Patient Protection Act: Patient Protection Act: Unpacking the Tax ComplexitiesUnpacking the Tax ComplexitiesDan Gibson, CPA, EA

Sarah Anderson, CPA, MST

June 22, 2010

Opening CommentsOpening Comments• Act Does Not Mandate Employer Insurance Coverage.

• However,– Penalty to individuals who don’t have coverage.– Provides credits for those who can’t afford it.– Penalty to Large Employers who don’t provide it.– Penalty to Large Employers who don’t provide enough of

it.– Rewards Small Employers who do provide it.– Taxes High Income Individuals and High Cost Insurance

Plans to help pay for it.

3

AgendaAgenda

• Individuals – Potential Penalty• Large Employers – Potential Penalty• Small Employers – Potential Credit• Higher Income Individuals – Potential Tax• High-Cost Insurance – Potential Tax• Reporting Requirements – More of it• FSAs/HSAs/HRAs - Restrictions

INDIVIDUALSINDIVIDUALS

Minimum Essential Coverage PenaltyMinimum Essential Coverage Penalty

• Starts: 2014• Applicable to:

Any Uninsured Person who is a -• US Citizen (living in the US)• US legal residents.

Min. Essential Coverage Penalty(cont)Min. Essential Coverage Penalty(cont)• Provisions – Monthly Penalty (Phased in 2014 to 2016)• For 2014 it is equal to 1/12th of the greater of:– $95 (“Flat Dollar”) OR– 1% of income (“Applicable Percentage of Income”)

• For 2016 it is equal to 1/12th of the greater of:– $695 OR– 2.5% of income

– For families, can’t exceed 3 times Flat Dollar Amount.– $285 in 2014– $2,085 in 2016

– This is not a insurance premium substitute.

Min. Essential Coverage Penalty(cont)Min. Essential Coverage Penalty(cont)• Exceptions– Individuals whose premiums to the lowest cost plan

exceed 8% of their income.– Those with income below federal income tax filing

threshold• $9,350 - Single• $18,700 - Married

– Religious objectors/undocumented aliens/prisoners/Native Americans

– Those without coverage for less than 3 months

Premium Assistance CreditPremium Assistance Credit• Starts: 2014• Applicability:– Individuals based on their income compared to

the federal poverty level (FPL)– Eligibility goes up to 400% of FPL. • Single: $44,000• Family: $88,000

– Insurance will be purchased through an Exchange.– Credit to range from 2 to 9% of income.

Premium Assistance Credit(cont)Premium Assistance Credit(cont)

• Exceptions To Eligibility–Those covered by employer plans•Unless – Employer pays for less than 60% of premiums, or– Employee contributions exceeds 9.5% of income.

Medical Expense DeductionMedical Expense Deduction

• Starts: 2013 • Applicability: All Individuals.• Provision: – Current Law: 7.5% of AGI– New Law: 10% of AGI

• Exception: Seniors 65 and older from 1/1/13 to 12/31/16 will remain at the 7.5% of AGI.

Indoor Tanning ServicesIndoor Tanning Services

• Starts: July 1, 2010• Applicable to: Individual using the service • Provision: 10% Excise tax on services.

LARGE EMPLOYERSLARGE EMPLOYERS

Nondeductible Penalty (Pay or Play)Nondeductible Penalty (Pay or Play)• Starts: 2014• Applicable to:– Employers w/ 50+ full-time employees.• F/T = Average of 30 hours/week• At least one employee is eligible for a premium credit.• Look back to prior year for number of employees.

– Employer not offering an insurance plan, or– Employer’s plan underfunded or too expensive for

employee to buy

Nondeductible Penalty(Cont)Nondeductible Penalty(Cont)• If No coverage offered:– Penalty is equal to 1/12th of $2,000($167.67) for any

month times the number of employees for the month.• Penalty is calculated based on the number of employees over

30. (i.e. 70 – 30 = 40 * $167.67 = $6,706.80/month)

• If Plan is underfunded or too expensive:– Penalty equal to the # of employees receiving a

premium assistance tax credit time 1/12th of $3,000 ($250) for any month.– This is limited to 1/12th of $2,000/month times the # of full-

time employees.• Again, this is calculated based on the number of employees over 30.

Free Choice VouchersFree Choice Vouchers• Starts: 2014• Applicable to : Employers providing insurance• Provision:

• Employer required to provide voucher to qualified employee• Employee not participating in employer plan• Employee whose premium contribution would have exceeded

8%, but not 9.5% of household income.• Employee’s Household income does not exceed 400% of FPL

• Voucher’s value is the amount the employer would have paid for the employee to their plan.

• Voucher used for the Insurance Exchange.

SMALL EMPLOYERSSMALL EMPLOYERS

Small Business Tax CreditSmall Business Tax Credit• Starts: 2010• Applicable to:– Employers • Up to 25 employees and average salaries of no more

than $50,000• Contributes at least 50% of the cost of participating

employees.• Provision:– Tax credit (up to 35% for 2010 – 2013, 50% for 2014+)

available to offset the cost of employer provided coverage.• Excluded employees: Seasonal, 2% S Corp SH, 5% C Corp SH• After 2013, only available to 2 years.

HIGHER INCOME TAXPAYERSHIGHER INCOME TAXPAYERS

Additional Medicare Payroll TaxAdditional Medicare Payroll Tax• Starts: 2013• Applicable to: Earned incomes over:– Single $200,000– Married $250,000

• Provision:– Imposes an additional 0.9% on earned income.

Increase from 1.45% to 2.35% (Employee portion)– Employer’s rate remains the same. Thus, for SE

individuals the additional 0.9% is not deductible.

Tax Impact of Medicare Tax IncreaseTax Impact of Medicare Tax Increase

Single Taxpayer Joint Return

Earnings Additional Tax Earnings Additional Tax

$250,000 $450 $250,000 $0

$500,000 $2,700 $500,000 $2,250

$1,000,000 $7,200 $1,000,000 $6,750

$5,000,000 $43,200 $5,000,000 $42,750

Medicare Tax on Unearned IncomeMedicare Tax on Unearned Income• Starts: 2013• Applicable to: Adjusted Gross Income over:– Single $200,000– Married $250,000

• Provision:– Additional tax of 3.8% on unearned income– Unearned income = the lesser of

• Net investment income OR• The excess over AGI of $200k (Single) or $250k (Married)

– Net investment income includes:• Portfolio income, Royalties, Rental Income, Capital Gain

– Reduced by investment expenses

• Excludes: IRA or Pension distributions.

Expiration of Bush Tax CutsExpiration of Bush Tax CutsJust a Reminder!Just a Reminder!

• Start: 2011• Applicable to taxable incomes:– Single $200,000 – MFJ $250,000

• Rates increases– Ordinary: 33% and 35% goes to 36% and 39.6%. – Capital gains from 15% to 20%. – Qualified Dividends from 15% to 20%, possibility to

ordinary income rates.

HIGH COST INSURANCEHIGH COST INSURANCE

High Cost Insurance Excise TaxHigh Cost Insurance Excise Tax• Starts: 2018• Applicable to:– Primarily, Insurers who administer high cost health

plans.• Annual premiums of $10,200 (single) or $27,500 (family)

• Provision:– The insurer is subject to a non-deductible 40% excise

tax in any month that the premiums exceed the threshold.

• Excluded: Dental and vision plans

REPORTING REQUIREMENTSREPORTING REQUIREMENTS

Employers Providing CoverageEmployers Providing Coverage• Starts: 2014 • Applicable to:– Employers providing insurance plans.

• Provision: Will be required to file information returns stating:– Employer Name/Address/EIN– Dates of coverage– Insurance coverage– Premiums paid by employee

Reporting for Large EmployersReporting for Large Employers• Starts: 2014• Applicable: Large Employers• Provision: Must Report– Certification that it offers full-time employees an

insurance plan.– Number of F/T employees/month for the calendar

year and information indicating if F/T employee is covered.

– If Er coverage is provided - additional information regarding cost and availability of coverage must also be provided.

Reporting on W-2’sReporting on W-2’s

• Start: 2011• Applicable: Employers paying any premiums.• Provision: Provide the value of the employer-

provided health insurance on the employee’s W-2

FSAs/HSAs/HRAsFSAs/HSAs/HRAs

FSAs/HSAs/HRAsFSAs/HSAs/HRAs

• Starting in 2011 the definition of qualified medical expenses will conform to itemized medical expenses.– i.e. OTC drugs will no longer apply.

• Starting in 2013 contributions to FSAs will be capped at $2,500 (annually indexed for inflation)

• Starting in 2011 there will be increased penalties for HSAs. An additional tax on disqualified distributions of 20% (currently 10%)

Time Line SummaryTime Line Summary

• 2010– Health Insurance Credit for Small Businesses

• 2011– OTC drugs not allowed for FSA/HRA/HSA/MSA– Penalty on NQ HAS/MSA distributions increases – W-2 reporting for cost of health coverage provided.

Time Line Summary(cont.)Time Line Summary(cont.)

• 2013– FSA contributions capped at $2,500– Ee portion of medicare tax increased by .9%(2.35%)– Medical deduction threshold increases to 10%– Medicare surcharge (3.8%) on unearned income

Time Line Summary(cont)Time Line Summary(cont)

• 2014– Free choice vouchers– Health insurance premium assistance credit– Potential penalty for individuals w/o insurance– Potential penalty for lg employers not providing– Information reporting by insurance providers– Information reporting by Large employers

Time Line Summary(cont.)Time Line Summary(cont.)

• 2018– Penalty on High-Cost Health Plans

Contact InformationContact Information

Dan Gibson, CPA, EAAmper, Politziner & Mattia, LLP750 Rt. 202 S, Suite 500Bridgewater, NJ 08807Phone: 908-218-5002Email: gibson@amper.com

Sarah Anderson, CPA, MSTAmper, Politziner & Mattia, LLP750 Rt. 202 S, Suite 500Bridgewater, NJ 08807Phone: 908-218-5002Email: sanderson@amper.com