The following questions and answers are organized by the effective date of the particular provision.
Effective in 2010
Q.1 I heard that some small employers are eligible to receive a business tax credit for making contributions to purchase health insurance for their employees. Do I qualify?
A.1 Certain "eligible small employers (ESE)" may receive a non-refundable business tax credit beginning in 2010 for providing contributions toward their employees' health care. An ESE has no more than 25 full-time equivalent (FTE) employees with an average compensation of $50,000 or less and that contributes at least 50% of the cost of each employee's health care premium for single coverage. In determining the full-time employee count, employers can exclude seasonal employees (less than 120 days per year) and these owner-employees: self-employed; greater than 2% shareholders of S corporations; 5% owners of C corporations; and most family members of these owner-employees. Employers with ten or fewer employees with average annual compensation less than $25,000 will qualify for the full credit, which is 35% of the premium for taxable employers and 25% of the premium for tax-exempt employers. The premium that may be used to compute the credit is limited to the lesser of the actual premium (individual or family) or the "average premium" for small groups in the geographic area of the employer for the year the credit is claimed. The IRS recently published the average premiums for 2010 in Revenue Ruling 2010-13. As an example, in Minnesota the average premium for single coverage is $4,704 and $11,938 for family coverage.
The credit is reduced by 6.667% for each FTE over ten and reduced by 4% for each $1,000 of average employee compensation over $25,000. In 2014, the credit is available only for contributions made for coverage under the national group health exchange and employers are limited to claiming the credit in only two tax years after 2013. Tax-exempt employers can recover the tax credit as a limited credit against payroll taxes. Further guidance on this from the IRS will be issued soon. For 2014 and later, the tax credit rate is increased to 50% for taxable employers and 35% for tax-exempt employers. The IRS has provided additional guidance on its Web site about how to determine the number of FTE employees, average annual compensation and other information about the small business tax credit: www.irs.gov/newsroom/article/0,,id=220839,00.html
Q.2 Are there any changes to cafeteria plans in 2010?
A.2 Yes. Beginning on the legislation's effective date (March 30, 2010), children of employees who have not reached age 27 as of the last day of the calendar year may be treated as a dependent for tax exclusions available under a cafeteria benefits plan. This means that if an employer properly amends its cafeteria plan, it can treat premiums paid for such individuals as pre-tax deductions and tax-free reimbursements can be made from flexible spending accounts for medical expenses incurred by an eligible child of an employee participating in the cafeteria plan. The IRS has issued guidance clarifying that cafeteria plans can immediately implement these changes so long as the plan is retroactively amended by the last day of the plan year to reflect these changes. See our previous article about coverage of children to age 26 here.
Q.3 Are there any new taxes taking effect this year (2010)?
A.3 Yes, a new 10% federal tax takes effect on July 1, 2010, for indoor tanning bed services. Tanning bed operators are required to collect the additional fee from customers and remit collected taxes to the federal government on a quarterly basis. Effective in 2011
Q.4 Section 125 Cafeteria Plans still be allowed?
A.4 Yes. In fact, changes have been made in order to encourage small employers (defined for this purpose as those with fewer than 100 employees) to offer a group health plan to their employees. Beginning in 2011, such employers will be able to offer a new "simple cafeteria plan" that is deemed to satisfy the non-discrimination rules if the plan complies with certain minimum eligibility, contribution and participation requirements similar to those for 401(k) safe harbor retirement plans.
However, in order to assist with the financing of health care reform, beginning January 1, 2011, health flexible spending accounts, HRAs and HSAs may no longer reimburse participants and dependents for expenses for over-the-counter medications without a prescription. This change is effective January 1, 2011, and so will affect cafeteria plans that have non-calendar-year plan years mid-year and will apply for a calendar-year plan during any grace period after the end of the plan year. Employees should be advised that (1) claims for over-the-counter medications without prescriptions will only be honored for 2010 plan years if they are purchased on or before December 31, 2010, and (2) because rules for election changes remain in effect, participants cannot change their elections to reflect their inability to have non-prescription drugs reimbursed.
Q.5 Will employers be able to continue to provide greater benefits to executives using fully insured health plans and supplemental insured health plans?
A.5 The Health Care Reform Law extends the non-discriminatory eligibility and benefit rules that now apply to self-insured group health plans to non-grandfathered fully insured group health plans for plan years beginning after September 23, 2010 (for calendar-year plans, plan years beginning January 2011 and later). Unlike with self-funded plans, highly compensated employees will not be subject to income taxes on discriminatory benefits. Sponsors of insured plans failing these non-discrimination rules will be subject to a $100 per day excise tax for each affected employee. Insured grandfathered plans will not be required to comply with Code Section 105(h) non-discrimination rules. See our previous article about grandfathered plans here.
Effective in 2012
Q.6 I heard that employees will have to be told the total cost of their employer provided health plan coverage. Is that true?
A.6 Yes. Effective for the 2011 tax year, employers will be required to include on each employee's W-2 form, information on the aggregate cost of health coverage (including medical, dental and vision care). The W-2 for 2011 must be issued in January 2012. COBRA valuation methods are to be used for reporting the value of coverage for active employees. Employers may want to begin discussions with their payroll staff/provider regarding recordkeeping changes that will be needed to implement this new reporting requirement.
Effective in 2013
Q.7 Are there any other new limitations on the tax exclusion or income tax deductions allowed for qualified medical expenses?
A.7 There is a new limitation on annual salary reduction contributions to flexible medical spending accounts of $2,500 beginning in 2013. This amount will be indexed in later years. Currently, there is no statutory limit on these contributions. However, flexible spending accounts must satisfy the IRC §105(h) non-discrimination requirements referenced above for self-funded plans. In addition, the gross income threshold before individuals can deduct qualified medical expenses on their federal income tax return is increased from 7.5% to 10% beginning in 2013. Special rules apply until 2017 for taxpayers age 65 or older.
Q.8 The Medicare Trust Fund is severely underfunded. Is there anything in the new law to provide more revenue to keep the Medicare Trust Fund solvent?
A.8 Yes. Congress has increased the Medicare Tax beginning in 2013 for high income individuals and on certain investment income. The additional Medicare Tax is 0.9% and it is applied to wages in excess of $250,000 for taxpayers filing joint returns and surviving spouses, $125,000 for taxpayers filing separate returns and $200,000 for taxpayers filing single returns. Employers are required to withhold the supplemental Medicare Tax on wages paid over $200,000 regardless of an employee's marital or filing status. Employees will reconcile the supplemental Medicare Tax owed on their individual income tax returns. Self-employed individuals will be assessed the additional 0.9% Medicare Tax on their self-employment income (K-1s, Schedule C, Schedule E). The new law also imposes a 3.8% Medicare Tax on unearned income, including net investment income of individuals, trusts and estates and capital gains, if certain higher income thresholds are met.
Q.9 Recently, a number of large public companies announced significant earnings adjustments related to retiree health care, in each case blaming the new Health Care Reform legislation. What was the cause of this accounting adjustment?
A.9 Beginning January 2013, employers receiving the Medicare D Prescription Drug Subsidy from the federal government under their retiree health plans can no longer deduct the related prescription costs from their taxable income. Under current law, employers can receive the subsidy and take a tax deduction for the same amount. U.S. Accounting Standards require employers to recognize this change immediately for financial reporting.
Q.10 There was some talk about putting limitations on compensation of health care employees. Is there anything in the law that does that?
A.10 The law does not limit the amount of compensation that can be paid to employees of health care companies, but does limit the amount of compensation that can be deducted for income tax purposes. The tax deduction for annual compensation is limited to $500,000. This deduction limitation is effective beginning in 2013, but applies to compensation paid after the effective date but for services performed after 2009 (e.g., deferred compensation).
Effective in 2018
Q.11 What happened to the proposed special tax on "Cadillac" health plans?
A.11 In the Reconciliation Bill, the punitive 40% excise tax on high-cost Cadillac health plans was delayed until the 2018 tax year. The excise tax will be imposed on insurance companies in the case of insured employer plans or on plan administrators in the case of self-funded plans. The tax is non-deductible and does not apply to individual health insurance products.