By DJ Berry
This is part one of two of an article concerning the recent action by the U.S. Supreme Court in upholding the constitutionality of the 2010 health care reform legislation. Part one will deal with the key individual and business aspects of the consequences of this action; part two will discuss the expiring provisions of the Bush-era tax cuts.
The “individual mandate” portion of the health care law, which is set to begin in 2014, basically requires certain individuals to carry minimum essential health coverage for themselves and their dependents or be required to pay a penalty for each month of noncompliance. This law will not apply to those who are exempt, or those who receive essential health insurance via a third party (i.e., an employer).
People who are deemed to be exempt include those covered by Medicaid/Medicare, health care ministry members, etc. As mentioned, people who receive employer-provided health insurance are also considered to be exempt, as long as the health insurance meets certain minimum coverage and affordability guidelines.
One tax issue related to health insurance and created as part of the act is the medical itemized deduction threshold will increase from 7.5% to 10% of AGI beginning in 2013. This means that it will be even more difficult to have medical expenses that are actually deductible. As an offset, this limitation does not apply to people who are age 65 or older before the end of the tax year.
One of the more controversial sections of the individual portion of the act is related to the creation of several new Medicare taxes. The first is an additional Medicare tax of 0.9% that will be imposed on wages and self-employment income of higher-income individuals beginning in 2013. This includes individuals who make more than $200,000, and married filing joint couples who make more than $250,000. The second Medicare tax, which also begins in 2013, imposes a 3.8% tax on unearned income. To compute the amount of tax on unearned income, a formula has to be followed. Essentially, the tax applies to the lesser of your investment income, or the amount that your AGI exceeds the $200,000/$250,000 threshold. At this point, it seems the tax will be applied to most forms of passive income (interest, dividends, rents, etc.) at their net amount. It does not appear that tax exempt income will be subject to the tax. Unfortunately, the 3.8% tax is in addition to the normal dividend/capital gain/ordinary income rates that still apply, so taxpayers subject to the tax will pay tax on passive income at their marginal rate as well as the new 3.8% Medicare tax.
The employer section of the act, titled the “employer mandate,” requires that large employers (which essentially means those with fifty or more full-time equivalent employees-full-time employees generally refers to those who work, on average, at least 30 hours per week) may be subject to a shared responsibility payment if any full-time employee is certified to receive a tax credit or cost-sharing reduction payment as part of their health insurance. This can generally occur where the employer does not offer the opportunity to enroll in minimum essential health care coverage, or the health care coverage is deemed to be unaffordable. This section does not apply until 2014.
Effective beginning in 2013, the employer section of the act will limit the amount of salary reduction contributions to health flexible spending arrangements to $2,500. This only includes a health flexible spending account. The $2,500 limit does not apply to salary reduction contributions to HSAs or HRAs. It also does not apply to employer contributions to health FSAs, HSAs or HRAs. The amount of the contributions can be adjusted annually for inflation, but not until after 2013. In addition, the definition of medical drug expenses for all of the flexible plans (beginning in 2011) will change to the point that the expenses will only be considered medical expenses if the medicine or drug is a prescribed drug or insulin. Note that this limitation only applies to medicine & drugs. Other items used for medical care can still be reimbursed via a flexible plan, such as crutches, bandages, and other expenses that were used in previous years.