Health Care Reform: How will it affect your pocketbook?
President
Barack Obama came into office promising an era of change. On March 23 he
delivered on one campaign promise by signing into law what is arguably the
most sweeping change to the nation's health care system in U.S. history.
To give you some idea of the effort expended in passing the measure - and
the sheer enormity of the bill - let's look at a few facts.
On March 21, the United States House of Representatives passed H.R. 3590, the Patient Protection and Affordable Care Act. This bill, called the Health Care Act, was subsequently amended by H.R. 4872, the Health Care and Education Affordability Reconciliation Act of 2010. The Reconciliation Act was signed into law on March 30.
The Health Care Act is a 906-page document and The Reconciliation Act is a 2,310-page document, according to the Government Printing Office.
This information, along with all the recent press about the acts, will help you understand how massive the new law is and how complicated it will be to implement. With that in mind, let's discuss a few of the major tax provisions and their implications in the new law.
Higher Payroll Taxes
As with most government initiatives this size, there has to be some mechanism to pay for the plan. One of those revenue raisers is an increase in Medicare taxes on wage earners. A new 0.9 percent Medicare tax will be levied on taxpayers who file single and earn more than $200,000. The threshold for married couples filing jointly is $250,000. Presently, all taxpayers pay 1.45 percent of their earned income in Medicare taxes, which is matched dollar for dollar by their employer. Self-employed individuals pay the full 2.9 percent. Beginning in 2013, taxpayers will pay an additional 0.9 percent on amounts in excess of these base amounts. The $200,000 and $250,000 thresholds will not be indexed for inflation.
Medicare Taxes on Unearned Income
Currently, individuals pay Medicare taxes only on earned income (wages and self-employment income). Unearned income (dividends, capital gains, etc.) is not subject to Medicare tax. Beginning in 2013, this exception will disappear. For those with adjusted gross incomes in excess of $200,000 for singles and $250,000 for married couples filing jointly, a new 3.8 percent Medicare tax will be levied on net investment income in excess of those threshold amounts.
How this will affect individual taxpayers will depend on the source of their income. For example, if a married couple has $75,000 in wages and $300,000 in capital gains, the new tax would apply to net investment income of $125,000 ($75,000 + $300,000 less $250,000). The overall additional tax would be $4,750 (3.8 percent of $125,000). Let's take a look at high wage earners. Assume our sample couple earns $300,000 and has $75,000 in capital gains. The increased Medicare tax would equal $3,300 (0.9 percent of earned income over $250,000 plus 3.8 percent of $75,000 net investment income).
Income from tax deferred retirement accounts such as a 401(k) or similar accounts will not be included in income subject to the additional tax. The tax would apply to estates and trusts. The two provisions increasing Medicare taxes are estimated to increase revenue by $210 billion over 10 years.
Deductible Medical Expenses
Presently, medical expenses in excess of 7.5 percent of adjusted gross income can be deducted as an itemized deduction. The new law increases this threshold to 10 percent for tax years after 2012. For individuals older than 65 and their spouses, the new threshold will not take effect until after 2016.
This increase in the nondeductible floor could have unintended consequences to those forced to withdraw funds from their retirement accounts to pay medical bills. Under current law, IRA withdrawals used to pay for deductible medical expenses (i.e. expenses in excess of the 7.5 percent floor), are not charged a 10 percent penalty upon early withdrawal. Increasing the floor to 10 percent will raise the portion of a withdrawal subject to penalty.
For example, assume you are 35 years old and must withdraw $25,000 from your IRA to pay a hospital bill for your child. Assume also that your adjusted gross income is $125,000 and you itemize deductions. Under current law, your itemized deduction would be $15,625 ($25,000 - [7.5 percent of $125,000]). The new law would reduce that deduction by $3,125 to $12,500. Additionally, if your withdrawal is subject to the early withdrawal penalties, you would pay a 10 percent penalty tax on the $3,125.
Since the new law does not take effect until 2013, perhaps Congress will be able to address the higher penalty tax. This change is expected to increase revenue by $15 billion over 10 years.
Individuals Without Coverage
Beginning in 2014, nonexempt U.S. citizens and legal residents will be required to maintain a minimum amount of health coverage. Individuals who fail to do so will be subject to certain penalties beginning in 2016. The penalty will be the greater of 2.5 percent of household income over the minimum income required to file a tax return or a per-person penalty rate. The rate for each adult in the household would be $695 while the rate for uninsured children under 18 years old will be half of the adult rate. The overall penalty cannot exceed 300 percent of the per-adult penalty, or $2,085.
Low Income Tax Credits
Families and individuals with income of up to 400 percent of the federal poverty level ($43,320 for an individual or $88,200 for a family of four) will be eligible for a cost sharing subsidy if they participate in a local health insurance exchange. They cannot be eligible for Medicaid, employer-sponsored insurance or other acceptable insurance.
Every Bill has its Quirks
As a side note, there are a few obscure provisions that were hardly mentioned during the debate. One of those is a tax on indoor tanning services. Beginning July 1, if you use an indoor tanning salon, expect to see your bill increase by 10 percent.
The Health Care and Reconciliation acts are complicated and will take time to sort out. There is no doubt there will be income tax implications for many Americans. Some provisions will take awhile to implement, but now is the time to begin looking at your personal finances to minimize potential negative effects of the changes in health care law.
Health Reform - A Business Perspective
On March 23, President Obama's long awaited health care bill was signed into law, but that was only the beginning of major changes to come in U.S. health care. This month's tax and accounting article discussed some of the issues of the new Healthcare Act as it relates to individuals. Here we will look at them from a business perspective.
Early Retirees
Beginning June 21, a new reinsurance program will become effective for businesses that provide insurance for early retirees. The federal government will reimburse 80 percent of the cost of benefits that employers provide to retirees aged 55 through 64. The reimbursement will be based on costs incurred in excess of $15,000 but less than $90,000. The reinsurance program will end by 2014 or when the $5 billion set aside for the program is exhausted.
Extended Coverage
Beginning with the 2011 plan year, employer health plans must offer coverage to adult children of plan participants through age 26. To qualify, the adult child does not have to be the participant's dependent, but they cannot be eligible for coverage under another health plan. After 2014, the adult child can participate in his or her parent's plan even if he or she is eligible for other employer coverage.
Other reforms effective in 2011 include:
Prohibition on lifetime
limits; however, restricted annual limits will be allowed; annual limits
are no longer allowed beginning in 2014;
Prohibitions against
imposing pre-existing condition limitations will be enforced in 2011 for
children under age 19 and in 2014 for any participant;
An employer's plan
must satisfy nondiscrimination rules of the Internal Revenue Code, applicable
previously only to self-insured plans.
W-2 Reporting
Beginning in 2011, employers will be required to report the value of employee health care coverage on Form W-2.
Fees on Certain Industries
Pharmaceutical companies and health insurance companies will be required to pay certain fees beginning in 2011. These fees will almost certainly be passed onto consumers. Additionally, beginning in 2011, pharmaceutical companies will be required to provide a 50 percent discount to Medicare Part D beneficiaries on brand-name drugs.
The pharmaceutical industry will pay total new fees of $2.5 billion in 2011; $2.8 billion in 2012 and 2013; $3 billion in 2014-2016; $4 billion in 2017; $4.1 billion in 2018; and $2.8 billion in 2019 and thereafter. The health insurance industry will pay total new fees of $8 billion for 2014; $11.3 billion for 2015 and 2016; $13.9 billion in 2017; and $14.3 billion for 2018. After that, the fee will be indexed to the rate of premium growth.
Employer Responsibilities
After December 31, 2013, applicable large employers (generally those with at least 50 full-time employees) will be required to offer affordable coverage to all of their full-time employees. They will pay a penalty if one of their employees is certified as having purchased health insurance through a state exchange and the employee receives a tax credit or cost-sharing reduction.
Employers offering coverage through an eligible employer-sponsored plan and paying a portion of the cost will have to provide vouchers to their employees that can be applied to the cost of a health plan with an insurance exchange.
Certain small employers might be eligible for a credit if they provide health coverage to their employees.
It's too soon to see whether small business and the consumer will be in better shape as a result of the new law. But one thing is certain: health care reform has been a long time in the making and will be a long time in the implementation. The provisions are complex and the economic implications for business owners (in terms of health care costs and taxes) are significant. It is not too early to begin planning how to best position your company to respond to changes that are on the horizon.
Tip of the Month: What Health care Reform Means to You - An Overview
Given the historic nature of the health care reform legislation, we should not be surprised that all the details will not be worked out for awhile. As part of what became a two-part process, the president signed into law a reconciliation bill, formally known as the Health Care and Education Affordability Reconciliation Act. The provisions of the first health care bill that actually passed Congress at the end of March are a duplicate of those approved by the Senate in December. Here are the key elements:
Small Business Owners
Beginning in 2014,
businesses with more than 50 employees will be required to either offer
workers health care coverage or pay a penalty of $750 per worker per year.
If the reconciliation bill is approved, the penalty for offering no coverage
would increase to $2,000 per employee. The coverage offered must meet certain
basic criteria -a specific set of services and cover 60 percent of employee
health care costs - or employers will be further penalized.
By no later than
2014, states are required to set up Small Business Health Options Programs
(SHOP) exchanges where small businesses will be able to pool together to
purchase health insurance. Businesses with 100 or fewer employees are considered
to be small businesses - though the states will be able to limit the insurance
pool to companies with 50 or fewer employees through 2016. This provision
could change to include part-time employees, with the net result of including
more small business enterprises in the pool.
Until the SHOP exchanges
are up and running, enterprises with 10 or fewer full-time employees earning
on average less than $25, 000 will be eligible for a tax credit of 35 percent
of health insurance costs. Partial tax credits will be available to businesses
employing 11 to 25 full-time workers with average wages of $50,000 or less.
The tax credit program will increase to 50 percent of costs for the first
two years that a company buys insurance through its state exchange.
Plans that cost more
than $10,200 for individuals ($27,500 for family coverage) - sometimes referred
to as Cadillac plans - will be subject to a 40 percent tax on the amount
that exceeds the limit. Although the tax would be paid by the insurers,
the cost would probably be passed on to the plan holders in the form of
higher premiums. The amendments pending a vote in the Senate would delay
the imposition of this tax until 2018 and restrict its use to the most expensive
health care plans.
Effective immediately,
insurers are banned from setting lifetime limits on coverage and on rescission
(the practice of canceling policies already issued) except when fraud is
involved. By 2014, insurers will have to meet more conditions and will no
longer be able to set rates or exclude coverage based on pre-existing medical
conditions, though they will have the opportunity to vary premiums based
on geographic location, age and use of tobacco products.
From the Individual's Standpoint
The most immediate benefits will accrue to people with pre-existing conditions, who will be able to get coverage through temporary pools within 90 days. The reform also offers relief to people whom:
Currently have a
co-pay for some preventative services;
Are subject to lifetime
limits on their policies;
Have waited a long
time for coverage (reform bill won't allow insurers to exceed waiting periods
of 90 days).
Additional changes include:
College students
will be eligible to stay on their parents' insurance plans until they reach
age 26.
Taxpayers who earn
more than $200,000 individually ($250,000 as a married couple) will be paying
more in Medicare taxes when the rate increases to 2.35 percent from 1.45
percent. If the reconciliation bill before the Senate passes, this tax will
also be applied to unearned income.
Individuals who
don't want to carry health insurance will be hit with tax penalties.
Seniors who have
Medicare Part D (drug) coverage will see the overall price they pay for
prescription medicines decline.
Obviously, the above is a bare bones summary of health care reform. The cost, the schedule for implementation and the tax consequences of the health care bill (and of its sibling, the reconciliation bill) are complicated. Consult your professional tax and financial advisors to discuss how the legislation will affect your specific situation.
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