The Patient Protection and Affordable Care Act of 2010 has become one of the most complex and wide-ranging laws in recent American history. And while the legislation has a huge impact on health plan insurers introducing greater government oversight as well as new care delivery models and financing m
echanisms thus far the impact on businesses has been minimal.
That’s about to change. As key provisions of the law take effect, its important for employers to understand how these provisions will trigger important tax and reporting changes. Here are the top 10 to focus on in the near term:
1. Small Business Tax Credit (2010). Currently, certain small-business employers may be eligible to receive an income tax credit of up to 35 percent of the amount of health insurance premiums paid on behalf of employees. The credit begins to phase out for businesses with 10 to 25 employees and average annual wages of $25,000 to $50,000. Employers must also contribute at least 50 percent of employees health care premiums. Tax-exempt employers are allowed a maximum 25 percent credit against payroll taxes.
2. Over-the-counter medications (2011). Over-the-counter medicines will no longer be permitted to be reimbursed in tax-advantaged spending accounts. Reimbursements will be limited to prescribed medicines and certain medical supplies.
3. Simple cafeteria plans (2011). Small businesses with fewer than 100 employees that sponsor a cafeteria plan will gain a safe harbor from the discrimination requirement applicable to highly compensated and key employees. This change will ease many businesses administrative burden, but its largely limited to C corporations. Sole proprietors, members of LLCs, partners and owners of more than two percent of shares of an S corporation are ineligible.
4. W-2 reporting of health care benefits (2012). Employers must calculate and aggregate the total cost of applicable employer-sponsored health coverage on employees Form W-2. There are no income tax consequences; its simply a reporting requirement.
5. Expansion of Form 1099 reporting (2012). Currently, a business that pays an individual $600 or more for services during a calendar year must file a Form 1099. Beginning in 2012, Form 1099 reporting will be expanded to include payments made to corporations for tangible goods, too. There are measures in the House and Senate to repeal this provision.
6. Medicare payroll tax increase (2013). Medicare hospital insurance payroll tax will increase 0.9 percentage points on wages and self-employment income in excess of $200,000 (single filers) or $250,000 (married couples filing jointly). Although there will be no change to the employer portion, employers will have to withhold 0.9 percent of an employees wages exceeding $200,000 (disregarding a spouses potential wages).
7. Medicare tax on unearned income (2013). Individuals, trusts and estates will be subject to a 3.8 percent Medicare tax on the lesser of net investment income or modified adjusted gross income over $200,000 (for single filers) or $250,000 (for married couples filing jointly). In general, unearned income includes interest, dividends, capital gains, rents and passive activity income, less allowable deductions.
8. Flexible spending account limits (2013). Currently there’s no cap on the amount employees can contribute to FSAs. Spending limits are left to the employers discretion. Starting in 2013, FSAs will be limited to $2,500 annually.
9. Employer mandate (2014). Businesses with 50 or more full-time equivalent employees who don’t offer minimum essential coverage at an affordable rate or who provide no coverage will be subject to penalties of $2,000 to $3,000 per employee, depending on the extent of coverage.
10. Employer reporting (2014). Employers offering minimum essential coverage will be required to report certain coverage information annually to the IRS and to covered individuals.
It’s worth noting that several of these provisions remain controversial and could be modified or rescinded by Congress. In the meantime, understanding whats in the pipeline is the first step toward planning for ways to leverage the opportunities of health-care reform.
Robert Grannum has more than 12 years of experience providing federal and state tax services to a variety of businesses, with particular emphasis on the health-care industry. He can be reached at firstname.lastname@example.org.