The Patient Protection and Affordable Care Act includes changes in the delivery of health insurance and several new income tax provisions. The implementation of these new rules over several years is a major focus of continuing education for Enrolled Agents and other tax professionals.
Coverage Changes
Starting in 2010, an adult child up to age 26 who is unable to obtain health insurance from an employer may remain covered by the employer plan of a parent. This replaces the common insurance company provision of not covering any child who reaches age 19 and is not a full time student.Tax CPE courses address how this provision may affect claiming older children as dependents.
Also new for 2010 is a provision that health insurance coverage for children cannot be denied solely because of pre-existing health conditions. In addition, health insurance coverage for anyone can no longer be terminated as a consequence of illness.
Policy maximums have also been eliminated beginning in 2010. Insurance companies are barred from instituting lifetime caps on coverage.
Starting in 2014, insurance companies cannot deny coverage for pre-existing conditions. This provision requires a pooling of risk involving mandatory coverage for everyone. Failure to obtain coverage beginning in 2014 will incur fines based upon individual incomes. Financial assistance will become available for families earning up to $88,200 per year. State operated insurance exchanges in 2014 will provide coverage options in addition to private insurers.
For those who have been denied coverage in 2010 due to pre-existing conditions, coverage is available through state-operated high-risk pools. The maximum out-of-pocket cost under this coverage is $5,950 for individuals and $11,900 for families.
Starting in 2010, Medicare beneficiaries no longer have out-of-pocket cost for preventative care such as physical exams, testing for treatable conditions, and laboratory work. In addition, the federal government will send $250 to those covered by Medicare to cover prescription drug costs not currently covered by Medicare Part D.
However, those with annual incomes of $85,000 ($170,000 on joint returns) incur a reduced prescription drug subsidy in 2010. In addition, government subsidies for Medicare Advantage plans are being reduced so those covered by such programs face higher premiums. To assist in tax return preparation, a registered tax agent must inquire about whether clients received their $250 checks.
Tax Provisions
Continuing professional education (CPE) has several areas to address relating to changing health care rules.Tax CPE courses include information on the new tax credits and additional tax assessments.
Tax credits are available for individuals who purchase health insurance through a state-operated exchange. The tax credit program begins in 2014, when each state is required to have established an exchange. The premium assistance credit is available for households with incomes between 100 percent and 400 percent of the annual poverty level. Upon enrollment, individuals will report income to the exchange. A premium assistance credit is then calculated and paid by the federal government to the state. The insured individual then pays the difference between the premium and the credit.
Individuals who fail to maintain health insurance coverage in 2014 will be subject to tax penalties. Tax professionals will learn in their CPE ethics course that, beginning in 2014, an employer with at least 50 full-time employees during the preceding year must offer all full-time employees and their dependents minimum essential coverage under an employer-sponsored plan. Failure to meet this requirement results in a fine for the employer if any eligible employee enrolls in coverage under a state exchange for which a premium tax credit is allowed to the employee.
To assure coverage exists from employer-provided plans, annual W-2 reporting beginning for the 2011 tax year requires disclosure of the value of each employee's health insurance provided by the employer.
Small businesses with fewer than 25 employees and average wages of less than $40,000 are eligible for tax credits beginning in 2010. The credit is up to 50 percent of employer contributions for health insurance premiums. Employers with fewer than 10 employees and average wages of less than $20,000 receive a 100 percent credit. Wages paid to five-percent owners of a business (or 2 percent of S corporation shareholders) are excluded from the average calculation.
In addition, business are required beginning in 2012 to report on Form 1099 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).
For 2010, the maximum adoption credit is increased to $13,170 per eligible child. This increase applies to both 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 in 2011.
The tax on distributions from a health savings account (HSA) or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20 percent, effective in 2011.
Continuing education tax deductible topics include a new threshold for itemized medical expenses. Beginning in 2013, the threshold is increased to 10 percent of adjusted gross income. The present threshold is 7.5 percent of AGI.
Also beginning in 2013, a new Medicare tax is effective for taxpayers with income of $200,000 or more ($250,000 for joint tax returns). This is a major change that is being addressed in continuing education. The tax is 3.8 percent of the lesser of investment income or a modified adjusted gross income calculation. For self-employed taxpayers, the same additional Medicare contribution applies to the Medicare component of the self-employment tax on income in excess of the threshold amount.
In 2014, flexible spending accounts (FSAs) will have lower contribution limits. The new maximum amount allowed will be $2,500. In addition, fewer expenses will qualify for FSA spending. For example, an FSA withdrawal will no longer be available to cover the cost of over-the-counter drugs.
However, employees may use a cafeteria plan for paying premiums under a health care plan offered through a state-operated exchange. This affects employees who receive group coverage through an exchange option provided by their employer plus have cafeteria plans. This provision is also effective beginning in 2014.
