Patiently waiting, the PPACA has now passed muster with the Supreme Court. Only 2 provisions were changed. The provision on penalty for PPACA for the individual mandate (all individuals must have health insurance) is now called a “tax” under Congress’s power to levy taxes. Also states that opt out of Medicaid provisions, may not be mandated to follow-thru on the mandated Medicaid rules. In essence, if these states don’t want to burden of administering the Medicaid mandate, they simply decline all federal funding.
This article is intended to provide brief analysis on the tax provisions of PPACA for individuals and small businesses. We will not cover the health insurance exchanges and the various taxes that will be charged on health providers.
The 2 main provisions affecting individuals and businesses are these:
- Individuals are mandated to purchase health insurance if they can afford it (meeting Medicare definition of poverty) or face a 1% tax (estimated at $695 per person and rising to 2.5% of income by 2016. Family limit is $2,085. Exemptions for financial hardship and religious beliefs. Individuals that need help to purchase health insurance and utilize the exchanges will receive a tax credit.
- Small businesses with over 50 full time equivalent (FTE) employees( combo of full time and part time who work over 30 hours a week) are mandated to provide health care coverage. The interesting aspect here is how the penalty is calculated. The penalty of $2,000 per each FTE is only effective on actual full time employees over 30. Small businesses do not pay penalties on part time employees. So these businesses in violation of the mandate may not actually have penalties if they have a lot of part time employees. This was effective in 2014.
- Also there will be subsidies to encourage small businesses. There is s small business tax credit if they have fewer than 25 FTE’s and cover half the cost of health insurance. It is 35% of health insurance premiums currently to go up to 50% in 2014. Again, on the face, there are some meaningful exceptions. The small business must have fewer than 10 FTE’s that make less than $25,000 and if the average salary size is over $50,000 than the credit is completely phased out. This credit will sunset in about 10 years. This has been effective since 2010.
- Small businesses must have health insurance of average or better that is in the market to qualify (minimal coverage must cover at least 60% actual value of benefits and average premium can not be more than 9.5% of employee’s income.
The PPACA act will be phased in over the several years with 2014 being the main year of implementation. 2014 will be the year of the individual mandate.
The following includes taxes that will be paid to fund PPACA affecting wealthier individuals and small businesses:
- Limit contributions to flexible spending arrangements in cafeteria plans to $2,500 effective 1/1/2012
- Raise 7.5% AGI income floor for medical expenses to 10%
- Income from self-employment and wages of single individuals in excess of $200,000 annually will be subject to an additional tax of 0.9%. The threshold amount is $250,000 for a married couple filing jointly (threshold applies to joint compensation of the two spouses), or $125,000 for a married person filing separately. This is effective 1/1/13.
- In addition, an additional tax of 3.8% will apply to the lesser of net investment income or the amount by which adjusted gross income exceeds $200,000 ($250,000 for a married couple filing jointly; $125,000 for a married person filing separately. This is effective 1/1/13.
- 40% excise tax on health coverage in excess of $10,200 per person or $27,500 per family – tax on Cadillac plans. This is effective 1/1/18.
- 10% Indoor tanning tax, effective 10/1/10, new IRS form 720, a quarterly tax form.
I have covered the basic and rather complicated provisions of the PPACA act focusing on tax impact to individuals and small businesses. Based on my experience with my clients, the subsidy on the health insurance tax credit is pretty complicated and much analysis must be done by tax preparers regarding the health insurance plans available to these small businesses. Also many small businesses of highly educated professionals or tradesmen – attorneys, CPA’s, plumbers, software programmers, and engineers do not qualify since their wages are too high. Only businesses like small restaurants, dry cleaners, construction companies with low wage earners usually qualify.
Individuals that currently self –insure and try to negotiate directly with hospitals/ doctors will now be penalized for not paying health insurance premiums and may even be prevented from direct negotiations under this act. The penalty for not buying insurance at about $2K per family may not be steep enough to prevent these self insured individuals from continuing their practice. There will be less use of the health savings accounts , flex spending accounts, and reimbursement accounts since 1) Restrictions on the use of these accounts 2) Tax deductibility limits.
There will be an incentive for families with elderly parents to start a comprehensive gift /transfer strategy to shift all assets to the next generation so the elderly parents may qualify as poverty level participants for Medicaid assistance. This strategy already exists today but will be more utilized in the future. I also predict abusive situations with this strategy.
Lastly, I don’t believe this will be the last of court challenges on PPACA. In an odd technicality, PPACA only allows the IRS to provide tax credits / subsidies to individuals / businesses participating in the healthcare exchanges. But since some states are not participating , the IRS has developed a broad rule that these credits/ subsidies can still be applied. I’m sure this will be challenged on the grounds that the IRS is overreaching its authority. I’m pretty sure all legal roadblocks may come thru th pike on these exchanges