Either as an individual or the owner of a small business, you may be affected by the Affordable Care Act tax provisions. The Affordable Care Act (also known as Obamacare) was signed into law by President Obama on March 23, 2010, and recently survived a challenge in the United States Supreme Court. While the main focus of the Affordable Care Act is health reform legislation, there are several tax provisions that will take effect as different parts of the legislation are implemented. The following is an outline of some of the important tax-related consequences of the Affordable Care Act that have already been implemented and some information for what you can expect as the legislation is fully rolled out between now and 2014.
In addition to making sweeping changes to the U.S. health care system, the health care reform legislation added a number of new taxes and made various other revenue-increasing changes to the Code to help finance health care reform.
One of the provisions that were enacted in 2010 was the Small Business Health Insurance Tax Credit. For tax years from 2010 through 2013, the maximum credit is 35% of health insurance premiums paid by small business employers. A small employer is one that has fewer than 25 full-time equivalent employees, pays an average wage of less than $50,000 a year, and pays at least half of the employee’s health insurance premiums. The credit is scheduled to increase to 50% for small business employers after 2013. However, in tax years that begin after 2013, an employer must participate in an insurance exchange in order to claim the credit, and other modifications and restrictions on the credit apply.
In 2011, insurance companies were required to prove they spent at least 80% of the premium payments on medical services, rather than on things like advertising and executive salaries. Those that didn’t were required to provide rebates to policyholders. You may have seen letters, or even rebate checks, hitting your mailboxes recently stipulating to these facts. These rebates may be taxable income to you if you previously received a tax benefit from a deduction for the insurance premiums paid. Your tax advisor should be consulted.
In 2012, employers are required to disclose the aggregate cost of applicable employer-sponsored coverage on an employee’s annual Form W-2. Reporting is for informational purposes only. However, for 2012 Forms W-2 (and W-2s issued in later years, unless and until further guidance is issued), an employer is not subject to reporting for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding year.
Upcoming changes in 2013 include an increase in the deduction for medical expenses. Under prior law, medical expenses had to exceed 7.5% of adjusted gross income in order to be deductible for regular tax purposes, and 10% of adjusted gross income for Alternative Minimum Tax (AMT). The Affordable Care Act increases the regular tax limitation to 10% of adjusted gross income for those who are under the age of 65, bringing it in line with the AMT limitation.
The Medicare Surtax will also kick-in in 2013. For single taxpayers making more than $200,000 and married filing jointly taxpayers making more than $250,000, an additional 3.8% Medicare tax on dividends, capital gains, and rental and royalty income will apply. The KOS Bottom Line Bulletin September 2012 edition included an article titled “Get Ready for the Medicare Surtax in 2013.” To read this article, click here or go to the KOS website at www.koscpa.com/announcements.
If you contribute to a Flexible Savings Plan that your employer provides, beginning in 2013 the amount you may contribute annually to that plan will be limited to $2,500. This is down from the $5,000 prior limitation and will be adjusted annually for inflation.
In 2014, the state-run health exchanges will be set up and the penalties for individuals who do not purchase insurance will kick-in. The penalty will increase over the three year period from 2014 to 2017 as follows:
2014 – The greater of $95 or 1% of income.
2015 – $325 or 2% of income.
2016 – $695 or 2.5% of income
Businesses with 50 or more workers will be subject to a $2,000 per worker penalty if they don’t offer health insurance. Those that do receive a tax credit of 50% of the premium cost.
Nearly all businesses will have to make changes in order to comply with the Affordable Care Act. Do you have questions about how this act affects you? As an employer, are you aware of what changes you need to make? If so, you should attend our breakfast seminar on November 14 titled “What Does the Affordable Healthcare Act (AKA “Obamacare”) Mean for Employers?” This FREE program takes place from 8:30 until 10:30 a.m. at the KOS office at 1101 Lake Cook Road, Suite C in Deerfield, Illinois. To reserve a space, contact Kelly Wallaert at 847.580.4100 or kwallaert@koscpa.com.
Christie Butcher, CPA, MST
Manager, KOS Public Accountants
(This article was originally posted on the Kessler Orlean Silver website here)
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