The Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act (which are collectively referred to as the healthcare legislation) were signed into law in March, and they include lots of tax changes. Some have nothing to do with healthcare, some won’t kick in for several years, some are effective right now and some are even effective retroactively.
This chart briefly summarizes some of the most important tax changes, which became effective before 2010, as well as those taking effect in 2010, 2011 and 2012.
In the next post, we will look at tax changes that will become effective in 2013 and later. (Of course, there will be some clarifications, technical corrections and IRS guidance to follow.)
|RETROACTIVE CHANGES TAKING EFFECT BEFORE 2010|
|Tax Change||Description||Effective Date/
Tax Code or Law Section
|A new, retroactive federal income tax exclusion for student loan amounts paid off or forgiven under certain state loan repayment/ forgiveness programs intended to increase the presence of healthcare professionals in underserved areas.||Amounts received or forgiven in tax years after 2008.IRC Section
|CHANGES TAKING EFFECT
|New Health Insurance
| Qualifying small employers can claim a new credit that can cover up to 35 percent of the cost of providing health insurance to employees.
Qualifying small employers that are tax-exempt non-profits can claim credits to cover up to 25 percent of employee health insurance costs. A qualifying small employer is one that: has no more than 24 full-time-equivalent (FTE) workers; pays an average FTE wage of less than $50,000; and has a qualifying healthcare arrangement in place.
A qualifying arrangement requires employers to: pay at least 50 percent of the cost of each enrolled employee’s coverage and pay the same percentage for all employees (even those with more-expensive family coverage or self-plus-one coverage).
However, for tax years beginning in 2010, a favorable transition rule allows the credit to be claimed when the employer doesn’t pay the same percentage for each enrolled employee but instead pays an amount equal to at least 50 percent of the cost of single coverage (even if an employee has more-expensive coverage). The allowable credit is quickly reduced under a complicated phase-out rule when the employer has more than 10 FTE employees or average FTE wage is in excess of $25,000.
|Tax years beginning in 2010-2013. The credit can be claimed for eligible costs incurred in tax years beginning in 2010 before the healthcare law was enacted. IRC Sections 45R, and IRS Notice
For more information from the IRS: Small Business Healthcare Tax Credit: Frequently Asked Questions.
| Effective for plan years beginning after September 22, 2010, health plans that cover dependent children must continue to cover adult children until they turn 26. (Plans may allow to voluntarily provide such coverage before that.)
In conjunction, employer-provided health coverage for an employee’s adult child is now treated as a tax-free fringe benefit as long as the child hasn’t reached age 27 by the end of the year. It doesn’t matter if the adult child is the employee’s dependent or not.
The IRS has stated that tax-free treatment also applies to reimbursements from an employer-provided cafeteria plan, healthcare flexible spending account (FSA) plan, or health reimbursement arrangement (HRA) to cover an under-age 27 adult child’s qualified medical expenses.
If you’re self-employed and pay your own health coverage, the cost of covering an adult child is eligible for the above-the-line deduction for self-employed health premiums, as long as the adult child hasn’t reached age 27 by year end (regardless of whether the child is a dependent).
There is a discrepancy between the age-26 coverage requirement and the age-27 tax breaks.
|March 30, 2010IRC Sections 105(b) and 162(l)IRS Notice
| Increases the annual cap on tax-free employer adoption assistance payments by $1,000 and extends it through 2011. For 2010, this change increases the cap to $13,170 (up from $12,170).
Similarly, the healthcare legislation increases the maximum annual adoption credit by $1,000 and extends the new deal through 2011. For 2010, this increases the maximum credit to $13,170 (up from $12,170).
Also, for 2010 and 2011, the adoption credit becomes refundable so it can be collected in full even if you don’t owe federal income tax.
|Tax years beginning in 2010 and 2011.IRC Sections 36C and 137|
for Not-for-Profit Hospitals
|Establishes new rules for hospitals to qualify for tax-exempt nonprofit status.||Tax years after March 23, 2010.IRC Sections 501(r) and 6033(b)|
|Disallows the cellulosic biofuel producer credit for so-called black liquor fuels.||Fuels sold or used after 2009.IRC Section
|New Loss Ratio
Rule for Health Organizations
|Requires a medical loss ratio of at least 85 percent for health organizations to qualify for certain insurance company tax breaks.||Tax years after 2009.IRC Section 833|
|New Tanning Excise Tax||Imposes a 10 percent excise tax on indoor tanning services.||Services after June 30, 2010.IRC Section 5000B|
|Economic Substance Doctrine is Codified||The legislation attempts to provide a home in the tax code for the economic substance doctrine. It will be deemed to exist only if the transaction in question: changes the taxpayer’s economic position in a meaningful way without regard to tax consequences and is entered into for a substantial non-tax purpose. A 20 percent penalty can be assessed on tax underpayments attributable to transactions that are disallowed because they lack of economic substance. The penalty rises to 40 percent for “undisclosed economic substance transactions.” Other penalties may also apply.||For transactions entered into after March 30, 2010 and tax underpayments, understatements, refunds, and credits attributable to transactions entered into after that date. IRC Sections 7701(o), 6662(i), and 6676(c)|
|CHANGES TAKING EFFECT
|Employer Must Report Healthcare Costs on Forms W-2||Requires employers to report to employees on their annual W-2 forms the value of employer-provided heath insurance coverage (not including salary-reduction amounts contributed to healthcare flexible spending accounts).||Tax years after 2010.IRC Section
Tax-Free Reimbursements for
|If you participate in an employer-sponsored healthcare FSA or HRA or have your own health savings account (HSA) or medical savings account (MSA), current rules allow you to take tax-free withdrawals to pay for non-prescription drugs like pain and allergy relief medications. Starting next year, this tax-favored treatment will only be available for prescription drugs, insulin, and doctor-prescribed over-the-counter medications.||For expenses incurred in tax years beginning after 2010.IRC Sections 106(f), 220(d), and 223(d)|
|If you take money out of your HSA or MSA for any reason other than to cover qualified medical expenses, the current rules say you will usually owe federal income tax plus a 10 percent penalty tax, or a 15 percent penalty tax for an MSA. The new law increases the penalty tax rate to 20 percent for nonqualified withdrawals.||Withdrawals in tax years beginning after 2010.IRC Secs. 220(f) and 223(f)|
|Establishes a new and simpler Section 125 cafeteria benefit plan for employers with 100 or fewer employees. These plans will be deemed to automatically satisfy all applicable cafeteria benefit plan nondiscrimination rules if they satisfy certain minimum standards for eligibility, participation, and contributions.||Tax years beginning after 2010.IRC Section 125(j)|
on Drug Companies
|Imposes a new nondeductible fee on manufacturers and importers of branded prescription drugs. Each targeted company must pay an allocable portion of the total annual fee, which is $2.5 billion for 2011. The fee is apportioned among targeted companies based on each company’s share of sales in the preceding year.||Calendar year 2011.Section 9008 of the Patient Protection Act|
|CHANGES TAKING EFFECT IN 2012|
|In general, a business that pays $600 or more in a calendar year to a corporation must supply the corporation with a Form 1099 and file a copy with the IRS. Before this, most payments by businesses to corporations were exempt from 1099 reporting requirements. The new requirement won’t apply to corporations that are tax-exempt organizations.||For payments made after 2011.IRC Section 6041(a) and (h)|
|A business that pays $600 or more in a calendar year to a single payee (including an individual) for property generally must supply a Form 1099 and file a copy with the IRS. Before this change, payments by businesses for property (as opposed to payments for services) were generally exempt from 1099 reporting requirements.||For payments made after 2011.IRC Section 6041(a)|
|Health insurers and sponsors of applicable self-insured health plans will have to pay an annual fee of $2 per covered life ($1 per life for affected policy or plan years that end by September 30, 2013).||Policy years ending after September 30, 2012.IRC Sections 4375, 4376, and 4377|