The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (the “Acts”), enacted into law in March 2010 as part of an overhaul of the U.S. health care system, will significantly impact businesses. The Acts impose new health insurance requirements for large businesses, increase the Medicare tax on high-income individuals, and make a number of changes unrelated to health care. Some of the key provisions that affect businesses are discussed in this advisory.
Health Insurance Coverage
The Acts do not require employers to offer health insurance coverage but do impose a penalty on certain businesses that do not provide coverage for full-time equivalent (FTE) employees (i.e., employees who work 30 or more hours per week). Employers with less than 50 FTE employees are not subject to the penalty. There also is no penalty for an employer that does not provide health insurance coverage if no FTE employees receive a subsidy or tax credit for insurance purchased through a new state insurance exchange created by the Acts.
The amount of the penalty is $2,000 per employee per year, with the penalty waived for the first 30 employees. If the employer offers health insurance, but has at least one employee that receives a subsidy or credit in a state insurance exchange, a penalty of $3,000 per year for each employee that receives the subsidy or credit will be imposed. The amount of this penalty cannot exceed the penalty that would apply to an employer that does not provide employee health insurance. The penalties apply pro rata on a monthly basis and are effective beginning in 2014.
Employers that offer health insurance must provide employees with vouchers to purchase insurance through the state insurance exchange if the employee earns less than 400 percent of the federal poverty level and the employee’s share of the cost of the insurance would be more than 8 percent and less than 9.5 percent of the employee’s household income. The amount of the voucher must equal the amount the employer would have contributed for health insurance coverage for the employee. The employer is not subject to the penalties described above for any employee to whom it gives a free-choice voucher. This provision applies beginning in 2014.
Small businesses can take a credit to offset their federal income taxes for contributions to purchase health insurance for employees. This credit targets small businesses and tax-exempt organizations that employ low- and moderate-income workers. Companies with no more than 25 FTE employees with wages that average no more than $50,000 are eligible for a portion of the credit, with a full credit given to employers with 10 or fewer FTE employees with average wages of less than $25,000.
In order to qualify for the credit, an employer must contribute at least half of the total cost of the health insurance premiums. The tax credit is generally equal to 35 percent of the health insurance premium contributions for 2010 through 2013, and 50 percent for tax years beginning in 2014. For tax-exempt organizations, the maximum credits are 25 percent in 2010 through 2013, and 35 percent beginning in 2014.
The amount of the credit taken reduces the business expense deduction an employer can take for health insurance. The credit can be carried back for one year and carried forward for 20 years. A for-profit employer may claim the credit on its annual income tax return as part of the general business credit and may take the credit into account in determining the amount of estimated tax payments. The Internal Revenue Service (IRS) will issue future guidance as to how a tax-exempt organization will take the credit. The IRS has posted answers to frequently asked questions on its Web site.
Employers must comply with new reporting requirements that provide information on the employer’s health insurance plan and employees covered by the plan. These rules apply beginning in 2014.
Children under 27
Payments made pursuant to an employer-provided health or accident plan to an employee’s child under the age of 27 are not taxable to the employee, effective March 30, 2010.
IRS Form W-2
Employers must disclose the aggregate value of the employer health benefits provided to each employee on IRS Form W-2 for tax years beginning in 2011.
Additional Medicare Tax
For tax years beginning in 2013, an additional Medicare tax applies for wages in excess of $250,000 for individuals filing joint tax returns, $125,000 for married individuals filing separately, and $200,000 in all other cases. The tax is 0.9 percent of wages in excess of the stated thresholds. For a single taxpayer, the Medicare tax will thus be 1.45 percent of the first $200,000 of wages and 2.35 percent on wages over $200,000. The employer must withhold this additional amount from wages, but the employer’s share of the tax will not be increased.
In addition to this tax on wages, for an individual with a modified adjusted gross income in excess of the applicable threshold amount, a Medicare tax of 3.8 percent will be imposed on the individual’s net investment income (not to exceed the amount the individual’s modified adjusted gross income exceeds the threshold amount). For example, if a single taxpayer has net investment income of $100,000 and modified adjusted gross income of $220,000, the 3.8 percent tax will be imposed on $20,000, i.e., the difference between $220,000 and the threshold amount of $200,000. Employers do not have any reporting or withholding obligations for the Medicare tax on investment income.
Economic Substance Doctrine
The economic substance doctrine is a doctrine that has been applied by the courts to deny tax benefits if a transaction lacks economic substance. The Acts clarify the application of the doctrine and impose a 20 percent penalty for understatements due to a transaction lacking economic substance that was entered into after March 30, 2011. The penalty is 40 percent instead of 20 percent if the relevant facts surrounding the transaction are not disclosed on the taxpayer’s tax return. A transaction will be considered as having economic substance only if the transaction, apart from federal income tax effects, changes the taxpayer’s economic position in a meaningful way, and the taxpayer has a substantial purpose for entering into the transaction.
Estimated Taxes for Large Corporations
For corporations that have at least $1 billion in assets, estimated tax payments will be increased by 15.75 percentage points for payments due in July, August and September of 2014. Thus, the corporate estimated tax payment owed by large corporations for these months is increased from 157.75 percent to 173.50 percent of the payment otherwise due. Payments after September 2014 will be correspondingly reduced.
Corporate Information Reporting
Payments made to corporations for goods and services have historically been exempt from information reporting on IRS Form 1099. Payments made by businesses after Dec. 31, 2011, to corporations (except tax-exempt corporations) for property and services are subject to information reporting on IRS Form 1099.
New Excise Taxes
Manufacturers or importers of medical devices will be subject to a tax equal to 2.3 percent of the sales price for sales beginning in 2013. The tax will not apply to contacts, hearing aids, eyeglasses and other items typically purchased by the general public.
Indoor Tanning Services
A new 10 percent excise tax will be imposed on individuals using indoor tanning services. The tax must be collected and remitted by the company providing the tanning services. Tanning services are defined as services that induce tanning through the use of ultraviolet lights. This provision applies to tanning services performed on or after July 1, 2010.
Businesses should all review the new rules as soon as possible to ensure they have procedures in place to meet new compliance and reporting requirements for both changes related to health care and other provisions contained in the Acts.