Health Care tax provisions affecting small businesses
I’m sure all of you are wondering what impact the
health care legislation will have for you as small business owners. Of
course there are a variety of items in the bills that can affect
employers, but the following are the key provisions that will affect us
this year and in the near future. As usual these changes provide another
opportunity to do some strategic tax planning in this area.
Tax
credits to certain small employers that provide insurance. The new law
provides small employers with a tax credit (i.e., a dollar-for-dollar
reduction in tax) for nonelective contributions to purchase health
insurance for their employees. The credit can offset an employer's
regular tax or its alternative minimum tax (AMT) liability.
Small
business employers eligible for the credit. To qualify, a business must
offer health insurance to its employees as part of their compensation
and contribute at least half the total premium cost. The business must
have no more than 25 full-time equivalent employees (“FTEs”), and the
employees must have annual full-time equivalent wages that average no
more than $50,000 (this does not include owner wages). However, the full
amount of the credit is available only to an employer with 10 or fewer
FTEs and whose employees have average annual full-time equivalent wages
from the employer of less than $25,000. The credit is initially
available for any tax year beginning in 2010, 2011, 2012, or 2013.
Most small businesses exempted from penalties for not offering
coverage to their employees. Although the new law imposes penalties on
certain businesses for not providing coverage to their employees
(so-called “pay or play”), most small businesses won't have to worry
about this provision because employers with fewer than 50 employees
aren't subject to the “pay or play” penalty.
For businesses with
at least 50 employees, the possible penalties vary depending on whether
or not the employer offers health insurance to its employees. If it does
not offer coverage and it has at least one full-time employee who
receives a premium tax credit, the business will be assessed a fee of
$2,000 per full-time employee, excluding the first 30 employees from the
assessment. So, for example, an employer with 51 employees who doesn't
offer health insurance to his employees will be subject to a penalty of
$42,000 ($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 its full-time employees in excess of 30). These provisions
take effect Jan. 1, 2014.
The “Cadillac tax” on high-cost health
plans. The new law places an excise tax on high-cost employer-sponsored
health coverage (often referred to as “Cadillac” health plans). This is
a 40% excise tax on insurance companies, based on premiums that exceed
certain amounts. The tax is not on employers themselves unless they are
self-funded (this typically occurs at larger firms). However, it is
expected that employers and workers will ultimately bear this tax in the
form of higher premiums passed on by insurers. Since this tax isn’t
currently scheduled to apply until 2017, I’ll not go into the specifics
as it will surely change. We will keep an eye on developments in this
area in the coming years.
This is just a brief update of these
provisions. I’ll be glad to talk with you more about the impact of these
changes to your business. I’m also sending a brief outline of the
provisions that affect individual taxpayers in a subsequent email.
Please call if you have any questions on this or want to schedule a
time for more tax planning.
|
Health Care tax provisions affecting
individual taxpayers
Higher Medicare
taxes on high-income taxpayers. High-income taxpayers will be hit with a
double whammy: a tax increase on wages and a new levy on investment
income such as interest, dividends and net rental income.
Higher Medicare
payroll tax on wages. The Medicare payroll tax is the primary source of
financing for Medicare's hospital insurance trust fund, which pays
hospital bills for beneficiaries, who are 65 and older or disabled.
Under current law, wages are subject to a 2.9% Medicare payroll tax.
Workers and employers pay 1.45% each. Self-employed people pay both
halves of the tax (but are allowed to deduct half of this amount for
income tax purposes). Under the provisions of the new law, which take in
2013, most taxpayers will continue to pay the 1.45% Medicare hospital
insurance tax, but single people earning more than $200,0000 and married
couples earning more than $250,000 will be taxed at an additional 0.9%
(2.35% in total) on the excess over those base amounts.
NOTE: This is a
critical planning piece of the legislation. Since you as a taxpayer have
some control over the investment income that you report, and those of
you who are also business owners have control over salary amounts, you
have the opportunity to impact the affect of this tax by changing your
investment strategies. Planning for this over the next couple of years
is critical.
Floor on medical expenses deduction raised
from 7.5% of adjusted gross income (AGI) to 10%. Effective for tax years
beginning after Dec. 31, 2012 The new law raises the floor beneath
itemized medical expense deductions from 7.5% of AGI to 10%. Under
current law, taxpayers can take an itemized deduction for unreimbursed
medical expenses for regular income tax purposes only to the extent that
those expenses exceed 7.5% of the taxpayer's AGI. The AGI floor for
individuals age 65 and older (and their spouses) will remain unchanged
at 7.5% through 2016.
Limit reimbursement
of over-the-counter medications from HSAs, FSAs, and MSAs. The new law
excludes the costs for over-the-counter drugs not prescribed by a doctor
from being reimbursed through a health reimbursement account (HRA) or
health flexible savings accounts (FSAs) and from being reimbursed on a
tax-free basis through a health savings account (HSA) or Archer Medical
Savings Account (MSA), effective for tax years beginning after Dec. 31,
2010.
Increased penalties on nonqualified
distributions from HSAs and Archer MSAs. The new law increases the tax
on distributions from a health savings account or an Archer MSA that are
not used for qualified medical expenses to 20% (from 10% for HSAs and
from 15% for Archer MSAs) of the disbursed amount, effective for
distributions made after Dec. 31, 2010.
Limit health
flexible spending arrangements (FSAs) to $2,500. Under current law,
there is no limit on the amount of contributions to an FSA. Under the
new law, however, allowable contributions to health FSAs will capped at
$2,500 per year, effective for tax years beginning after Dec. 31, 2012.
The dollar amount will be indexed for inflation after 2013.
Dependent coverage
in employer health plans. Effective on the enactment date, the new law
extends the general exclusion for reimbursements for medical care
expenses under an employer-provided accident or health plan to any child
of an employee who has not attained age 27 as of the end of the tax
year. This change is also intended to apply to the exclusion for
employer-provided coverage under an accident or health plan for injuries
or sickness for such a child. A parallel change is made for VEBAs and
401(h) accounts. Also, self-employed individuals are permitted to take a
deduction for the health insurance costs of any child of the taxpayer
who has not attained age 27 as of the end of the tax year.
Excise tax on indoor
tanning services. The new law imposes a 10% excise tax on indoor tanning
services. The tax, which will be paid by the individual on whom the
tanning services are performed but collected and remitted by the person
receiving payment for the tanning services, will take effect July 1,
2010.
Liberalized adoption credit and adoption
assistance rules. For tax years beginning after Dec. 31, 2009, the
adoption tax credit is increased by $1,000, made refundable, and
extended through 2011 The adoption assistance exclusion is also
increased by $1,000.
Again, this is a
brief summary of the changes. If you’d like more information or have any
concerns about your tax or financial situation, please call (916) 646-8180.
|
|
