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Healthcare Reform Tax Alert
– April 8, 2010
For informaiton on how this reform affects medical practices, click here.
For information on how this reform affects hospitals, click here.
President Obama’s March 23, 2010 signature on the massive healthcare reform law, the Patient Protection and Affordable Care Act and the related sidecar legislation termed the Reconciliation Act, is the most sweeping change to the healthcare system since the implementation of the Medicare system.
Fortunately, the tax increases will not become effective until 2013, so there is time to anticipate and perhaps mitigate the impact of those increases. This Alert aims to communicate the significant tax issues impacting businesses and individuals. The new law was passed lacking many details to be provided later through regulations, but the framework is sufficient to enable business owners and individuals to take action soon. This is massive legislation and while the full impact is too long for a communication of this intended brevity, a few provisions which will have the broadest impact are outlined below.
IMPACT ON BUSINESSES
Small Business Tax Credit. For tax years beginning after 2009 a credit of up to 35% of the health insurance premiums paid for employees is available to employers who have less than 25 full time equivalent employees (FTE). To receive the credit, a business must have 25 or fewer FTEs, have average wages less than $50,000 and pay for at least 50% of the health insurance premiums. The full credit is only available to employers with 10 or fewer FTEs. After 2013, the availability of the credit is limited.
Penalty on Not Offering Health Coverage. Beginning in 2014, employers with more than 50 employees will be subject to penalties for failure to offer “minimum essential coverage” at “affordable” rates or for paying less than 60% of the health premium. The annual penalty can be $2,000 to $3,000 per employee. However, this penalty is waived on the first 30 employees. As insurance companies tailor policies to meet the minimum coverage requirement, a determination of premium cost versus penalty can be made.
Reporting of Employer Health Insurance Coverage. Starting in 2011, employers must include on Forms W-2 the value of health insurance premiums provided for each employee. This reporting is in anticipation of a 2018 excise tax of 40% imposed on the annual value of health benefits if that benefit exceeds $10,200 for a single individual or $27,500 for a family.
Prescription Drug Cost Subsidy Changes. Employers who provide retirees with a prescription drug benefit currently receive a subsidy from the government of 28% of their cost. That subsidy is not taxable even though it offsets a portion of their cost. Beginning in 2013, the cost must be reduced by the amount of the subsidy and only the net cost deducted. This provision has prompted certain major companies to announce multi-million dollar charges to earnings in the first quarter of 2010.
Changes to Form 1099 Information Reporting. The legislation expands current reporting rules to require a business to furnish and file Form 1099-MISC for all payments that total $600 or more in the aggregate during a calendar year to a single business (other than to a tax-exempt corporation) regardless of their corporate status. The payments to be reported include amounts paid for property or services. The provision does not apply for certain payments currently exempted from reporting, such as securities and broker transactions. The provision is effective for payments made after December 31, 2011.
Early indications reveal that these changes will likely cause the Form 1099 reporting volume, as well as the associated B-Notices, to increase significantly for most companies. While the law applies to payments made after December 31, 2011, companies should consider broad changes now including: W-9 procedures to include all vendors; soliciting W-9's for corporate vendors; preparing for larger Form 1099 year-end printing, mailing, and filing; and making the appropriate budgetary and system updates to accommodate these future changes.
Codification of the Economic Substance Doctrine. The economic substance doctrine permits the IRS to disregard a transaction that complies with the literal terms of the Internal Revenue Code but, except for the expected Federal income tax benefits, lacks economic substance. Under the legislation, there are now two tests the IRS will apply to determine whether or not a transaction has an economic purpose or was created to avoid income tax. A transaction is treated as having economic substance only if (1) the transaction changes in a meaningful way (apart from the Federal income tax effects) the taxpayer's economic position, and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction.
TAX CHANGES AFFECTING INDIVIDUALS
Additional Medicare Tax on High Earned Income. The current employee portion of the Medicare tax is 1.45% imposed on all wages. For 2013 and after, that tax is increased by 0.9% on all income over $200,000 for individuals and $250,000 for joint filers. This increase applies to only the employee portion, not the employer’s required matching of the 1.45%. Self employed individuals are also subject to the increase.
Unearned Income Tax Increase. Beginning in 2013, a 3.8% tax is added to “unearned” income for persons whose income exceeds a certain threshold. Income from interest, dividends, rents, royalties, certain capital gains and net income from passive activities may be subject to this additional tax. However, this tax will apply only to those individual and joint filers with income above $200,000 and $250,000 respectively.
These taxes may seem relatively benign but remember that the tax cuts adopted during the Bush administration will expire at the end of 2010. This will raise the top tax bracket from 35% to 39.6% and return the tax on dividend income to taxation at that higher rate from its present 15% rate. Thus, some “unearned” income will be taxed at a Federal rate of 43.4%. Adding a state income tax rate of 5% produces a combined rate of almost 50%.
Limits on Flexible Savings Accounts (FSAs). The maximum contribution to a health FSA will be limited to $2,500 annually beginning with years after 2012. This amount will be indexed for inflation based on the consumer price index after 2013. FSAs are administered through cafeteria plans and are used by employees to obtain tax savings on prepaid, qualified prescription drug and medical expenses. The use of FSA funds for over-the-counter medications will not be allowed under the new law.
Increase in AGI Floor on Medical Expense Deductions. The legislation increases the adjusted gross income threshold for claiming the itemized deduction for medical expenses from 7.5% to 10% beginning after 2012. The 7.5% threshold is retained through 2016 for individual taxpayers who have attained age 65 (or have a spouse who has attained age 65) before the close of an applicable tax year.
Modification to Adoption Credit. The child adoption tax credit and adoption assistance exclusion are increased in 2010 from $12,170 to $13,170 (and indexes that amount for inflation). The legislation also extends the credit through 2011 and makes it refundable to taxpayers.
Tanning Salons. The cost of keeping that golden tan year-round just went up. The legislation imposes a 10% tax on amounts paid for indoor tanning services. The tax is to be collected by tanning salon service providers. The provision is effective for services performed on or after July 1, 2010.
FINAL THOUGHTS
Begin planning for transactions which have any element of discretion as to timing. It may be advisable to accelerate a sale rather than permit it to occur in a future year with higher tax costs. Timing of passive income recognition, itemized deduction payments, receipt of bonuses and sale of a business are all more crucial as a result of these tax changes. Warren Averett is prepared to help you with this planning to minimize tax liability.
Warren Averett will continue to monitor the implications of Healthcare Reform. As additional information becomes available we will discuss the relevancy with you. Please contact your Warren Averett advisor or one of the contacts listed below for additional information:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
