PPACA amends the Tax Code in a number of ways that will affect employers. The most significant are described below, in order of their effective dates.
- Tax exclusion for coverage of adult children. Health coverage provided under an employer health plan to an employee's children who have not reached age 27 by the end of the year is not subject to tax, even if they are not the employee's tax dependents. The IRS provided guidance on this provision in Notice 2010-38, including guidance on amending cafeteria plans to permit these individuals to be covered.
Effective in 2011:
- Increased penalty on nonqualified distributions from HSAs. The penalty for nonqualified (i.e., nonmedical) distributions from HSAs and Archer MSAs increases from 10% to 20%.
- Reporting the cost of health coverage on Form W-2. The aggregate cost of health insurance coverage provided by an employer must be reported on the employee's Form W-2. The cost of coverage generally means the same thing it does for purposes of the excise tax on "Cadillac" coverage described below (even though the excise tax itself is not effective until 2018), except that it generally does not include contributions to health FSAs, HSAs or Archer MSAs. Complying with this requirement is likely to be time-consuming and require expert advice on how to value the different kinds of coverage provided to employees. Employers should begin this process as soon as possible.
Effective in 2012:
- Form 1099s required in more situations. The general exception from information reporting on Form 1099 under current law for payments to a corporation is repealed, except for payments to a tax-exempt corporation, which continue to be exempt as under current law. In addition, reporting on Form 1099 will be required for gross proceeds and amounts paid for property (currently not subject to information reporting because the taxable amount is not fixed or determinable).
- Fees to fund patient-centered outcomes research trust fund. An annual fee is imposed on health insurance policies and self-insured employer health plans. The fee is generally $2 multiplied by the average number of lives covered under the plan.
Effective in 2013:
- Tax on Medicare Part D subsidy. If an employer provides retiree drug coverage and receives a subsidy under Medicare Part D, the cost of the prescription drugs that are taken into account in determining the subsidy will no longer be deductible. In addition to the tax cost, for many companies receiving the subsidy this change will require a reduction of their "deferred tax assets," resulting in a significant, immediate accounting charge.
- $500,000 limit on deductible compensation. A health insurance company or HMO generally may not deduct compensation paid to any officer, director, employee or independent contractor to the extent it exceeds $500,000. The limit is applied each year, to compensation earned in that year. Any portion of the $500,000 allowance that is not used up deducting current compensation for a year can be applied to deferred compensation earned in the same year but paid in a later year. The limit applies to compensation earned in 2010 or a later year and deducted in 2013 or a later year. This rule closely resembles the rule applicable employers in the troubled assets relief program (TARP). Like that rule, there is no exception for performance-based compensation.
The rule applies on a controlled-group basis, meaning that it could apply to an entity that is not itself an insurance company or HMO if there is an insurance company or HMO in its controlled group.
Effective in 2018:
- Excise tax on "Cadillac" plans. A nondeductible 40% excise tax is imposed on health coverage to the extent the cost exceeds $10,200 (in the case of individual coverage) or $27,500 (in the case of family coverage). The limits are adjusted for age and gender (but not geographic area) and are increased (by $1,650 for individual coverage and $3,450 for family coverage) for retirees and for plans that cover mostly employees in high-risk professions or employees who repair or install electrical or telecommunications lines. The limits are indexed under a complex formula. The tax is imposed on the employer in the case of a self-insured plan and on the issuer in the case of an insured plan. All coverage provided to an employee and his family by or through an employer must be aggregated for this purpose (other than a very limited list of limited-scope benefits and benefits under separate dental and vision policies), including employee-paid coverage and other taxable coverage. The employer (or the plan in the case of a multiemployer plan) is responsible for determining the excess and allocating it among different providers (if there is more than one), and can be responsible for any shortfall if this is not done correctly.
The cost of coverage will be determined actuarially, in roughly the same way as COBRA premiums are determined when an employee terminates employment. Currently there is no guidance explaining how that is done, but the IRS is actively working on regulations on this issue.