How Will the Health Care Legislation Affect You and Your Taxes?

In late March 2010, President Obama signed into law the new health care legislation.  The legislation will affect virtually every individual in one way or another and will significantly impact the preparation of tax returns in the future.  The provisions take effect over a period of years and are categorized by the year they become effective.  Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals. 

The following is an overview of the provisions that apply to individual taxpayers and small businesses.   

2009
o  Student Loan Forgiveness for Health Professionals – Excludes student loan debt forgiveness from income for certain medical professionals who work in health professional shortage areas.

o  Investment Credit for Therapeutic Discovery Projects – A small company investment tax credit for expenses incurred for qualified investments in qualifying therapeutic discovery projects.

2010
o  Insurance for Uninsured Americans with Pre-Existing Conditions – A Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition.

o  Expanding Coverage for Early Retirees – A program that provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents.

o  Providing Free Preventive Care – New plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.

o  Pre-Existing Condition Exclusions for Children Under Age 19 – For new plans and existing group plans, the new law includes rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition.

o  Elimination of Arbitrary Rescission of Coverage – Insurance companies may no longer retroactively cancel policies because of an "unintentional" mistake on paperwork.

o  Lifetime Limits are Phased Out – Effective for all policies issued after September 23, 2010 and those renewing after this date, there can no longer be lifetime limits placed on health care plans.

o  Annual Dollar Limits – There is a phase out of annual dollar expenditure limits on health plans over the next three years until 2014 when the Affordable Care Act bans them for most plans.

o  Tanning Services Excise Tax – A new 10% excise tax is imposed on the amount paid for any indoor tanning service.

o  Excludable Medical Reimbursements for Older Children – An income exclusion for reimbursements of medical care expenses by an employer-provided accident or health plan is extended to any child of an employee who hasn't attained age 27.

o  Self-Employed Health Insurance Deduction – Self-employed individuals may include in their tax-deductible health insurance children who have not attained age 27.

o  Tax Credits for Small Employers Offering Health Coverage – Provides a tax credit for an eligible small employer for non-elective contributions to purchase health insurance for its employees.

2011
o  Employer W-2 Reporting Responsibilities – Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2.
   
o  Increased Tax on Nonqualifying HSA or Archer MSA Distributions – The additional tax for making non-medical withdrawals from Health Savings Plans and Archer MSA plans is increased to 20%.

o  Over-the-Counter Medication Restriction for Employer Plans – Over-the-counter medications will no longer qualify for reimbursement.

o  Small Employer Simple Cafeteria Plans – Small employers may provide employees with a "simple cafeteria plan."

2012
O  Information Reporting Required for Payments to Corporations – Businesses that pay any amount greater than $600 during the year to non-tax-exempt corporate providers of property and services will have to file an information report with each provider and with IRS.

2013
o  Additional Hospital Insurance Tax for High-Income Taxpayers – The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on incomes over a threshold.

o  Surtax on Unearned Income for High-Income Taxpayers – A 3.8% surtax is imposed on net investment income of high-income individuals, estates, and trusts. 

o  Employer Health FLEX-Spending Plan Contributions Limited – Medical reimbursements from flexible spending plans is limited to $2,500.

o  Medical Itemized Deductions Limited – The AGI threshold percentage for claiming itemized medical expenses is increased from 7.5% to 10%.

o  Compensation Deduction Limit for Health Insurance Issuers – Limits companies' deduction for certain employees' compensation.

2014
o  Mandatory Heath Insurance Overview – Many of the provisions of the Health Care Legislation are linked to the mandate that everyone becomes insured.  The chart provides an overview of how these provisions interact to achieve that goal.

o  American Health Benefit Exchanges – By 2014, each state must establish an exchange to help individuals and small employers obtain coverage. 

o  Penalty For Not Being Insured – Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage.

o  Premium Assistance Credit – Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”.

o  Free Choice Vouchers – Employers who offer minimum essential coverage through an eligible employer-sponsored plan and are paying a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the insurance exchange. 

o  Large Employer Health Coverage Excise Tax – Large employers would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy.

2018
o  Excise Tax on High-Cost Employer-Sponsored Health Coverage – There will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed certain limits.

Student Loan Forgiveness for Health Professionals

Previously, an individual’s gross income didn’t include cancellation of debt income that was attributable to the discharge of all or part of any student loan if the discharge was made under a provision of the loan - that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

New Law: The law has been amended to include amounts received by an individual in tax years beginning after Dec. 31, 2008; the gross income exclusion for amounts received under the National Health Service Corps loan repayment program or certain State loan repayment programs is modified to include any amount received by an individual under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas as determined by the State.




If you think this retroactive income exclusion might apply to you, please give this office a call.

Investment Credit for Therapeutic Discovery Projects

In 2009 and 2010, for companies with 250 or fewer employees, a 50% nonrefundable investment tax credit is allowed for expenses paid or incurred for qualified investments in qualifying therapeutic discovery projects.

Qualifying Therapeutic Discovery Project - A qualifying therapeutic discovery project is one designed to develop a product, process, or therapy to diagnose, treat, or prevent diseases and afflictions by:

(1) Conducting pre-clinical activities, clinical trials, clinical studies, and research protocols, or

(2) Developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or to further the delivery or administration of therapeutics.

Insurance for Uninsured Americans with Pre-existing Conditions

Beginning July 1, 2010, a Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition. States have the option of running this new program in their state. If a state chooses not to do so, then the individual can utilize the Federal programs. 

This program serves as a bridge to 2014, when all discrimination against pre-existing conditions will be prohibited. 

To learn more about the plan for a particular state, visit the Department of Health and Human Services website. 

Expanding Coverage for Early Retirees

Too often, Americans who retire without employer-sponsored insurance and before they are eligible for Medicare see their life savings disappear because of high rates in the individual market. To preserve employer coverage for early retirees until more affordable coverage is available through the new Exchanges required to be established by 2014, the new law creates a $5 billion program to provide needed financial help for employment-based plans to continue to provide valuable coverage to people who retire between the ages of 55 and 65, as well as their spouses and dependents.

The program provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents. The Secretary will reimburse sponsors for certain claims between $15,000 and $90,000 (with those amounts being indexed for plan years starting on or after October 1, 2011).

Employers wishing to participate in the program can obtain additional information on the Department of Health Services website.

Providing Free Preventive Care

Effective for health plan years beginning on or after September 23, 2010, all new plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.

Pre-existing Condition Exclusions for Children Under Age 19

Effective for health plan years beginning on or after September 23, 2010, for new plans and existing group plans, the new law includes rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition. This limit applies to both specific coverage denials (because of a pre-existing condition) AND banning benefit limits (refusing you a policy).  This pre-existing condition will also apply to all individuals effective in 2014.

Elimination of Arbitrary Rescission of Coverage

Effective for health plan years beginning on or after September 23, 2010, insurance companies may no longer retroactively cancel a policy because of sickness or an "unintentional" mistake on paperwork. The only exception is if the case involves fraud or intentional misrepresentation of the facts.

Annual Dollar Limits

There is a phase out of annual dollar expenditure limits on health plans over the next three years until 2014 when the Affordable Care Act bans them for most plans.  Thus, plans issued or renewed beginning September 23, 2010 will be allowed to set annual limits no lower than the amounts shown in the following table:


If you have additional questions, please give this office a call.

Tanning Services Excise Tax

For indoor tanning services performed on or after July 1, 2010, a new 10% excise tax is imposed on the amount paid for any indoor tanning service, whether paid for by insurance or otherwise. The tax is imposed on tanning service recipients, although the service provider is liable for the collection and payment of the tax; thus, service providers are liable if they fail to collect the tax.

"Indoor tanning service" is a service that uses any electronic product that is designed to incorporate one or more ultraviolet lamps, and intended for the irradiation of an individual by ultraviolet radiation, with wavelengths in the air between 200 and 400 nanometers, to induce skin tanning.

The term “indoor tanning service” excludes phototherapy.  Phototherapy must be performed by, and on the premises of, a licensed medical professional for the treatment of: dermatological conditions, sleep disorders, seasonal affective disorder or other psychiatric disorders, neonatal jaundice, wound healing, or other medical conditions treatable by exposure to specific wavelengths of light.

In general, a payment for indoor tanning services is treated as made, and the liability for the tax is imposed, at the time it can reasonably be determined that the payment is made specifically for indoor tanning services.

o Gift Certificates & Gift Cards – Payment for tanning services is made when the card is redeemed, not when it is originally sold.

o Bundled Services – Payment for tanning services is made at the time the bundled services are purchased. (Temp. Reg § 49.5000B-1T(d)(3))

o Membership Fees – Where the tanning services are incidental to the overall services provided by a qualified physical fitness facility, the membership fee is not payment for tanning services.

o Other Goods & Services – If a payment covers indoor tanning services and other goods and services, the charges for the other goods and services may be excluded in computing the tax, but only if the charges (1) are separable, (2) do not exceed the fair market value of the goods and services, and (3) are shown in the exact amount in the records of the transaction. If the tax is not paid at the time payments for the tanning services are made, then to the extent that it is not collected, it has to be paid by the person performing the service.

The tax is to be remitted quarterly on IRS Form 720.  Where there are multiple locations, Form 720 must be filed for each separate EIN.  Semi-monthly deposits of tax are not required.

Employer Tax-Free Medical Benefits Available to Children under Age 27

As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee's children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010.  Generally, under pre-Act law, to be a qualifying child of a taxpayer for this purpose, the child must have been the taxpayer’s dependent under age 19 (or under age 24 in the case of a full-time student).

Child – Broad Definition for this Purpose Other than age, the “child” definition has no other restriction.  Thus, there is no income or marital restrictions.

These changes immediately allow employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits – to permit employees to begin making pre-tax contributions to pay for this expanded benefit.

Employees with children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child.

Employees may immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided no later than plan years beginning on or after Sept. 23, 2010.

The definition of “child” for this purpose includes the individual’s:

• child,
• stepchild,
• legally-adopted individual, 
• an individual lawfully placed with the employee for legal adoption, and 
• an eligible foster child.   

No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year.  Even a married child is included by this definition!  (But the married child’s spouse and/or children are not covered.) A child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1983 attained age 27 on April 10, 2010).

Contact your employer for further information regarding the employer’s plan related to this very beneficial change.