Since the Affordable Care Act became law in 2010, many of the tax provisions of that law have slowly been coming into effect. From the beginning, we had expanded medical deductions for children up to age 27 and a small-business credit to encourage employers to offer health insurance. Some tax provisions will not come into effect until a few years down the line. The penalty for employers failing to provide health insurance has been delayed until at least 2015. The excise tax for overly generous "Cadillac" health plans will not come into effect until 2018.
The year 2013 saw the beginning of the additional 0.9 percent tax on earned income in excess of $200,000 for single filers and $250,000 for joint filers. 2013 also saw the beginning of the new 3.8 percent tax on the lesser of net investment income or adjusted gross income in excess of those same thresholds. 2013 also saw the medical expense deduction threshold increase to 10 percent of adjusted gross income for those under age 65 (it will increase to 10 percent for those age 65 and over in 2017).
The year 2014 brings some additional significant tax provisions associated with health care reform.
THE INDIVIDUAL MANDATE
A penalty, otherwise known as a shared responsibility payment or individual mandate, will be imposed on applicable individuals who fail to obtain minimum essential health insurance coverage. The amount of the penalty is equal to the lesser of the amount of the national average premium for qualified health plans that offer a "Bronze" level of coverage (the basic level of coverage) or the sum of the monthly penalty amounts for the year. The monthly penalty amount is equal to one-twelfth of the greater of a flat dollar amount (the sum of the applicable dollar amounts for the individuals in the household not covered up to a maximum of 300 percent of the applicable dollar amount). The penalty amount is the greater of 1 percent of the taxpayer's household income for 2014 or the applicable dollar amount of $95 ($95 per adult and $47.50 per child, up to a family maximum of $285 -- 300 percent of $95). In 2015, the percentage increases to 2 percent and the applicable dollar amount increases to $325. In 2016, the percentage increases to 2.5 percent and the applicable dollar amount increases to $695.
There are a number of categories of exemption from the application of the penalty, such as a low-income exemption, a hardship exemption, a short-term lapse exemption, a non-U.S. residency exemption, and religious exemptions. Further, the Internal Revenue Service is limited in its ability to enforce the penalty. It can basically only offset the penalty against tax refunds due in the current or future years.
Individuals who do not qualify for an exemption had until March 31, 2014, to get minimum essential coverage in place to avoid the penalty. A later date may apply if an individual experiences a change of circumstances that makes them no longer exempt from the requirement. Possible changes in circumstances include marriage, the birth of a child, or relocation to another state. The law permits only a three-month short-term lapse in minimum essential coverage during a year that the taxpayer is otherwise subject to the penalty.
PREMIUM ASSISTANCE CREDIT
2014 also saw the introduction of a premium assistance credit to assist lower-income taxpayers in affording health insurance obtained on the state exchanges. Many taxpayers may have already received the benefit of an advance credit when they applied for health insurance on an exchange based on the prior-year tax information. The credit is available to household incomes between 133 and 400 percent of the federal poverty level. The beginning percentage may be 100 percent in states that have not adopted expanded Medicaid coverage. The credit is based on a percentage of the household income, ranging from 2 percent at 133 percent of the federal poverty level to 9.5 percent at 300 to 400 percent of the federal poverty level. Household incomes up to and in excess of $90,000 could potentially qualify for this refundable premium assistance credit.
On the tax return for 2014, the correct amount of the premium assistance credit will be determined. Taxpayers who received too large an advance credit will owe some additional tax or have their tax refund reduced, and taxpayers who received too small or no advance credit will claim the credit on their tax return. The premium assistance credit is a refundable credit.
2014 also brings changes to the small-business health insurance credit. From 2010 through 2013, the credit had been a maximum of 35 percent of the employer's premium expenses, with eligibility phasing out when the number of full-time employees reached 25 or average annual wages reached $50,000. The credit is available to small employers who cover at least 50 percent of the cost of single health care coverage for each employee.
In 2014, the percentage increases to 50 percent; however, to qualify for the credit, the health insurance was to have been purchased through a state exchange, and the employer can claim the credit for only two years. The IRS has been concerned that too few small businesses had been claiming the credit. There has also been concern that states were so focused on getting their individual exchanges up and operating that the exchanges for small business, the so-called "SHOP" exchanges, were getting pushed aside to be focused on later. The opening of the SHOP exchanges has therefore been delayed until Nov. 15, 2014. Small businesses can still claim the 50 percent credit for 2014 but will have to set up coverage outside of a SHOP exchange for 2014 and then utilize the SHOP exchange for 2015.
A small business eligible to use the SHOP exchange generally must have fewer than 100 employees, although it may be fewer than 50 employees in some states. Many small businesses that already had health insurance coverage in place for their employees can also qualify for the credit. These small businesses may have been entitled to a credit going back to 2010 and can file amended returns to claim the credit for any open years if they had not already done so.
Final regulations on information reporting of health care coverage were issued in March 2014, and delayed once again some of the health insurance information reporting requirements. The regulations address reporting of minimum essential coverage by health insurance issuers, some employers and others providing minimum essential coverage and reporting of health care coverage by applicable large employers. The final regulations apply to calendar years beginning after Dec. 31, 2014, and thus apply to reporting in 2015 for the 2014 calendar year. However, the regulations specify that no penalties will apply if a reporting entity first reports beginning in 2016 for calendar year 2015.
Also postponed until 2015 is the penalty on any employer failing to provide minimum essential coverage. Employers who have 50 or more full-time equivalent employees are subject to the penalty. Final regulations issued in February, however, limit the employer mandate in 2015 to "larger" employers (employers with 100 or more employees). Furthermore, for 2015, larger employers need only provide coverage to 70 percent of their full-time employees (rather than 95 percent, which will be applicable in 2016). Employers with 50 to 99 employees do not have to comply with the employer mandate until 2016, although employers in this category must report on their workers and coverage for 2015.
The penalty, when it does apply, is generally applicable if any of those employees are certified to the employer as having enrolled in a qualified health plan and receive a premium assistance tax credit or cost-sharing reduction. The annual penalty is equal to $2,000 per full-time employee, assessed monthly, but there is a 30-employee exclusion. Employers and their tax advisors should spend 2014 anticipating how they will address these potential penalties in 2015. Some employers may decide that paying the penalty may make more business sense than providing the required coverage.
As the provisions of health care reform continue to become effective, more and more tax provisions come into effect. 2014 will be another significant year in the roll out of the tax provisions of health care reform. Taxpayers and their advisors have a number of issues related to health care reform to address in 2014. Individuals must address obtaining minimum essential coverage and the possible credit available to help pay for that coverage or face possible penalties. Businesses must address the decision of whether to provide minimum essential coverage and the possible tax credit available to help pay for that coverage, or whether to risk possibly being subject to penalties starting in 2015.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer, CCH Tax and Accounting.
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