Now Health Care and Taxes are Certain

Debate all you want about whether it is a step in the right direction or not, but a version of health care reform has become law. One interesting aspect of this is how involved the IRS will now be in everyone's health care, as Congress has picked that agency primarily to administer the laws requiring health insurance, providing subsidies to those who cannot afford health insurance, and implementing various provisions to help pay for the cost of the new law. We will see just how effective the IRS can be with this new task as the various provisions of the law become effective piece-by-piece over the next several years.

As if the new law isn't complex enough just with the substantive provisions in it, different parts of the law become effective at different times. Most of the law will be in operation by 2014, but one provision doesn't even take effect until 2018. We are here to help you sort out what parts are applicable to you and/or your business, and when they go into effect. We will focus mostly on the provisions in the law with tax implications, but if you hear about something we may not cover here, please contact us if you would like to know more.

Provisions Taking Effect in 2010

  • Children can now be covered by their parent's health insurance through age 26. If that health insurance is provided by your employer, the benefit is tax-free to the employee. And a health flexible spending account (FSA) or health reimbursement arrangement (HRA) can now be used to cover out-of-pocket medical expenses of those children.
  • Small businesses (including non-profit organizations), meaning those with 25 or fewer full-time equivalent employees and with average wages of less than $50,000 per full-time equivalent employee, will receive a tax credit for some portion of the health insurance premiums they pay for their employees' coverage. The credit has various phase-outs depending on number of employees and average wages, phase-ins of the credit percentage over the next few years, exclusions for owner-employees and family members, comparisons to state average insurance premiums, etc. In other words, it is complex and requires an analysis of your specific situation to know if you qualify. We are here to help.
  • Effective July 1, tanning salons will be required to tack on a 10% excise tax to the tanning services they provide. Merchandise purchased at the salon, or other services provided, are not subject.

Provisions Taking Effect in 2011

  • You will no longer be able to use your health FSA, HRA, or health savings account (HSA) to pay for over-the-counter drugs.
  • The penalty on HSA distributions not used to pay for qualified medical expenses increases from 10% to 20%.

Provisions Taking Effect in 2012

  • This is the year a provision that is completely unrelated to health-care takes effect, but it was in this act solely to raise revenue to help pay for the health care act. Beginning in 2012, all businesses will be required to file a Form 1099 to report purchases of goods or services of over $600 from all vendors. Right now, a business primarily reports payments to non-employee service providers that are not corporations on Form 1099-MISC. This is generally a very small fraction of a business' overall purchases from vendors during a year. Starting in 2012, virtually every payment for any good or service will need to be reported to the IRS. As the law stands right now, for instance, if your business buys over $600 of office supplies from Office Depot during the year, you will have to send Office Depot a Form 1099. The IRS commissioner has indicated that the IRS plans to use its administrative authority to exempt purchases made using debit or credit cards from this reporting requirement, but payments with check or cash will still need to be reported to the IRS. This sneaky provision in the health care reform act may actually be the one that affects small businesses the most.

Provisions Taking Effect in 2013

  • "High-income" taxpayers, single with wages over $200,000 or married with combined wages over $250,000, will be subject to a 0.9% Medicare tax surcharge on the amount of wages over these thresholds. Employers will be required to withhold this extra Medicare tax only if their employee by himself or herself exceeds the threshold. In situations, say, where both spouses work and earn $200,000 each, no extra Medicare tax will be withheld by their employers, but the couple will have to pay in the $1,350 ($400,00 wages - $250,000 threshold = $150,000 * 0.9%) of extra Medicare tax via estimated tax payments or with their tax return.
  • Using a slightly different measurement, "high-income" taxpayers with AGI over $200,000 for single or $250,000 for married, will be subject to a 3.8% Medicare tax on their net investment income. Net investment income includes interest, dividends, capital gains, rents, and income from passive activities.
  • The floor on medical expenses deductible as an itemized deduction will increase from 7.5% of AGI to 10% of AGI for taxpayers under age 65. For a taxpayer over age 65 (and his or her spouse), the floor doesn't increase to 10% until 2016.
  • The amount that can be contributed to a health FSA to be used to pay for medical expenses with pre-tax dollars will be limited to $2,500 per year. This amount will be the same whether the employee is single or has a family.

All those provisions come into effect over the next four years, and we still haven't gotten to the supposed real heart of the health care act, which is to ensure that all Americans have health insurance. Starting in 2014 is when the law begins to have mandates requiring businesses to provide health insurance, individuals to have health insurance, and providing assistance to those who can't afford health insurance. Of course, there are exceptions to all those mandates, but the reality of the matter is that in 2014 the IRS effectively becomes the health-care police. This is because the law was written so that the penalties for not having health insurance (or, if you are a large enough business, not providing health insurance to your employees) are structured as taxes, meaning they are under the jurisdiction of the IRS. Isn't that a scary thought?

We will continue to provide more information as the various parts of this new law become effective. Right now, the provision with the most current impact is the credit for small businesses that provide health insurance to their employees. We are currently working with our clients to analyze their situations to determine how much credit they may qualify for and, if necessary, adjusting their estimated tax payments to account for this credit. If you would like us to analyze your situation now, please contact us.