By Mark E. Battersby
The massive, and controversial, "Patient Protection and Affordable Care Act," and the "Health Care and Education Reconciliation Act of 2010," the two recently enacted health care "reform" bills, include more than $400 billion in so-called "revenue raisers" and new taxes on employers and individuals. The centerpiece in the health reform laws is the mandate for most Americans to obtain health insurance.
The new "reform" laws contain a number of new rules, such as new penalties for individuals who choose to remain uninsured, tax credits and other sweeteners for employers participating in new insurance pools, new penalties for larger employers that don't provide insurance (or provide insurance deemed inadequate or unaffordable), plus a voucher system for certain lower income employees who choose not to be covered by their employer's health plan.
What impact will this massive overhaul of health care have on dental manufacturers and dealers?
The small business health tax credit
The Internal Revenue Service has already begun encouraging small businesses to explore and, if qualified, claim the new small health insurance coverage credit. The credit was created for eligible small businesses to either maintain their current health insurance coverage or begin offering health insurance coverage to their employees.
Small employers (no more than 25 employees and average wages below $50,000 annually) are eligible for a federal tax credit, a direct reduction of a business's tax bill, for the amount spent on health insurance for their employees — up to 35%. The full amount of the credit is, however, available only to an employer with 10 or fewer full-time equivalent employees (FTEs) and whose employees have average annual full-time equivalent wages from the employer of less than $25,000. These wage limits would be indexed to the Consumer Price Index for Urban Consumers beginning in 2014.
Self-employed dealers, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the Small Employer Health Insurance Credit. In fact, a special rule prevents sole proprietors from receiving the credit for the owner and their family members.
Self-employed dealers and other business owners can, of course, deduct the cost of health insurance for themselves and their spouses and dependents. Thus, if an S corporation pays accident and health insurance premiums (under a plan established by the S corporation) on behalf of a more-than-2% shareholder who is also its employee and who must include the value of the premiums in his or her gross income, the shareholder is permitted to deduct the cost of the premiums paid on his or her behalf.
Penalty for remaining uninsured
Starting in 2014, the new law will require nearly all Americans to have health insurance through an employer, a government program, or by buying it directly. That year, new insurance markets will open for business, health plans will be required to accept all applicants, and tax credits will start flowing to millions of people, helping them pay the premiums.
Those who continue to go without coverage will have to pay a penalty to the IRS, except in cases of financial hardship. Fines will vary by income and family size. For example, a single person making $45,000 would pay an extra $1,125 in taxes when the penalty is fully phased in in 2016.
Prior to the passage of this reform, there was no federal requirement that employers offer health insurance coverage to employees or their families. The new law imposes penalties on certain businesses for not providing coverage to their employees (so-called "pay or play").
Fortunately, many businesses will not have to worry about the provision requiring them to offer health insurance because employers with fewer than 50 employees aren't subject to the "pay or play" penalty. The new law exempts all small firms with fewer than 50 employees from the employer responsibility requirements that begin in 2014. This means, according to our lawmakers, that 96% of all firms in the U.S., or 5.8 million out of 6 million total businesses, will be exempt from the requirement to provide health coverage for employees.
The penalty for any month would be an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.
"Free choice" vouchers
After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage would have to provide qualified employees who choose not to participate in the employer's health plan with a voucher whose value could be applied to the purchase of a health plan through the Insurance Exchange. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan.
Health Insurance Exchanges
Beginning in 2014, the new law creates state-based Health Insurance Exchanges to make health insurance affordable and accessible for small businesses and the self-employed. With the option of joining a large "pool," small businesses will have access to the same type of quality, affordable coverage that only large firms currently have. Employees of small businesses will be able to do one-stop comparison shopping for an affordable insurance plan that offers lower rates, stable pricing from year to year, and a choice of quality plans.
Those who are employed by small businesses but do not receive insurance through their employer and are on the Exchange will have access to sliding-scale tax credits to help pay their premiums. Effective in 2014, for those with access to the Exchange, sliding scale tax credits are provided to individuals and families up to 400% of poverty. That means the tax credits phase out completely for individuals with $43,320 in income and families of four with $88,200 in income.
Additional tax on high-wage earners
To help pay for making health insurance affordable for small businesses and the middle class, the new law includes an increase in taxes for high earners. Specifically, for tax years beginning after Dec. 31, 2012, the hospital insurance or "HI" tax rate will be increased by 0.9%age points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly); these figures are not indexed for inflation.
Also added is a hospital insurance tax on unearned income.
The unearned income surtax
Beginning in 2013, a 3.8% surtax called an "Unearned Income Medicare Contribution" will be placed on the net investment income of anyone earning over $200,000 ($250,000 for a joint return). Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). It should be noted that income "actively" earned by anyone running a small, closely-held business, is exempt from the unearned income surtax.
New limit on health plan contributions
The owners and operators of many businesses, as well as their employees, have long used both flexible spending accounts (FSAs) and health savings accounts (HSAs) to pay for medical expenses with pretax dollars. An HSA goes along with a high-deductible insurance policy and gives individuals a tax deduction for money saved that can be used for health care expenses. An FSA has similar tax advantages, but contributions to it are deducted from an employee's salary, and money in the account must be used by the end of the year.
The new law modifies the definition of qualified medical expenses for health FSAs and HSAs to conform them to the definition used for the medical expense itemized deduction (excluding over-the-counter medicines unless prescribed by a health-care professional) beginning in 2011. The law also caps health FSA contributions at $2,500 per year after 2012, which is indexed annually for inflation after 2013.
There are also increases in the additional tax on non-qualified distributions from health savings accounts (HSAs) from 10% to 20% and from Archer MSAs from 15 to 20%. And, as mentioned, the amount of contributions to health flexible spending accounts (FSAs) will be limited to $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount would be inflation indexed after 2013.
New reporting responsibilities
For tax years beginning after Dec. 31, 2010, employers will have to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual W-2 form. Plus, manufacturers and dealers have long been required to document amounts paid to unincorporated suppliers. Soon, every manufacturer and dealer paying any amount greater than $600 during the year to incorporated providers of property and services will be required to file an information report with each provider and with the Internal Revenue Service, effective for payments made after Dec. 31, 2011.
In 2014, companies employing more than 50 workers will be required to provide health coverage and most people will be required to have health insurance. The tax on high-cost "Cadillac" policies will not go into effect until 2018, the increase in Medicare payroll taxes begins in 2013, while the tax credits available to small employers for health-care related expenses starts in 2010.
Many of the changes in the new law's more than 2,400 pages, such as requiring most people to have health insurance and employers to provide coverage, will take at least two years to go into effect. Will you and your business be ready?