Highlights of key provisions in the “Health Care and Education Reconciliation Act of 2010”

Tax Changes Relating to Universal Health Coverage Mandate

Penalty for remaining uninsured. Individuals who choose to remain uninsured would have to make a payment, but under the House bill, relative to the payment requirements in the Senate bill (H.R. 3590): (a) income below the filing threshold would be exempted, (b) the flat payment would decrease to $325 in 2015 and $695 in 2016 and (c) the percent of income that is an alternative payment amount would be raised from 0.5 to 1.0% in 2014, 1.0 to 2.0% in 2015, and 2.0 to 2.5% for 2016 and subsequent years to make the assessment more progressive.

Low-income tax credits for participating in health exchanges. Tax credits would be available for individuals and families with incomes up to 400% of the federal poverty level ($43,420 for an individual or $88,200 for a family of four) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. These individuals and families would have to obtain health care coverage in newly established Insurance Exchanges in order to obtain credits.

Employer responsibilities. Large employers would either have to provide affordable coverage to workers or make a contribution. Relative to employer responsibilities requirements in the Senate-passed health bill (H.R. 3590), the House bill would improve the transition to the employer responsibility policy for employers with 50 or more full-time equivalent workers (FTE) by subtracting the first 30 full time employees from the payment calculation (e.g., a firm with 51 workers that does not offer coverage will pay an amount equal to 51 minus 30, or 21 times the applicable per employee payment amount). The House bill also would increase the applicable payment amount for firms with more than 50 FTEs that do not offer coverage from $750 to $2,000 per full-time employee, and eliminate the assessment for workers in a waiting period, while maintaining the 90-day limit on the length of any waiting period beginning in 2014.

Tax credits for small employers offering health coverage. The House bill would provide an immediate sliding scale tax credit up to 35% to small employers with fewer than 25 employees and average annual wages of less than $50,000 who offer health insurance coverage to their employees. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

Dependent coverage in employer health plans. Effective on the enactment date, the health reform measure would extend 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 would also be intended to apply to the exclusion for employer- proved coverage under an accident or health plan for injuries or sickness for such a child. A parallel change would be made for VEBAs and 401(h) accounts. Also, self-employed individuals would be permitted to take a deduction for any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Health-Related Revenue Raisers

Excise tax on high-cost employer-sponsored health coverage. For tax years beginning after Dec. 31, 2017, the bill would place a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage would apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.

The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans would be disregarded in applying the tax. The dollar amount thresholds would be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010.

Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool.

The excise tax would be levied at the insurer level. Employers would be required to aggregate the coverage subject to the limit and issue information return for insurers indicating the amount subject to the excise tax.

New employer reporting responsibilities. For tax years beginning after Dec. 31, 2010, employers would have to disclose the value of the benefit provided by them for each employee’s health insurance coverage on the employee’s annual Form W-2.

Additional Hospital Insurance Tax (HI) for high wage workers. For tax years beginning after Dec. 31, 2012, the House-passed bill increases the HI tax rate by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly); these figures are not indexed.

Surtax on unearned income. For tax years beginning after Dec. 31, 2012, the House-passed bill would “broaden the HI tax base” by placing a 3.8% surtax called the Unearned Income Medicare Contribution, on net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return). Net investment income would be interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income would be reduced by properly allocable deductions to such income.

New limit on health FSA contributions. The House-passed bill would limit the amount of contributions to health flexible spending accounts (FSAs) to $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount would be inflation indexed after 2013.

Restricted definition of medical expenses for employer provided coverage. For purposes of employer provided health coverage (including health reimbursement accounts (HRAs) and health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs)), the definition of medicine expenses deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses. But this change would not apply to doctor prescribed over-the-counter medicine. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) could not be reimbursed through a health FSA or HRA. In addition, the cost of over-the-counter medicines (other than insulin or doctor prescribed medicine) could not be reimbursed on a tax-free basis through an HSA or Archer MSA. These changes would be effective for tax years beginning after Dec. 31, 2010.

Increased tax on nonqualifying HSA or Archer MSA distributions. The additional tax for HSA withdrawals before age 65 that are used for purposes other than qualified medical expenses would be increased from 10% to 20%, and the additional tax for Archer MSA withdrawals that are used for purposes other than qualified medical expenses would be increased from 15% to 20%, both effective for distributions made after Dec. 31, 2010.

Modified threshold for claiming medical expense deductions. For tax years beginning after Dec. 31, 2012, the House bill would increase the adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses from 7.5% to 10%. However, the 7.5%-of-AGI threshold would continue to apply through 2016 to individuals age 65 and older (and their spouses).

Deduction for employer Part D would be eliminated. The House bill would eliminate the deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees. This would apply for tax years beginning after Dec. 31, 2012.

Industry-specific revenue raisers. The House bill would impose revenue raising changes on health related industries, as follows:

… A new deduction limit on executive compensation would apply to insurance providers. If at least 25% of the insurance provider’s gross premium income is derived from health insurance plans that meet the minimum essential coverage requirements in the bill (“covered health insurance provider”), an annual $500,000 per tax year compensation deduction limit would apply for all officers, employees, directors, and other workers or service providers performing services for or on behalf of a covered health insurance provider. The limit would apply for remuneration paid in tax years beginning after 2012, with respect to services performed after 2009.

… Pharmaceutical manufacturers and importers would have to pay an annual flat fee beginning in 2011 allocated across the industry according to market share. The schedule for the flat fee would be: 2011, $2.5 billion; 2012 to 2016, $3 billion; 2017, $4 billion; 2018, $4.1 billion; 2019 and later, $2.8 billion. The fee would not apply to companies with sales of branded pharmaceuticals of $5 million or less.

… Manufacturers or importers of medical devices would have to pay a 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device. A taxable medical device would be any device, defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act, intended for humans. The excise tax would not apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by IRS to be of a type that is generally purchased by the general public at retail for individual use.

… Health insurance providers would face an annual flat fee on the health insurance sector effective for calendar years beginning after Dec. 31, 2013. The fee would be allocated based on market share of net premiums written for a U.S. health risk for calendar years beginning after Dec. 31, 2012. The schedule for the flat fee would be: 2014, $8 billion; 2015 and 2016, $11.5 billion; 2017, $13.5 billion; 2018, $14.3 billion and indexed to medical inflation for later years. The fee would not apply to companies whose net premiums written are $25 million or less.

… The indoor tanning industry would be hit with a 10% excise tax on indoor tanning services, effective for services provided on or after July 1, 2010.

… Non-profit Blue Cross Blue Shield organizations would have to maintain a medical loss ratio of 85% or higher in order to take advantage of the special tax benefits provided to them, including the deduction for 25% of claims and expenses and the 100% deduction for unearned premium reserves. The provision is effective in 2010.

Non-Health Related Revenue Raisers

Corporate information reporting. Businesses that pay any amount greater than $600 during the year to corporate providers of property and services would have to file an information report with each provider and with IRS, effective for payments made after Dec. 31, 2011.

Codification of economic substance doctrine and imposition of penalties. The economic substance doctrine is a judicial doctrine that has been used by the courts to deny tax benefits when the transaction generating these tax benefits lacks economic substance. The courts have not applied the economic substance doctrine uniformly. The House bill would clarify the manner in which the economic substance doctrine should be applied by the courts and would impose a penalty on understatements attributable to a transaction lacking economic substance. These changes would be effective for transactions entered into after the enactment date.

Elimination of credit for “black liquor.” A $1.01 per gallon tax credit applies for the production of biofuel from cellulosic feedstocks in order to encourage the development of new production capacity for biofuels that are not derived from food source materials. Congress is aware that some taxpayers are seeking to claim the cellulosic biofuel tax credit for unprocessed fuels, such as “black liquor.” For fuel sold or used after Dec. 31, 2009, the House bill would limit eligibility for the tax credit to processed fuels (i.e., fuels that could be used in a car engine or in a home heating application).

Estimated taxes for large corporations. The House bill would increase by 15.75 percentage points the required corporate estimated tax payments factor for corporations with assets of at least $1 million for payments due in July, August, and September of 2014.

Other Tax Changes

Simple cafeteria plans for small businesses. For tax years beginning after 2010, the House bill would establish a new employee benefit cafeteria plan to be known as a Simple Cafeteria Plan. This plan would be subject to eased participation restrictions so that small businesses could provide tax-free benefits to their employees; it would include self-employed individuals as qualified employees.

Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the House bill would increase the adoption tax credit by $1,000, make the credit refundable, and extend the credit through 2011. The adoption assistance exclusion also would be increased by $1,000.

New credit for new therapies. Effective for expenses paid or incurred after Dec. 31, 2008, in tax years beginning after that date, a two-year temporary credit would be created, subject to an overall cap of $1 billion, to encourage investments in new therapies to prevent, diagnose, and treat acute and chronic diseases.

New exclusion for certain health professionals. The House bill would exclude from gross income payments made under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas. This would be effective for amounts received by an individual in tax years beginning after Dec. 31, 2008. (A separate provision would exclude from gross income the value of specified Indian tribal health benefits, effective for benefits and coverage provided after the enactment date.)


About Don James, CPA/PFS, CFP
Don is the Tax & Financial Planning partner with Kiplinger & Co., CPAs headquartered in sunny Cleveland, Ohio since 1982. He partners with business owners and families and specializes in goal achievement solutions, tax minimization strategies and serves in the role of gatekeeper of sound financial advice.

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