Weight of health care law heavy on employers
June 22nd, 2010
Tax credits available for some small businesses
The new health care law includes sweeping changes for both employers and individuals. Following is a brief summary of several key tax-related provisions.
Coverage for individuals: After 2013, any individual not eligible for Medicare or Medicaid must obtain minimum essential coverage or pay a nondeductible penalty based on a flat dollar amount or a percentage of household income. The new law also provides coverage subsidies to qualified lower-income individuals through premium assistance tax credits and reduced cost-sharing.
Employer requirements: Beginning in 2014, an employer failing to offer minimum essential coverage in any month for an eligible full-time employee will be liable for an additional tax. The tax equals 1/12th of $2,000 times the number of all full-time employees. This penalty applies to employers with 50 or more workers, but the first 30 workers are subtracted from the calculation.
Small businesses: Beginning in 2010, a qualified small business may use a special tax credit to offset employer-provided coverage. A “small business” is generally one with no more than 25 employees and average annual wages of less than $50,000 per employee. A larger credit is available to employers with no more than 10 employees and average annual wages of less than $25,000.
Also in 2010, a small business can claim a credit equal to 35 percent of the cost of its qualified employer contributions. In 2014, the credit increases to 50 percent of the contributions if the employer participates in a state-run insurance exchange.
Even better: If a small business employs 10 or fewer full-time employees with average annual wages of no more than $25,000, it can claim a 100 percent credit. The credit percentage phases out, but not below zero, if the employer exceeds either of these two limits.
The IRS recently released new guidance on the health care law, which clarifies that this calculation doesn’t include sole proprietors, partners in a partnership, more-than-2 percent shareholders in an S corporation and individuals owning more than 5 percent of another business. Family members of these individuals are also excluded.
Medicare taxes: Beginning in 2013, an additional 0.9 percent Medicare tax is imposed on wages of unmarried individuals with earned income above $200,000 and $250,000 for married joint filers; and an additional 3.8 percent Medicare tax applies to “net investment income” received by unmarried individuals with a modified adjusted gross income (MAGI) above $200,000 and $250,000 for joint filers.
Tax on health insurance plans: Beginning in 2118, insurers will have to pay a 40 percent excise tax if the annual premiums for a health insurance plan exceed $10,200 for individual coverage and $27,500 for family coverage.
Medical deductions: Under current law, an individual may deduct only qualified medical expenses in excess of 7.5 percent of adjusted gross income (AGI). Beginning in 2013, the new law generally raises this “floor” to 10 percent of your AGI.
However, an individual (and spouse) who is age 65 or older is temporarily exempt from this increase for tax years beginning after 2012 and before 2017.
Flexible spending accounts: The new law caps the annual amount of health care FSA contributions at $2,500, beginning in 2013 (indexed for inflation after 2013).
Adoption credit: The new law makes the adoption credit refundable, retroactively raises the dollar limit on the credit for 2010 from $12,170 to $13,170 and enhances the credit for adopting special needs children.
Information reporting: Beginning in 2012, a business must file information returns for annual payments of $600 or more to any corporate or non-corporate recipient (other than tax-exempt entities). Please see our next monthly e-newsletter for more on the information reporting requirements.
Coverage for individuals: After 2013, any individual not eligible for Medicare or Medicaid must obtain minimum essential coverage or pay a nondeductible penalty based on a flat dollar amount or a percentage of household income. The new law also provides coverage subsidies to qualified lower-income individuals through premium assistance tax credits and reduced cost-sharing.
Employer requirements: Beginning in 2014, an employer failing to offer minimum essential coverage in any month for an eligible full-time employee will be liable for an additional tax. The tax equals 1/12th of $2,000 times the number of all full-time employees. This penalty applies to employers with 50 or more workers, but the first 30 workers are subtracted from the calculation.
Small businesses: Beginning in 2010, a qualified small business may use a special tax credit to offset employer-provided coverage. A “small business” is generally one with no more than 25 employees and average annual wages of less than $50,000 per employee. A larger credit is available to employers with no more than 10 employees and average annual wages of less than $25,000.
Also in 2010, a small business can claim a credit equal to 35 percent of the cost of its qualified employer contributions. In 2014, the credit increases to 50 percent of the contributions if the employer participates in a state-run insurance exchange.
Even better: If a small business employs 10 or fewer full-time employees with average annual wages of no more than $25,000, it can claim a 100 percent credit. The credit percentage phases out, but not below zero, if the employer exceeds either of these two limits.
The IRS recently released new guidance on the health care law, which clarifies that this calculation doesn’t include sole proprietors, partners in a partnership, more-than-2 percent shareholders in an S corporation and individuals owning more than 5 percent of another business. Family members of these individuals are also excluded.
Medicare taxes: Beginning in 2013, an additional 0.9 percent Medicare tax is imposed on wages of unmarried individuals with earned income above $200,000 and $250,000 for married joint filers; and an additional 3.8 percent Medicare tax applies to “net investment income” received by unmarried individuals with a modified adjusted gross income (MAGI) above $200,000 and $250,000 for joint filers.
Tax on health insurance plans: Beginning in 2118, insurers will have to pay a 40 percent excise tax if the annual premiums for a health insurance plan exceed $10,200 for individual coverage and $27,500 for family coverage.
Medical deductions: Under current law, an individual may deduct only qualified medical expenses in excess of 7.5 percent of adjusted gross income (AGI). Beginning in 2013, the new law generally raises this “floor” to 10 percent of your AGI.
However, an individual (and spouse) who is age 65 or older is temporarily exempt from this increase for tax years beginning after 2012 and before 2017.
Flexible spending accounts: The new law caps the annual amount of health care FSA contributions at $2,500, beginning in 2013 (indexed for inflation after 2013).
Adoption credit: The new law makes the adoption credit refundable, retroactively raises the dollar limit on the credit for 2010 from $12,170 to $13,170 and enhances the credit for adopting special needs children.
Information reporting: Beginning in 2012, a business must file information returns for annual payments of $600 or more to any corporate or non-corporate recipient (other than tax-exempt entities). Please see our next monthly e-newsletter for more on the information reporting requirements.
Source: The Tax Strategist, June 2010
