In 2010, Congress enacted the Patient Protection and Affordable Care Act with its major emphasis on increasing the number of Americans covered by health insurance and decreasing the cost of health care.
This legislation was scheduled to be phased in over a period of years, but there have been delays and obstacles with the implementation. The act has survived a Supreme Court challenge and multiple congressional efforts to alter or abolish it.
From an individual perspective, new taxes were implemented in 2013 to fund the cost of implementing the Affordable Care Act (ACA). These changes included a new 3.8 percent tax on net investment income and a similar tax of .9 percent on earned income, based on income thresholds.
Numerous strategies can be employed to reduce or eliminate the impact of these taxes.
The “Individual Mandate” takes effect this year. It imposes a penalty on individuals and their dependents if they fail to obtain health insurance that meets the requirements of ACA.
The penalty is computed from the higher amount of two different calculation methods. The first method is based on a flat dollar amount depending on the family size. The second method is a percentage of adjusted total income.
The dollar amounts and percentages are phased in over a three-year period with substantial increases each year.
There are exemptions from the penalty, including individuals or families under the poverty level, those covered by Medicare, Medicaid or other health insurance approved under the ACA, members of Indian tribes, etc., and individuals for whom the cost of insurance would exceed 8 percent of their total household income.
For 2014, the penalty will be the higher of $95 per individual ($285 for a family of three or more) or the income calculation of 1 percent of total adjusted household income. By 2016, the flat dollar amount will be $695 per individual and 2.5 percent of household income.
Employers were extended some relief with delayed effective dates for the so-called “Employer Mandate,” but employers should be looking at several issues now to prepare for year-end reporting and the impact of the mandatory coverage requirements for large employers in 2015.
Employers should conduct an analysis to determine their potential exposure to the “pay or play” penalties that could take effect as early as 2015. A spreadsheet should be created listing all employees, hours worked, whether they are seasonal employees and whether they have been offered health insurance.
From this data, the percentage of full-time employees offered health insurance can be calculated. Also, the number of FTEs can be calculated to see what provisions of the ACA impact them and the effective dates.
Large employers are those with an average of at least 50 full-time employees and full-time equivalents in the prior calendar year. Special rules apply to seasonal employees. Beginning in 2015, employers with greater than 100 employees will be subject to the employer mandate penalty. In 2016, employers with 50 to 99 employees will also be included.
In 2015, qualified group health plan coverage must be offered to at least 70 percent of all full-time employees and their dependents. In 2016, this increases to 95 percent.
The coverage being offered must meet the required minimum standards of ACA and be deemed affordable to the employee. Dependent coverage must be offered, but the employer isn’t required to pay for that coverage.
If adequate coverage is not offered, employers will be subject to a penalty of $2,000 for each full-time employee (less the first 30 employees; 80 for 2015). If minimum value coverage is offered but is deemed not affordable, the employer will be penalized $3,000 for any employee who purchases a plan on the Exchange and receives a subsidy.
Other important changes impact tax reporting for employee benefits in 2014. An employer can no longer deduct contributions to an individual health insurance policy for an employee unless that reimbursement is treated as taxable wages to the employee.
Also, health reimbursement arrangements (HRA’s) must be integrated with a group health plan. Contributions to flexible spending accounts (FSA’s) are also severely limited. Noncompliance with these provisions will lead to a penalty of up to $100 per day per affected employee.
Large employers with at least 50 full-time or full-time equivalent employees in 2014 that do not sponsor a group health plan need to comply with information reporting rules.
They will need to provide 2015 calendar year information to employees in January 2016 on Form 1095 along with the W-2s and submit that information to the IRS shortly thereafter. This form is scheduled to be released by the IRS soon and will include information on the monthly health insurance coverage offered and the employees enrolled.
This massive piece of legislation will take many years to be fully implemented and will be hotly contested.
Individuals are already feeling the impact of tax increases and will be faced with possible penalties on their 2014 tax returns if they have not obtained coverage through their employer or the Exchange.
As businesses renew their health insurance plans, they must assess whether their plan will be grandfathered or will meet the minimum standards and affordability tests. If not, they must plan for the consequences covered by this legislation.
John Leahey is a tax partner at WebsterRoger LLP. He can be reached at 843-665-5900 or JLeahey@websterrogers.com.
By John Leahey