of them have tax implications that you should be aware of.

Some of the ACA tax provisions have already been put in place, some go into effect starting in 2013 and some are set to take place somewhere down the road up to 2016 and even beyond.

This newsletter is focused on the most relevant ACA provisions with impact on your taxes.


Provisions already implemented
(2010 to December 2012)

  • Small businesses (defined as businesses with 25 or fewer employees and average annual wages of $50,000 or less) are eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of their employees for insurance premiums.

  • Employers with 10 or fewer employees and average wages of less than $20,000 would get 100% of the credit; it would be phased out, up to the 25-employee limit. The $20,000 average annual wages figure will be indexed for inflation after 2013. 5% owners under the section 416 top-heavy plan rules and 2% S corporation shareholders are not included in the definition of employee, but leased employees are counted.


  • Eligible small employers are 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.

  • Health coverage for an employee's children/adult dependents under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various workplace and retiree health plans. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

  • ACA requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. The act requires businesses to file an information return (e.g., a Form 1099) for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation).

  • The additional tax on distributions from a health savings account (HSA) or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount.

  • ACA provides for a program administered by the Department of Health and Human Services that will foster the creation of qualified nonprofit health insurance issuers to offer health insurance. Insurers receiving federal grants or loans under the program would be exempt from federal tax for periods when the insurer complies with the terms of the program.



Provisions effective as of 2013 and beyond:

  • Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% from 1.45% to 2.35% on wages that exceed $200,000 a year for individuals and $250,000 for families.

  • The maximum amount available for reimbursement of incurred medical expenses of an employee, the employee’s dependents, and any other eligible beneficiaries with respect to the employee, under a health flexible spending account for a plan year (or other 12-month coverage period) must not exceed $2,500. The provision is effective for tax years beginning after Dec. 31, 2012.

  • Threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of adjusted gross income (AGI) to 10% of AGI for regular income tax purposes. (Effective 2013.) Taxpayers age 65 and over are exempt from the cutback through 2016.

  • A new Medicare Net Investment Income Tax goes into effect starting in 2013. The 3.8% Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.

  • Starting in 2014, ACA provides for refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange.

    Beginning on January 1, 2014 health insurance exchanges will be created where an individual or small business (up to 100 employees) can compare the costs of various health plans and different types of health coverage benefits. The purpose of the health insurance exchanges is to make health insurance more affordable and easier to purchase for small business and individuals.

    Eligibility for the premium assistance credit is based on the individual’s income for the tax year ending two years prior to the enrollment period.

    The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the federal poverty level (for the family size involved) who do not receive health insurance through an employer or a spouse’s employer.

    The credit amount is determined by the Secretary of Health and Human Services, based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of federal poverty level for the family size involved to 9.5% of income for those at 400% of federal poverty level for the family size involved.

    The premium assistance credit will be available for years ending after Dec. 31, 2013.


  • U.S. citizens and legal residents are required to maintain minimum amounts of health insurance coverage. Minimum essential coverage includes various government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans and other coverage as recognized by the Secretary of Health and Human Services in coordination with the Secretary of the Treasury. This requirement would not apply to individuals who are incarcerated, not legally present in the United States or maintain religious exemptions.

    Individuals who fail to maintain minimum essential coverage will be subject to a penalty equal to $750. The fee for an uninsured individual under age 18 is one-half of the adult fee. The total household penalty may not exceed 300% of the per-adult penalty. The penalty amount will be phased in over the years 2014–2016 and will be indexed for inflation after 2016.



  • An “applicable large employer” that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

    An employer is an applicable large employer with respect to any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year.

    The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.


  • The federal government will require a new annual fee from health insurance companies on each specified health insurance policy. The fee is equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the policy. The issuer of the policy is liable for payment of the fee.

The health reform legislation is complicated and the sweeping changes will have far-reaching consequences for how health care is delivered and practiced, as well as for the tax implications it incurs.

For the provisions presented above the IRS has issued proposed and/or final guidance. We will keep you up-to-date as soon as more information and guidance from the IRS becomes available.

The Affordable Care Act
& Its Impact on Taxes
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