It’s
massive, and it’s complicated. At more than 2,400 pages, the Affordable Care Act (ACA for short) has
left businesses and individuals confused about what the law contains and how it
affects them.
The aim of the law is to provide affordable, quality health care for
all Americans. To reach that goal, the law requires large companies to provide
health insurance for their employees starting in 2015, and uninsured
individuals must get their own health insurance starting in 2014. Those who
fail to do so face penalties.
Insurance
companies must also deal with new requirements. For example, they cannot refuse
coverage due to pre-existing conditions, preventive services must be covered
with no out-of-pocket costs, young adults can stay on parents’ policies through
age 26, and lifetime dollar limits on health benefits are not permitted.
The
law mandates health insurance coverage, but not every business or individual
will be affected by this requirement. Here’s an overview of who will be
affected.
FOR
BUSINESSES – It’s all in the numbers
· Fewer than 50 employees
Companies with fewer than 50 employees are encouraged to provide
insurance for their employees, but there are no penalties for failing to do so.
A special marketplace will be available for businesses with 50 or fewer
employees, allowing them to buy health insurance through the Small Business
Health Options Program (SHOP).
· Fewer than 25 employees
Small companies that pay at least 50% of the health insurance premiums
for their employees may be eligible for a tax credit for as much as 35% of the
cost of the premiums. To qualify, the business must employ fewer than 25
full-time people with average wages of less than $50,000. For 2014, the maximum
credit increases to 50% of the premiums the company pays, though to qualify for
the credit, the insurance must be purchased through SHOP.
· 50 or more employees
For companies with 50 or more full-time employees, the requirement to
provide “affordable, minimum essential coverage” to employees has been delayed
for one year and is not required until 2015. Originally, employers had been
required to file information returns that reported details about the health
insurance they provided, with penalties to apply if the insurance did not meet
standards. Companies complained that they needed more time to meet the
reporting obligations, and in response the IRS made the reporting requirement
optional for 2014. Without the reporting, the IRS could not determine
penalties, so the penalties also were postponed for a year.
Bottom line: the IRS is
encouraging companies to comply in 2014 even though there are no penalties for
failure to do so.
· The business play or pay penalty
Starting in 2015, companies with 50 or more employees that don’t offer
minimum essential health insurance face an annual penalty of $2,000 times the
number of full-time employees over a 30-employee threshold. If the insurance
that is offered is considered unaffordable (it exceeds 9.5% of family income),
the company may be assessed a $3,000 per-employee penalty. These penalties
apply only if one or more of the company’s employees buy insurance from an
exchange and qualify for a federal credit to offset the cost of the premiums.
FOR
INDIVIDUALS – It’s all about coverage
Currently,
attention is focused on the health insurance exchanges or “Marketplace” that
opened for business on October 1. Confusion about the Affordable Care Act has left many people thinking everyone has to
deal with the exchanges. The fact is that if you are covered by Medicare,
Medicaid, or an employer-provided plan, you don’t need to do anything.
Also, if you buy your health insurance on your own and are happy with
your plan, you can keep your coverage. However, the only way to get any
premium-lowering tax credits based on your income is to buy a plan through the
Marketplace.
· The exchanges
(Marketplace)
Each state will either develop an insurance exchange (Marketplace) or
use one provided by the federal government. The Marketplace will allow those
seeking coverage to comparison shop for health plans from private insurance
companies.
There will be four types of insurance plans to choose from: Bronze,
Silver, Gold, and Platinum. The more expensive the plan, the greater the portion
of medical costs that will be covered. The price of each plan will depend on
several factors including your age, whether you smoke, and where you live.
Many individuals will qualify for federal tax credits which will
reduce the premiums they actually pay. Each state’s Marketplace will have a
calculator to assist individuals in determining the amount, if any, of their
federal tax credit.
· The individual play or
pay penalty
If you’re one of the 45 million or so Americans without health
insurance, you will need to get coverage for 2014 or pay a penalty of $95 or 1%
of your income, whichever is greater. Low-income individuals may qualify for
subsidies and/or tax credits to help pay the cost of insurance.
The penalty increases to $325 or 2% of income for 2015 and to $695 or
2.5% of income for 2016. For 2017 and later years, the penalty is
inflation-adjusted. Those who choose not to be insured and to pay the penalty
instead will still be liable for 100% of their medical bills.
NOTE: If you will be shopping for health insurance on the
Marketplace, be aware that there’s no need to rush to enroll; the enrollment
period runs from October 1, 2013, through March 31, 2014. Take the time
you need to review your options and select what’s best for you and your family.
MORE
ABOUT THE LAW AND YOUR TAXES
In
addition to the penalties required by the Affordable
Care Act, the law made other tax changes that could affect you. Among them
are the following:
·
Annual contributions to flexible spending accounts are limited to $2,500
(indexed for inflation).
·
The 7.5% adjusted gross income threshold for deducting unreimbursed medical
expenses increases to 10% for those under age 65. Those 65 and older can use
the 7.5% threshold through 2016.
·
The additional tax on nonqualified distributions from health savings accounts
(HSAs) is 20%, an increase from the previous 10% penalty.
·
The payroll Medicare tax increases from 1.45% of wages and self-employment
income to 2.35% on amounts above $200,000 earned by individuals and above $250,000
earned by married couples filing joint returns. This rate increase applies only
to the employee portion, not to the employer portion.
· A 3.8% Medicare surtax is
imposed on unearned income (examples: interest, dividends, capital gains) for
single taxpayers with income over $200,000 and married couples with income over
$250,000.
The Affordable Care Act may be one of the
most complicated and confusing laws ever passed, but one thing is very clear:
the law will affect the taxes of most Americans. In order to manage your tax
bill, you will have to factor the new health care rules into your overall
personal and business tax planning. For guidance, contact our office.
To
begin checking out your state’s exchange (Marketplace), start at www.healthcare.gov
– the federal government’s website on the Affordable
Care Act.
NOTE: This Memo is intended to provide
you with an informative summary of the tax issues connected with the Affordable Care Act. This massive
package of legislation contains varying effective dates, definitions,
limitations, and exceptions that cannot be summarized easily. For details and
guidance in applying the tax provisions of this law to your situation, seek
professional assistance.
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