The Patient Protection and Affordable Care Act of 2010, in concert with the enactment of the Health Care and Education Tax Credits Reconciliation Act of 2010, resulted in a number of changes to the US tax code. As such there are a number of tax implications for individuals and businesses.
Healthcare Exchanges, which are also referred to as Health Insurance Marketplaces, officially opened for enrollment on October 1, 2013. Some of these exchanges are run by the state in which you reside. Others are run by the federal government.
Individuals (including self-employed) who do not currently have insurance or buy insurance on their own can use these marketplaces to buy insurance, which becomes effective January 1 of each year. When you get health insurance through the Marketplace, you may be able to get the new advance Premium Tax Credit that will immediately help lower your monthly premium.
Starting January 2014, United States citizens and legal residents must obtain minimum essential health care coverage for themselves and their dependents, have an exemption from coverage, or make a payment when filing a 2015 tax return in 2016. The Individual Mandate is also known as the Individual Shared Responsibility Payment. Only the amount of income above the tax filing threshold ($10,000 indexed for inflation) for an individual, is used to calculate the penalty.
The payment varies and is based on income level.
In 2015, the penalty is $325 per person for the year ($162.50 per child under 18) or approximately 2 percent of your yearly household income, whichever is higher. The maximum penalty per family using this method is $975. In 2014, the basic penalty for an individual (no dependents) was $95 per person for the year ($47.50 per child under 18) or 1 percent of your yearly income (whichever is higher), with substantial increases in subsequent years. The maximum penalty per family using this method is $285.
In 2016, the penalty increases to $695 per person for the year or 2.5 percent of yearly household income (again, whichever is higher), indexed for inflation thereafter.
Most people already have qualifying health care coverage and do not need to do anything more than maintain that coverage throughout the year. Self-insured ERISA policies used by larger employers, as well as Medicare, Medicaid, and CHIP (Children’s Health Insurance Program), and all of the health insurance plans offered by the exchanges fall under the category of minimum essential health care coverage.
Note: Certain individuals are exempt from the tax and include: (1) people with religious objections; (2) American Indians with coverage through the Indian Health Service; (3) undocumented immigrants; (4) those without coverage for less than three months; (5) those serving prison sentences; (6) those for whom the lowest-cost plan option exceeds 8 percent of annual income; and (7) those with incomes below the tax filing threshold who do not file a tax return ($10,300 for singles and $20,600 for couples under 65 in 2015).
Refundable Tax Credit
Effective in 2014, certain taxpayers are able to use a refundable tax credit to offset the cost of health insurance premiums so that their insurance premium payments do not exceed a specific percentage of their income. Qualified individuals are those with incomes between 133 percent and 400 percent of the federal poverty level. A sliding scale based on family size is used to determine the amount of the credit. In addition, married taxpayers must file joint returns to qualify.
FSA (Flexible Spending Arrangements) contributions are limited to $2,500 per year starting in 2013 and indexed for inflation after that. In 2016, the limit remains at $2,550 (same as 2015).
New Rules for HSAs and Archer MSAs
Tax on non-qualified distributions from HSAs and Archer MSAs that are used to cover the cost of over the counter medicine without a script increased to 20 percent starting in 2011. Medical devices, eyeglasses, contact lenses, copays, and deductibles are not affected, nor is Insulin even if it is non-prescription.
Medicare Part D
The subsidy for the Medicare Part D tax deduction for employer provided retirement prescription drug coverage was eliminated starting in 2013.
Increase in AGI Limit for Deductible Medical Expenses
Starting in 2013 the limit for deductible medical expenses increased to 10 percent of AGI (7.5 percent in prior years); however, the 7.5 percent threshold continues through 2016 for taxpayers aged 65 and older, including those turning 65 by December 31, 2016.
Health Coverage of Older Children
The cost of employer provided health care coverage for children (through age 26) on tax returns is excluded from gross income.
Medicare Tax Increases for High Income Earners
Starting in 2013, there is an additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly).
Also starting in 2013, there is a new Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the new tax.
Exemptions are available for business owners and income from certain retirement accounts, such as pensions, IRAs, 401(a), 403(b), and 457(b) plans, is exempt.
If you run an income-generating business with no employees, then you’re considered self-employed (not an employer) and can get coverage through the Marketplace and use it to find coverage that fits your needs.
Note: You are not considered an employer even if you hire independent contractors to do some work.
If you currently have individual insurance, that is, a plan you bought yourself and not the kind you get through an employer, you may be able to change to a Marketplace plan.
Note: You can’t be denied coverage or charged more because you have a pre-existing health condition.
Small Businesses (50 or Fewer Employees)
If you have 50 or fewer full-time equivalent (FTE) employees (generally, workers whose income you report on a W-2 at the end of the year) you are considered a small business under the health care law.
As a small business, you may get insurance for yourself and your employees through the SHOP (Small Business Health Options Programs) Marketplace. This applies to non-profit organizations as well.
And, if you have fewer than 25 employees, you may qualify for the Small Business Tax Credit (see next section). Non-profit organizations can get a smaller tax credit.
Note: Beginning in 2016, the SHOP Marketplace is open to employers with 100 or fewer FTEs.
As an employer, you must provide notification to your employees of coverage options available through the Marketplace and are required to provide this notice to all current employees and each new employee beginning October 1st, 2013, regardless of plan enrollment status or full or part-time employment. The Department of Labor has sample notices that employers can use to comply with this regulation. One notice is for employers who do not offer a health care plan and the second for employers who offer a health care plan.
Small Business Health Care Tax Credit
Small businesses and tax-exempt organization that employ 25 or fewer, full-time equivalent workers with average incomes of $51,600 or less in 2015 (as adjusted for inflation since 2014), and that pay at least half (50 percent) of the premiums for employee health insurance coverage are eligible for the Small Business Health Care Tax Credit. For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.
Starting in 2014, the tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). The tax credit is highest for companies with fewer than 10 employees who are paid an average of $25,800 or less in 2015 (as adjusted for inflation since 2014). The smaller the business, the bigger the credit is.
Note: The credit is available only if you get coverage through the SHOP Marketplace.
Additional Tax on Businesses Not Offering Minimum Essential Coverage
Effective January 1, 2015, an additional tax is levied on businesses with 50 or more full-time equivalent (FTE) employees that do not offer minimum essential coverage. This penalty is sometimes referred to as the Employer Shared Responsibility Payment or “Pay or Play” penalty.
For tax years 2015 and after, an applicable large employer is liable for an Employer Shared Responsibility payment only if:
(a) The employer does not offer health coverage or offers coverage to fewer than 95 percent of its full-time employees in 2015, and the dependents of those employees and at least, one of those full-time employees receive a premium tax credit to help pay for coverage on a Marketplace;
(b) The employer offers health coverage to all or at least 95 percent of its full-time employees in 2015), but at least one full-time employee receives a premium tax credit to help pay for coverage on a Marketplace, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value.
Note: Employers with fewer than 50 FTE employees are considered small businesses and are exempt from the additional tax.
Employers that are subject to the employer shared responsibility provisions (Applicable Large Employers or ALEs) also have information reporting responsibilities regarding minimum essential coverage offered to employees. These responsibilities require employers to send reports to employees and to the IRS. The first information reporting returns are due to be filed and furnished in 2016 for 2015. An employer that sponsors self-insured health insurance coverage – whether or not the employer is an ALE – has insurer information reporting responsibilities as a provider of minimum essential coverage.
The amount of the annual Employer Shared Responsibility Payment is based partly on whether you offer insurance.
- If you don’t offer insurance, the annual payment is $2,000 per full-time employee (excluding the first 30 employees)
- For an employer that offers coverage to at least 95 percent of its full-time employees (and their dependents), but has one or more full-time employees who receive a premium tax credit, the payment is computed separately for each month. The amount of the payment for the month equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month is capped at the number of the employer’s full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000.
Note: Unlike employer contributions to employee premiums, the Employer Shared Responsibility Payment is not tax deductible. In addition, Employer Shared Responsibility payments are indexed to inflation beginning in years after 2014.
A health plan meets minimum value if it covers at least 60 percent of the total allowed costs of benefits provided under the plan. To determine whether other coverage meets minimum value, please contact us for assistance.
Note: All plans in the Marketplace meet minimum value, so any coverage offered through the SHOP Marketplace should qualify.
Excise Tax on High-Cost Employer-Sponsored Insurance
Effective in 2020, a 40 percent excise tax indexed for inflation will be imposed on employers with insurance plans where the annual premium exceeds $10,200 (individual) or $27,500 (family). For retirees age 55 and older, the premium levels are higher, $11,850 for individuals and $30,950 for families.
Excise Tax on Medical Devices
Effective January 1, 2014, a 2.3 percent tax was levied on manufacturers and importers on the sale of certain medical devices; however, PATH eliminated this excise tax for tax years 2016 and 2017. A “taxable medical device” is defined in the Federal Food, Drug and Cosmetic Act intended for humans, but does not include: (1) eyeglasses; (2) contact lenses; (3) hearing aids; and (4) any other medical device determined by the Department of Treasury to be of a type which is generally purchased by the general public at retail for individual use.
Indoor Tanning Services
A 10 percent excise tax on indoor tanning services went into effect on July 1, 2010. The tax doesn’t apply to phototherapy services performed by a licensed medical professional on his or her premises. There’s also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.
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