Tax Impact of Health Care Overhaul

4/15/2010

By Mark Corey, CPA

The Health Care overhaul recently passed by Congress will have a major impact on business and individual taxes for years to come. Among the changes that will impact your business and individual tax situation are:

• An excise tax on high cost medical plans, so called “Cadillac” plans. These are health insurance plans costing an individual more than $10,200 and a family more than $27,500 annually, and will be hit with a 40% excise tax. Dental and vision plans are exempt from this calculation.
• The law creates a new 3.8% tax on unearned (investment) income for individuals with an income above $200,000 per year, $250,000 for joint filers.
• The law also adds a 0.9% surtax on their Hospital Insurance (HI) payroll taxes, raising their HI tax rate to 2.35%.
• In 2013 there will be a $2,500 limit on tax-free employee contributions to health flexible spending arrangements (FSAs).
• In 2011, you will not be able to use FSA funds to purchase non-prescription medications
• The law increases the itemized deduction threshold for deducting medical expenses to those expenses in excess of 10% of AGI instead of the current 7.5%. However, persons who are 65 or older will continue to use the 7.5% threshold until 2016.
• The law imposes a penalty of $2,000 per employee for companies with more than 50 workers that do not offer health insurance
• The law imposes a penalty for individuals who do not obtain health insurance in the amount of $325 and $695 in 2016.
• The new law provides a Medicare drug program rebate to close the Medicare prescription “donut hole.” This is the gap in coverage where all costs are out of pocket for all drugs purchased between $2,700 and $6,154.
• The law contains extensive Medicare reforms designed to reduce overall Medicare costs.
• The change extends the prohibition of lifetime health insurance policy coverage limits.
• The law provides for limitations on excessive waiting periods for health coverage to begin.
• The law allows parents to provide coverage for non-dependent children up to age 26 for all existing health insurance plans starting six months after enactment.
• The change prohibits pre-existing condition exclusions in 2014 for group plans.

The Health Care overhaul bill and subsequent reconciliation bill are very complex and the impact will be felt for the next several years. If you have any questions on how this bill may impact you or your business please your tax professional.