Key Changes in the New Healthcare Law

The Patient Protection and Affordable Care Act, which was just signed into law by President Obama, will significantly change the face of health care for employers and many individuals. In addition to virtually mandating health coverage for all citizens in the United States, the massive law includes significant tax changes. Many of the provisions do not become effective for two to four years. Here is a brief summary of what the legislation contains and when you and your company might be affected.

“ And we have now just enshrine … the core principle that everybody should have some basic security when it comes to their health care.”

– President Barack Obama
signing the Patient Protection and Affordable Care Act on March 23, 2010

The new Patient Protection and Affordable Care Act of 2010, and its accompanying reconciliation law, provide broad-based changes for employers as well as many individuals. In addition to virtually mandating health insurance coverage for all U.S. citizens, this massive health care reform legislation includes several other far-reaching tax provisions.

The changes generally take effect over time – in some cases, you won’t see them for two to four years. But advance planning can maximize tax advantages for some and minimize tax disadvantages for others.

HERE’S A BRIEF SUMMARY OF SOME OF THE PROVISIONS.

Individual coverage – This is one of the foundations of the health care legislation. For tax years beginning after 2013, any individual who is not eligible for Medicare or Medicaid must obtain “ minimum essential coverage” through an employer-sponsored plan or one of the other options, such as a government-sponsored plan or a private plan. If you fail to do so, you will be assessed a nondeductible tax penalty based on the greater of a flat dollar amount (cut in half for children under age 18 or full-time students) or a percentage of household income (see chart below).

These figures will be phased in over three years and then adjusted for inflation for tax years beginning after 2016.

< TABLE >

Premium assistance credits – For tax years beginning after 2013, the new law provides “ premium assistance credits” that certain taxpayers can use to help purchase health insurance through a state-run exchange. Eligibility for this refundable tax credit will be based on household income in the tax year ending two years before the enrollment period.

The credit is generally available to taxpayers with a household income between 100 percent and 400 percent of the federal poverty level who aren’t receiving health insurance through an employer (or spouse’s employer). This credit is coordinated with reduced cost-sharing for qualified individuals.

Employer responsibilities – For tax years beginning after 2013, an employer may have to pay a tax penalty if it fails to offer minimum essential coverage to an eligible employee. The penalty for each month is equal to the number of full-time employees multiplied by one-twelfth of $2,000.

This rule applies to any employer with at least 50 full-time employees during the prior calendar year. Note: The penalty is based on all full-time employees, not just employees who aren’t receiving minimal essential coverage. But an employer can subtract the first 30 employees from the calculation. For instance, the penalty for an employer with 100 full-time employees is based on 70 employees.

Small business credits – The new requirements for employers may be costly, but qualified small business owners can benefit from a special tax credit.

For tax years beginning in 2010 through 2013, an eligible small business can receive a credit of up to 35 percent of the contribution for employee health insurance premiums. In 2014 and later years, an eligible business can receive an increased credit of 50 percent of the contribution for a two-year period. The credit is available for small employers with less than 25 full-time equivalent employees.

Medicare tax – The new law includes a fundamentally different tax treatment in the imposition of the 1.45 percent Medicare tax paid by individuals (2.9 percent for self-employed individuals). Previously, this payroll tax only applied to “ earned income” such as wages and bonuses. No part of the Social Security tax, including the Medicare tax, was ever due on “ unearned income” received from investments. For tax years beginning after 2012, certain high-income taxpayers may be assessed an additional tax on earned income and an unprecedented Medicare tax on unearned income.

New Reporting Requirements

For tax years beginning after 2011, the new law requires employers to report the value of the employer-sponsored health insurance coverage on employees’ W-2 forms. It also requires businesses to file information returns for all payments totaling $600 or more in a calendar year to a single recipient, including corporations (other than tax-exempt entities). Additional details on these requirements will be issued in the future by the IRS.

Two New “ Payroll” Taxes for High-Income Earners

The Patient Protection Act imposes two new extra Medicare taxes on high-income individuals beginning in 2013:

You must pay an additional 0.9 percent Medicare tax on earned income if you’re a single tax filer with earned income above $200,000 or a joint filer with earned income above $250,000.

You must pay an additional 3.8 percent Medicare tax on net investment income if you’re a single tax filer with a modified adjusted gross income (MAGI) above $200,000 or a joint filer with a MAGI of more than $250,000.

Example: Let’s say in 2013, you receive $220,000 in wages, $70,000 in capital gains and $10,000 in IRA distributions, for an MAGI of $300,000. Because you’re a joint filer and your MAGI exceeds the threshold by $50,000, you must pay the additional Medicare tax on $50,000 of your capital gains, or an extra $1,900 ($50,000 times 3.8 percent). However, you don’t owe the extra 0.9 percent tax because your earned income doesn’t exceed the $250,000 threshold.

There are numerous other tax provisions in the new health care law, including changes for cafeteria plans, flexible spending accounts and other tax-favored health care accounts; and fees on insurers for high-cost insurance plans. Other special rules and “ grandfather” exceptions for health plans may apply.

Consult with your tax and employee benefits advisers for assistance relating to these issues for both the present and the foreseeable future.

Timely Opportunities ©2000-2010 BizActions LLC, All Rights Reserved

DIRECT 401(K)-TO-ROTH ROLLOVERS

Years ago, if you wanted to convert assets in a 401(k) plan to a Roth, you had to make two moves. First, you had to roll over the 401(k) assets to a traditional IRA. Then, you had to convert the IRA to a Roth.

But the Pension Protection Act of 2006 authorized direct rollovers from qualified plans, such as 401(k)s, to Roth IRAs.

Now that the $100,000 dollar cap has been removed, you might take advantage of the 401(k) change. The IRS issued guidance in Notice 2009-75 on this technique. Here are a few key points:

If you roll over assets from a designated Roth-401(k), the amount rolled over isn’t taxable, regardless of whether it constitutes a qualified distribution or not.

Other transfers are subject to tax. The taxable amount is equal to the amount transferred to the Roth reduced by any after-tax contributions.

Special rules apply to net unrealized appreciation of company stock in a plan account. A plan participant generally does not owe tax on this appreciation when it is distributed. The IRS Notice clarifies that tax on net unrealized appreciation can’t be avoided in a direct rollover to a Roth IRA.

BUSINESS WISDOM FOR TODAY’S ECONOMY

“Anyone may arrange his affairs so that his taxes shall be as low as possible … nobody owes any public duty to pay more than the law demands.”

– U.S. Court of Appeals Judge Learned Hand (1872-1961)