The Patient Protection and Affordable Care Act, a dramatic restructuring of U.S. healthcare, was signed into law on March 23, 2010, and amended by the Health Care and Education Reconciliation Act on March 31, 2010. These two new laws together expand healthcare coverage in the U.S. to millions of the uninsured by imposing greater federal controls and requirements, including mandates on individuals to obtain healthcare insurance and on employers to offer certain levels of healthcare coverage. The new healthcare law will be financed through an estimated $569.2 billion of new taxes over 10 years and an estimated $523.5 billion of cuts in Medicare spending, thus supporting the new governmental spending of over $1 trillion. The Congressional Budget Office (CBO) also projects that the new laws will reduce federal deficits by $143 billion over 10 years.
New Withholding Taxes
Under the new law, high-income taxpayers will see tax increases on their wages and a new levy on their investments. The Medicare payroll tax, which funds Medicare Hospital Insurance for persons 65 or older and for the disabled is currently at a rate of 2.9% on all wages (without limit) with workers and employers paying 1.45% each.
Beginning in 2013, the new law imposes an additional 0.9% Medicare Hospital Insurance payroll tax for taxpayers with earnings and wages above $200,000, (or $250,000 for taxpayers filing joint returns) for a total Medicare tax of 2.35% on wages in excess of these thresholds. Wages under the new thresholds continue to be taxed at 2.9%. Employers will be required to withhold the new tax from an employee’s wages exceeding $200,000. The earnings of an employee’s spouse are not considered for the employer’s withholding purposes, although a couple will owe the full tax on their joint wages over $250,000.
The self-employed will pay 3.8% of Medicare tax on earnings over the applicable threshold, but are allowed to deduct 1.45% on all compensation that is treated as the employer’s portion of the tax.
Excise Tax On High Cost Employer Health Plans
Beginning in 2018, the new law also imposes a non-deductible 40% excise tax on so-called “Cadillac” health care plans, the annual cost of which exceeds $10,200 for individuals (or $27,500 for families). These amounts are modified by a “cost adjustment percentage” of at least 100% plus percentage points to account for age, gender and other factors. Beginning in 2018, these threshold amounts will be indexed annually. For employer-sponsored medical insurance plans, the insurer is liable for this excise tax. The plan administrator must pay the excise tax for any self-insured health plan. A plan for this purpose includes both basic and ancillary benefits such as those provided through any flexible health spending arrangement (FSA) or health reimbursement account (HRA). Dental and vision plans are excluded from this tax. Each employer is responsible for calculating the applicable excise tax.
Employer Penalty For Not Offering Appropriate Insurance
Beginning in 2014, the new law penalizes certain employers for failing to provide certain health coverage to employees. The IRS will assess penalties on certain employers with at least 50 full-time employees (working an average of 30 or more hours per week) if any employee of that employer purchases health insurance through a state exchange and becomes entitled to a tax credit. Business affiliates that are treated as a single employer for qualified retirement plan purposes will be considered one employer for purposes of applying this penalty. The new law imposes penalties on a business with 50 or more employees if that business (a) does not offer health insurance; (b) offers unaffordable minimum coverage; or (c) offers minimum essential coverage which is not at least 60% of the cost of benefits. If the business does not offer such coverage and has at least one full time employee who receives a premium tax credit (see section below on "Tax Credit to Purchase Insurance"), the business will be assessed a fee of $2,000 per full time employee (excluding the first 30 employees). For example, an employer with 51 employees that does not offer health insurance will be subject to a penalty of $42,0000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of full time employees in excess of 30).
Employers with fewer than 50 employees are not subject to penalty if they do not provide health insurance.
Retiree Medical: Eliminating Medicare Part D Subsidy
An employer that offers retiree prescription drug coverage that is at least as valuable as Medicare Part D is currently entitled to deduct the entire cost of providing that coverage, even though a portion of it is offset by the Medicare Part D subsidy. Beginning in 2011, the Act repeals the deduction that is offset by the subsidy, thus making retiree prescription drug coverage more expensive to the employer.
Employer Reporting and Compliance
Beginning in 2011, employers must report on W-2 statements the aggregate cost of employer-sponsored health benefits for the individual, determined under rules similar to the rules for determining COBRA premiums costs. All health care coverage must be included, except those for health savings accounts (“HSAs”), Archer medical savings accounts (“MSAs”) and salary reduction contributions to flexible savings accounts (FSAs).
Employers with more than 50 employees will be required to report whether they offer their full-time employees health coverage, the length of the waiting period for that coverage, the lowest cost option in each enrollment category, the employer’s share of total costs, and the number and names of covered employees.
Under the new law, US citizens and legal residents are required to have healthcare coverage or be subject to a penalty equal to the greater of $695 per year (up to a maximum of $2,085 per family), or 2.5% of household income over a threshold amount required for income tax filing. The penalties will be phased in beginning in 2014.
Tax Credit to Purchase Insurance
Beginning in 2014, the new law creates a premium assistance credit which allows individuals and their families to purchase healthcare coverage on the market or on an insurance exchange established by the new law. The IRS would pay the credit directly to the insurance plan in which the individual is enrolled, thus subsidizing that person’s insurance coverage. The individual pays the plan the difference between the credit and the total premium. For employed individuals purchasing health insurance through the exchange, the premium payments are made through payroll deductions.
The premium assistance credit will be available for individuals and families with incomes of up to 400% of the federal poverty level (that is, $43,320.00 for an individual or $88,200.00 for a family of four, using 2009 poverty level figures). To get the assistance, the recipients must not be eligible for Medicaid, employer-sponsored insurance or other acceptable coverage. The credits are available on a sliding scale basis. However, any employee who receives such a credit subjects his or her employer to penalties (see above, Employer Penalty for Not Offering Appropriate Insurance).
Medicare Tax on Investments
Beginning in 2013 a new 3.8% tax will be imposed on the net investment income of taxpayers with adjusted gross income (“AGI”) above $200,000 (for single filers) and $250,000 (for joint filers). These thresholds are not subject to index. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business including passive activities, and net gain from the disposition of property (other than property held in a trade or business), reduced by applicable deductions. The new tax does not apply to income and tax deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000 or $250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 ($300,000 less $250,000) will be subject to the new tax.
HSA's, FSA's and MSA's
Under the present law, there is no cap on amounts that may be deferred tax free to health flexible spending accounts (FSAs). Beginning in 2013, however, health FSAs will be capped at $2,500, thus reducing the payment of uninsured medical expenses that are subsidized with pre-tax dollars.
Beginning in 2011, the new law also excludes the costs of over-the-counter drugs, not prescribed by a physician, from being reimbursed through health reimbursement accounts (HRAs), health flexible savings accounts (FSAs), Health Savings Accounts (HSAs) or Archer medical savings account (MSA).
In addition, new tax increases will be imposed on distributions from HSAs or MSAs that are not used for qualified medical expenses. The tax will be 20% (up from 10% for HSA’s and 15% for Archer MSA’s) of the disbursed amount. The new taxes go into effect in 2011.
Tax Credits for Very Small Employers
A business that offers health insurance to its employees and contributes at least 50% of the premium cost is eligible for a tax credit. To be eligible, the business must not have more than 25 full time equivalent employees with wages averaging no more than $50,000.
The credit, which is initially available for any tax year beginning in 2010, is generally equal to 35% of the employer’s non-elective contributions towards the employee’s health insurance premiums (and 50% for tax years beginning in 2014). However, the tax credit phases out as firm size and average wages increase.
For tax-exempt employers, the maximum credit is 25% for years 2010 through 2013, increasing to 35% in 2014.
The credit is not available for seasonal workers, self-employed individuals, 2% shareholders of S corporations, 5% owners of small business and dependents or other household members. However, leased employees are eligible employees for the credit. Employers receiving credits will be denied any deduction for health insurance cost equal to the credit amount.
Increasing Participation in Healthcare
An employer that provides health insurance coverage and has more than 200 full-time employees must automatically enroll employees in the plan. An exception applies for employees who opt out after demonstrating other acceptable coverage. Beginning in 2014, a new penalty is imposed on an employer with more than 50 employees if the employer’s health plan has an extended enrollment waiting period exceeding 30 days. Waiting periods of more than 90 days are prohibited. A penalty of $400 is imposed on the employer for any employee waiting more than 30 days but not more than 60 days, and $600 for any employee waiting more than 60 days. These amounts will be indexed beginning in 2015.
The new law requires employers to inform employees upon their hire (or by March 1, 2013 for current employees) about exchanges that will offer healthcare coverage to individuals. Employers must inform employees about the possibility of their being eligible for such exchanges and for a tax credit as well as any loss in employer contributions toward the employee’s health benefits if the employee purchases health insurance through the exchange.
Plan Design Issues
Beginning in 2011, the new healthcare law will affect the design of employer-provided healthcare plans including the following changes:
- Eliminating lifetime and annual limits on benefits;
- Providing first dollar coverage for preventive care;
- Extending eligibility for dependent coverage (if altered) to employees’ unmarried children through age 26; and
- Establishing a new internal and external review procedure for claims determination.
- Shortening eligibility periods (to avoid penalty).
In light of the new healthcare regime, employers are encouraged to review their healthcare programs to start positioning them for coming new changes. For Massachusetts employers, there is the added complexity of the Massachusetts healthcare reform which must be considered side-by-side with the Federal reform.