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Impact of Healthcare Reform Legislation

On March 23rd, President Obama signed the Patient Protection and Affordable Care Act, followed by the Healthcare and Education Reconciliation Act on March 30th. Together, these two pieces of legislation complete the long-awaited “healthcare reform” that the President has promised.

Below is a summary of the tax related provisions and primary healthcare related provisions contained in these bills.

Tax Related Provisions:

• A 3.8% surtax is imposed on net investment income of taxpayers earning over $200,000 ($250,000 for joint returns). Net investment income includes interest, dividends, royalties, rents, passive trade or business income, and net gain from disposition of property (other than property held in a trade or business). The surtax applies to trusts and estates as well—the lesser of undistributed net investment income or income in excess of the highest tax bracket. (Effective for tax years beginning after December 31, 2012.)

• An additional 0.9% Medicare payroll tax on earnings and wages exceeding $200,000 ($250,000 for individuals filing jointly) is imposed, thereby raising the rate from 1.45% to 2.35%. (Effective for wages paid after December 31, 2012.)

• Contributions to health flexible spending accounts (FSAs) are limited to $2,500 per year. (Effective for tax years beginning after December 31, 2012.)

• The penalty for nonqualified HSA and Archer MSAs withdrawals increases from 10% to 20%. (Effective for distributions made after December 31, 2010.)

• Medical reimbursements from FSAs, HSAs, HRAs, and MSAs are limited to prescribed medications, drugs and insulin, thereby eliminating over-the-counter-medications. (Effective for tax years after 2010.)

• The adjusted gross income threshold for claiming the itemized deduction for medical expenses increases from 7.5% to 10%. (Effective for tax years beginning after December 31, 2012. Effective date is 2017 for taxpayers 65 and older.)

• An employer’s payment for Part D Medicare coverage for retirees is no longer deductible. (Effective for tax years beginning after December 31, 2012.)

• An excise tax of 10% is imposed on indoor tanning services. (Effective July 1, 2010.)

• Many revenue raising provisions are being imposed on health related industries, such as deduction limits on executive compensation, flat fee based on market share for pharmaceutical manufacturers and health insurance providers, and gross receipts tax on manufacturers or importers of medical devices.

• The required corporate estimated tax payments factor for corporations with assets of at least $1 million will increase by 15.75 percentage points for payments due in July, August, and September of 2014.

• A new Simple Cafeteria Plan will be available for small businesses and self-employed individuals with eased participation restrictions. (Effective for tax years beginning after 2010.)

• Beginning this year, the adoption credit and adoption assistance exclusion both increase by $1,000. The tax credit will now be refundable.

Health Care Provisions:

• Non-exempt U.S. citizens and legal residents must maintain minimum essential coverage, or pay a penalty. The penalty could be as much as $695 per person or 2.5% of household income, with a family maximum of $2,085. (Effective for tax years beginning after December 31, 2013.)

• Tax credits are available for individuals and families with incomes between 100% and 400% of the federal poverty level ($43,320 for individuals and $88,200 for a family of four) that are eligible and obtain health care coverage in a newly established Insurance Exchange. A subsidy would also be provided to qualifying low-income individuals to help with insurance costs. (Effective after 2013.)

• Employers employing an average of at least 50 full-time employees that do not offer health insurance coverage or who offer coverage that is unaffordable, will be subject to a penalty if any full-time employee purchases health insurance through a state exchange. (Effective for months beginning after December 31, 2013.)

• Employers offering minimum essential coverage to employees, and paying a portion of that coverage, must provide qualifying employees with a voucher whose value can be applied to purchase coverage through the Insurance Exchange. Qualified employees are those who do not participate in the employer’s health plan, and whose required contribution for participation in the employer provided plan exceeds certain income limits. (Effective after December 31, 2013.)

• Qualified small employers will be given a tax credit for non-elective contributions to purchase health insurance for its employees. A qualified small business employer is one with no more than 25 full-time equivalent employees with annual full-time equivalent wages that average no more than $50,000. (Effective for tax years beginning after December 31, 2009.)

• Effective immediately, reimbursement for medical care expenses is extended to any child of an employee who has not attained age 27 as of the end of the tax year. Additionally, a self-employed individual is now permitted to take a deduction for premiums paid for a child who has not attained age 27 as of the end of the tax year.

• A 40% nondeductible excise tax is imposed on insurance companies and plan administrators for any health coverage plan to the extent the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. (Effective for tax years beginning after December 31, 2017.)

• Children can no longer be denied coverage, despite a preexisting condition. Beginning in 2014, this benefit extends to adults as well as children with preexisting conditions.

• Lifetime maximum payout limitations no longer apply on any health insurance coverage.

We will keep you apprised of new developments that are certain to arise as a result of this legislation. If you have any questions regarding the specific implications to your family or business, please do not hesitate to call our office.

To comply with the requirements of IRS Circular 230, we must inform you that the information discussed above is not intended or written to be used, and cannot be used by the recipient or any other taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or to promote, market or recommend to another party any transaction, entity, investment plan, arrangement or other matter.