On March 23, 2010, the Patient Protection and Affordable Care Act (Patient Protection Act) was signed into law by President Barack Obama. One week later, the President signed into law the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act), completing reform of the nation’s health insurance and delivery systems.
Under the Patient Protection Act, as amended by the Reconciliation Act, starting in 2014, all U.S. citizens and legal residents not covered by employer-provided insurance or Federal programs will be required to obtain health care coverage or pay a penalty, unless they are exempt from the personal responsibility mandate. Families and individuals with incomes below specified levels will be offered premium assistance starting in 2014, and states may create health insurance exchanges through which individuals and small businesses can purchase qualified coverage. While a government-provided “public option” was not included in the final bill, the insurance coverage options through these exchanges will be offered by government agencies or nonprofit organizations. No penalty will be imposed on businesses that fail to provide insurance to workers, but companies that employ 50 or more workers will be subject to so-called “pay or play” rules after 2013.
According to the Congressional Budget Office (CBO), the health care reform package will cost the Federal government $938 billion over 10 years, but will reduce the Federal deficit by $143 billion over the same period, largely due to savings in Medicare and new taxes and fees levied in the bill. The CBO estimates that the legislation will provide coverage to 32 million uninsured Americans, but still leave 23 million people uninsured in 2019, one-third of whom will be illegal immigrants.
Effective for 2010
While many of the core provisions of the Patient Protection Act do not go into effect until 2014, others will be effective immediately, or within the next several years. Starting in 2010, small businesses with fewer than 25 employees that pay at least 50% of the health care premiums for their employees qualify for a tax credit up to 35% of their premiums. This credit will increase to 50% after 2014 if insurance is purchased through an exchange. The amount of the credit for a specific business depends on the number of its employees and the average wage.
Starting in June 2010, individuals who have been unable to obtain insurance due to a pre-existing condition can join a high-risk insurance pool. Beginning this year, insurance providers may no longer deny coverage to children due to pre-existing conditions. This provision is expanded to include adults with pre-existing conditions beginning in 2014. Also starting in 2010, uninsured adult children may remain on their parents’ health care plans until the age of 26. Beginning in September 2010, insurance companies are prohibited from imposing lifetime maximum limits on policies and from rescinding policies, except in cases of fraud. Under the new law, the so-called “doughnut hole” in Medicare prescription drug coverage will be closed over the next several years, and beneficiaries who fall through this coverage gap qualify for a $250 rebate in 2010.
Individual Coverage Mandate
Starting in 2014, all U.S. citizens and legal residents who are uninsured will be required to obtain health care coverage, or pay a penalty. Those who already have insurance, individually or through their employers, will not need to make any changes, provided the coverage meets certain minimal requirements. Individuals who fail to purchase and maintain coverage will be required to pay tax penalties that will be phased in over time. An adult who fails to obtain health insurance by 2014 will be penalized $95 or 1% of income, whichever is greater, provided the amount does not exceed the cost of a health care plan with basic coverage. In 2015, the penalty for not having insurance increases to $325 or 2% of income, and by 2016, the penalty rises to $695 for an adult or 2.5% of income, whichever is greater. A family’s total penalty generally cannot exceed 300% of the adult flat-dollar penalty ($285 for 2014, $975 for 2015, or $2,085 in 2015) or the cost of a basic health care plan. Exemptions to the penalty will be granted to individuals whose income is below the Federal income tax filing threshold; to individuals whose contributions to an employer-sponsored or basic plan through an insurance exchange would exceed 8% of household income; and to members of certain groups, including religious objectors, undocumented immigrants, incarcerated individuals, qualified members of Native American tribes, and certain hardship cases.
To assist those who cannot afford the full cost of premiums, the Federal government will expand the Medicaid program to enroll uninsured individuals with incomes below 133% of the Federal poverty level (FPL). Starting in 2014, subsidies will be provided on a sliding scale to individuals with lower to mid-level incomes who do not qualify for Medicaid. Families and individuals with incomes up to 400% of the FPL may be eligible for a premium assistance tax credit to help them purchase basic coverage through an exchange. These subsidies will not be applicable to individuals who are covered by employer-provided insurance, unless the workplace plan covers less than 60% of total allowed costs or the individual’s contribution to the premium exceeds 9.5% of his or her income.
Employer Coverage Requirements
While employers will not be required to offer health care plans, starting in 2014, a business with 50 or more full-time employees (defined as working 30 or more hours per week) will have to pay $2,000 per worker per year for all workers if even one of the company’s employees qualifies for and accepts a Federal health insurance premium subsidy. The first 30 employees are subtracted from the payment calculation. In addition, employers face a potential tax penalty of $3,000 per full-time worker per year for every full-time worker who qualifies for a health insurance coverage premium subsidy. Employers that offer health care coverage may in some cases be required to provide “free choice vouchers” to employees with incomes less than 400% of FPL whose share of the premium exceeds 8%, but is less than 9.8%, of their income and who choose to enroll in a plan in the exchange. Starting in 2011, employers and other entities providing minimum health coverage will be required to report the value of health benefits to the IRS, and this value will appear on employee W-2 forms.
Revenue Raising Provisions
To help raise revenue to cover the costs of providing subsidies to the uninsured, the new law will broaden the Medicare tax base for higher-income taxpayers starting in 2013. This includes levying an additional Hospital Insurance tax rate of 0.9% on earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly, as well as a 3.8% unearned income Medicare contributions tax on higher-income taxpayers on the lesser of net investment income or the excess of modified adjusted gross income (AGI) over the same threshold amounts. Some trusts and estates will also be liable for this 3.8% tax.
An excise tax on high-cost, or “Cadillac,” health plans, which was designed to raise revenues and reduce waste, will go into effect in 2018, which allows insurers time to adjust to the requirements. Starting in 2018, a 40% nondeductible excise tax will be imposed on health insurance providers or plan administrators for any health insurance plan with annual premiums in excess of $10,200 for individual and $27,500 for family coverage, with both amounts adjusted for inflation. For employees in certain high-risk professions and non-Medicare retirees age 55 and older, the thresholds increase to $11,850 for individual coverage and $30,950 for family coverage. Insurance providers and plan administrators are permitted to pass along the excise tax to consumers through higher premiums, as an alternative to or in combination with cost-cutting measures.
For taxpayers claiming the itemized medical expense deduction, the new law will increase the threshold to 10% of adjusted gross income (AGI), from the previous 7.5%, starting in 2013. Taxpayers age 65 and older and their spouses will be exempt from the higher threshold until 2017. The new law does not, however, adjust the allowable medical expense deduction floor for AMT purposes, which remains at 10%. Starting in 2011, provisions of the law will modify the definitions of qualified medical expenses for flexible spending accounts (FSAs), health savings accounts (HSAs), and health reimbursement arrangements (HRAs) to conform to the definition used for the medical expense itemized deduction, thereby excluding tax-free reimbursements for over-the-counter drugs not prescribed by a physician. The annual cap for contributions to FSAs will be set at $2,500 starting in 2012, with the amount indexed for inflation in subsequent years.
In other revenue-raising provisions, the legislation levies a 10% tax on indoor tanning services starting in July 2010 and limits the deductibility of compensation for executives of health insurance companies if at least 25% of the insurer’s premium fails to meet minimum essential coverage requirements. In addition, annual fees will be imposed on pharmaceutical manufacturers and importers starting in 2011 and health insurance providers starting in 2014. An excise tax of 2.3% will be levied on medical devices, excluding those routinely purchased by consumers, such as eyeglasses and hearing aids.
For more information on the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, contact one of our qualified tax professionals.