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content provided by the AICPA, edited by Tony Novak, CPA, MBA, MT, October 18, 2012
Editor's note: other recent summaries of PPACA and its effects can be found in these articles: "Health Reform Timeline"' "Consumer Health Reform Timeline" and "Tax changes triggered by federal health reform".
On March 23, 2010, President Barack Obama signed into law two initiatives that ushered in perhaps the most comprehensive and dramatic health care legislation since the passage of Medicare 45 years ago – the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Although the effects of this new health care reform legislation vary among organizations based on size and type, one fact is universal: its impact on employers, health care providers, insurers and individual citizens is substantial and long term.
With provisions addressing issues ranging from lifetime limits on coverage and pre-existing condition exclusions to dependent-care coverage and the adoption credit, and effective periods spanning 2010 to 2018 and possibly beyond, the legislation can present significant challenges.
Organizations and their leadership can best meet these challenges and position themselves to successfully implement the legislation by being prepared and informed, and understanding the legislation’s applicable features. They also can provide a valuable service to employees, and, in the process, promote a knowledge-driven organizational culture by communicating to employees the provisions with a direct impact on them.Editor's note: Some of these provisions have already been modified by Congress. Other changes are expected.
Reimbursements from employer-provided plans, including cafeteria plans. The definition of a qualified child expands to include any employee’s child who has not yet turned 27 by the end of the tax year. Thus, qualified benefits may include reimbursements for a child who hasn’t turned 27. The IRS says that cafeteria plans can allow employees to immediately make pretax salary reduction contributions for children younger than 27, even if the cafeteria plan has not formally been amended to provide for them. (Effective: March 30, 2010)
Amendments expanding coverage. All employer-sponsored plans will require amendments to (1) eliminate lifetime and annual limits on benefits; (2) provide first-dollar coverage for preventive care; and (3) extend eligibility for dependent coverage (if offered) to employees’ children who are not yet 26 years old. (Effective: Sept. 23, 2010)
W-2 reporting requirement. Employers must report on W-2s the value of health benefits provided to employees. (Effective: 2011)
Over-the-counter drugs. Health FSAs, HSAs, HRAs and Archer MSAs no longer can be used to pay for over-the-counter drugs. (Effective: 2011)
HSA and Archer MSA penalties. Penalties for using tax-favored accounts for disallowed purchases increases from 10 to 20 percent for HSAs and from 15 to 20 percent for Archer MSAs. (Effective: 2011)
New requirement for Forms 1099. The number of Forms 1099 that businesses will be required to issue has been greatly expanded. Businesses will have to file an information return (for example, a Form 1099) for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). Formerly, there was an exemption for payments to corporations and some other entities, such as tax-exempt organizations. In addition, the types of payments requiring a 1099 have been expanded to include amounts paid for purchases of goods, not just payment for services. (Effective: 2012)
Tax credit of up to 35 percent. Businesses with 25 or fewer full-time equivalent employees that provide employees health care coverage can claim a credit of up to 35 percent of nonelective contributions the businesses make on behalf of their employees for insurance premiums. To qualify for the credit, the employer must pay average annual wages of $50,000 or less. In addition, the employer must pay at least 50 percent of the premium cost and a uniform percentage for all covered employees. The premium amount taken into account is capped at the amount of the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage. (Effective: 2010-2013)
National high-risk pool. A temporary national high-risk pool will be created to permit adults with pre-existing conditions to obtain subsidized coverage. This pool will be dissolved after 2014 when all insurers will be prohibited from excluding persons with pre-existing conditions. (Effective: 2010-2014)
Adoption-credit increase. The maximum adoption credit is increased $1,000 to $13,170 per eligible child. This increase applies to non-special-needs adoptions and special-needs adoptions. Also, the adoption credit is made refundable. The new dollar limit and phase-out of the adoption credit are adjusted for inflation in tax years beginning after Dec. 31, 2010. The scheduled sunset of Economic Growth and Tax Relief Reconciliation Act (EGTRRA) provisions relating to the adoption credit is delayed one year. With sunset, effective for tax years beginning after Dec. 31, 2011, the credit reverts to $6,000 and is available for special-needs children only. (Effective: 2010)
Adoption-assistance programs. For adoption-assistance programs, the maximum exclusion is increased $1,000 to $13,170 per eligible child. The new dollar limit and income limitations of the employer-provided adoption-assistance exclusion are adjusted for inflation in tax years beginning after Dec. 31, 2010. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) sunset of provisions relating to adoption-assistance programs is delayed one year. Under the sunset, after Dec. 31, 2011, the income exclusion will disappear. (Effective: 2010)
Indoor tanning excise tax. A 10 percent excise tax is imposed on amounts paid for indoor tanning services. Like a sales tax, the tax is collected when a person pays for tanning services. (Effective: July 1, 2010)
Lifetime limits and cancellation for serious illness. Insurers cannot impose lifetime limits on insurance coverage or cancel policies due to serious illness. (Effective: Sept. 23, 2010)
Pre-existing conditions. Pre-existing condition exclusions for children are prohibited. (Effective: Sept. 23, 2010)
Dependent-care coverage. Group health plans and health insurers that provide dependent-care coverage must continue to make such coverage available for an adult child until reaching age 26 (effective for plan years beginning after Sept. 23, 2010). Reimbursements for medical care under an employer-provided accident or health plan are excluded from gross income for any employee’s child who has not yet turned 27 by the end of the tax year (effective March 30, 2010). The IRS will apply the same rule to coverage under an employer-provided accident or health plan. (Effective: Sept. 23, 2010) NOTE: Employers may see increases in the number of dependents for whom employees seek coverage.
Health FSA contribution limit. There is a $2,500 limitation on health FSA contributions. (Effective: 2013)
Coverage waiting period. There is no employee waiting period longer than 90 days to obtain coverage. (Effective: 2014)
Voucher requirement. Employers offering coverage must also offer a voucher to any employee with an income less than four times the federal poverty level whose share of the premium is greater than 8 percent but less than 9.8 percent of their income, and who chooses to enroll in a state exchange rather than participate in the employer’s group health insurance plan. The voucher amount must be equal to what the employer would have paid in premiums for that employee, and can be applied by the employee toward his/her premiums in the exchange plan. (Effective: 2014)
Increased tax-credit percentage. The new tax-credit percentage of up to 35 percent for 2010-2013 previously discussed will increase to a maximum of 50 percent for employers with 25 or fewer full-time equivalent employees who purchase insurance coverage for their employees through a state exchange. Employers with 10 or fewer employees and average wages of less than $25,000 will receive the full 50 percent credit for up to two consecutive years. (Effective: 2014)
Exchanges and other programs. All states must establish an exchange to facilitate the purchase of qualified health plans and establish a Small Business Health Options Program (SHOP) that will assist employers with up to 100 employees in obtaining group coverage. A Consumer Operated and Oriented Plan (CO-OP) program will be developed to facilitate the creation of not-for-profit, member-run health insurance companies. (Effective: 2014)
Automatic employee enrollment. Employers with more than 200 employees must automatically enroll employees in the health insurance plans they offer. They also must notify employees of the automatic enrollment and give them the ability to opt out of coverage. (Effective: Date not yet established)
Penalties for no coverage or inadequate coverage. Applicable large employers with an average of at least 50 employees that do not offer coverage for all full-time employees, or offer inadequate coverage, are required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange to which a tax credit or cost-sharing reduction is allowed or paid to the employee. The number of employees is based on average employee count from the previous calendar year. (Effective: 2014)
State exchanges. Employers with more than 100 employees will be able to join state exchanges, at the state’s discretion. (Effective: 2017)
Medicare tax changes. Medicare taxes increase by 0.9 percent to 1 percent on wages of more than $250,000 for joint returns, $125,000 for married filing separate or $200,000 for other individuals. Also, a 2 percent Medicare tax will be imposed on the lesser of investment income (interest, dividends, royalties, rents, etc.) or modified AGI more than $250,000 for joint returns or $200,000 for other individuals. (Effective: 2013)
Unreimbursed medical expenses. The itemized deduction threshold for unreimbursed medical expenses will increase to 10 percent of AGI. However, through 2016 it remains 7.5 percent if an individual (or the individual’s spouse) has turned age 65 before the close of the tax year. (Effective: 2013)
The content on this Web page is maintained by consumer finance writer Tony Novak. Comments, feedback, questions and corrections are welcome to help keep content relevant and up-to-date. Contact the author directly by e-mail, on Twitter or through the contact information included on his Web site.
Opinions expressed are the sole responsibility of the author and do not necessarily represent the opinion of Freedom Benefits Association or any other person, company or entity mentioned. Tony Novak operating under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator" is not an agent, broker, producer or navigator for any federal, state or commercial health insurance exchange but may be compensated as an accountant, adviser, consultant, reviewer, endorser or referrer to any firm or product named. Information is from sources believed to be true but cannot be guaranteed.