The Patient Protection and Affordable Care Act [“PPACA”] (also sometimes referred as “The Affordable Care Act” or “ObamaCare”) was originally enacted in 2010 but essentially became significant legislation this past summer when in a landmark decision, the Supreme Court by a margin of 5-4 upheld the law as constitutional. We at Langdon & Company LLP, a Raleigh CPA firm have tax professionals available to help guide you and your business through planning for the Act.
The key challenge to the legislation had been the controversial individual mandate designed to incent every U.S. citizen to obtain health insurance. In ruling that the penalties imposed under the law for violation of the insurance mandate are equivalent to a permissible tax, the Supreme Court ensured that this legislation insurance requirements and tax increases will remain intact until new legislation can be passed. This article provides an overview of the key provisions of PPACA.
The Insurance “Mandates”
Even with the passing of PPACA, it should be clearly understood that there is no Federal Law requiring employers offer health insurance coverage to employees and their families. Under the new law, beginning in 2013 as part of a shared responsibility for employers regarding health coverage, a large employer (in general, an employer with at least 50 full-time employees) that doesn’t offer “adequate” health care coverage for its full-time employees will be subject to an excise tax. “Adequate” is defined under the law as when an employer subsidizes at least 60% of the cost and that the employee’s share of costs does not exceed 9.5% of their household income. An employer subject to the excise tax will be exclude its first 30 uninsured employees from the calculation but may be exposed to a potential penalty tax of $ 3,000 per uninsured employee above that count.
Complementing the incentive for employers to provide healthcare, individuals will also be subject to a “penalty” tax of their own if they do not obtain qualified health insurance coverage. Beginning in 2014, individual taxpayers without coverage will be subject to a penalty tax of $ 95 per adult ($285 for a family), with the amount increasing to $ 695 (and $2,085 for a family) in 2016. The penalty will be an additional tax calculated and reported on Form 1040. PPACA does include provisions to assist individuals in obtaining affordable health insurance by mandating the creation of “Affordable Insurance Exchanges” [“Exchanges”] in every state and the District of Columbia. The Exchanges’ purpose will be to establish a competitively priced market for health insurance as well as facilitate the granting of Premium Credits by the Federal government to qualifying low income families and individuals to help defray the cost of health insurance.
The Tax Increase
Beyond the insurance mandate, PPACA incorporated a 2-pronged Medicare tax increase on high-income taxpayers in order to assist with the funding of this legislation; (a) increased tax on wages and (b) increased tax on investment earnings.
- a. Effective for tax years beginning after 2012, PPACA will impose an additional 0.9% (9/10 of 1%) Medicare Tax on taxpayers receiving wages in excess of the “applicable threshold” for their filing status. The “applicable thresholds” are $200,000 for single filers, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. Recently released guidance from the Internal Revenue Service confirmed that all wages currently subject to existing Medicare taxes are also subject to the new Medicare tax increase. An employer will be required to withhold the additional Medicare tax in the pay period in which the respective employee’s year-to-date wages exceed the $200,000 (regardless of their filing status). The employer withholding will be required even if the employee’s annual wages are expected to exceed the threshold, need not notify an employee when it commences the additional tax withholding, and must include residents, nonresident aliens or U.S. citizens living abroad. Self-employed individuals (including nonpassive partners and LLC members) will need to factor the additional tax in their quarterly estimated tax payment calculations. Form 1040 will be revised to permit the reporting of the Medicare Tax and any related withholdings or estimated tax payment amounts made during the year.
- b. The second Medicare Tax increase relates to investment earnings. High income taxpayers (i.e. those taxpayers whose adjusted gross income exceeds the “applicable thresholds” mentioned above) will be subject to a 3.8% Medicare Tax on earnings from capital gains, dividends, interest income, royalties and rental income. Excluded from the additional Medicare Tax on investment earnings are distributions from retirement plans or social security. Note that although both of these taxes are considered 2013 Medicare Tax increases, they are independent of each other; therefore high income individuals may be subject to both of these new Medicare Taxes depending on their level of wages and investment income.
Other Changes under PPACA
Other provisions of PPACA that impacts employers and employees include changes to family insurance coverage and Health Spending Accounts. First, expanding on an employee’s ability to purchase family insurance coverage from an employer, now children under 27 years of age may be included on their parents plan. Pre-tax insurance coverage typically is provided by an employer via a cafeteria plan or similar arrangement and now allows an employee to cover his/her children who have not yet reached age 27 regardless of whether the child qualifies as a dependent for tax purposes. Typically this will permit working parents to continue to provide their grown children with access to health insurance coverage for a longer period of time after high school (and college) before the child must obtain their own independent coverage. Second, the cost of over-the-counter medicine or drugs cannot be reimbursed from Health Savings Accounts (“HSA”), Flex Spending Arrangements (“FSA”) or Health Reimbursement Arrangement (“HRA”) without a prescription. This new “prescription” restriction does not apply to insulin or medical devices eyeglasses, and contact lenses. Third, penalties on nonqualified distributions from “HSA” accounts (i.e. when funds are not used for qualified medical expenses) will increase to 20% from the 10% under current law and annual contributions to an “FSA” are modified under PPACA, as the amount will now be limited to $2,500 per year.
The full text of PPACA is voluminous and contains reference to many other provisions not discussed in this article that could require action by employers. More information can be obtained on the internet from U.S. Dept. of Health and Human Services, Internal Revenue Service or by contacting Langdon & Company, a Raleigh NC CPA, or Healthcare Law Professional.
Anthony (Tony) Pandiscia, JD, CPA, is the tax partner in charge at Langdon & Company LLP. A 25-member firm based in Wake County and providing tax, audit, and advisory services to nonprofits, businesses and individuals, Langdon & Company LLP was recently honored for the 2nd consecutive year as one of the “Best Places to Work” by the Triangle Business Journal.