Health Care Reform Breaks: Tax Changes in 2010 and 2011

The Affordable Care and Patient Protection Act of 2010 and the Health Care and Education Reconciliation Act of 2010 comprise the historic health care reform package that will overhaul health care in America over the next several years. The key provision in the reform package—the mandate that forces every individual to carry health insurance or pay a penalty—does not go into effect until 2014. However, there are a variety of changes that may affect you well before that time. Here are changes that take effect this year and next year.

Changes for 2010

Coverage for children up to age 27. Health coverage for an employee’s child who has not attained age 27 by the end of the year is now generally tax free to the employee. A child up to age 27 need not qualify as the employee’s dependent (i.e., the child does not have to live with the employee or earn less than $3,650 in 2010) in order to entitle the employee to the exclusion.

This expanded exclusion applies to basic medical coverage, as well as dental and vision care, and other types of employer-sponsored plans. An employee in a cafeteria plan is now allowed to make pretax contributions to their plans covering this child. For self-employed individuals who deduct health insurance as an adjustment to gross income, the deductible premiums can include coverage for a child under age 27.

If a plan provides dependent coverage of children, it must continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided no later than plan years beginning on or after September 23, 2010.

Excise tax on tanning services. There is a new 10% excise tax on indoor tanning services. The tax went into effect on July 1, 2010. The tax is similar to a sales tax paid, which is the consumer at the time that services are obtained; the tax is collected by the business and remitted to the Treasury.

Note: The tax doesn’t apply to phototherapy services performed by a licensed medical professional on his or her premises.

Payment of $250 to Medicare beneficiaries. Those who have Part D coverage for prescription drugs will receive a one-time $250 payment from the government after they reach the “donut hole” (the coverage gap that is paid from beneficiaries’ pockets). There is nothing that beneficiaries need to do in order to receive this payment; the government sends it automatically. (If you don’t receive it within 45 days of when you expect it, beneficiaries should contact their Medicare drug plan.) The rebate is tax free.

Changes for 2011

W-2 reporting. Starting this year, employee W-2 forms must include the value of health care benefits. The reporting is mandated whether the benefits are paid by the employee, the employer, or a combination of both.

Restriction on over-the-counter medications. In 2011 and thereafter, health plans can no longer make tax-free reimbursements for over-the-counter medications, such as cough syrup. This rule affects reimbursements from flexible spending accounts (FSAs), heath reimbursement accounts (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs).

However, doctor-prescribed over-the-counter medications to treat a specific ailment or condition still qualify as a reimbursable amount. Also, insulin continues to be a reimbursable cost.

Increased penalty. Distributions from HSAs for nonmedical purposes are subject to a penalty unless the recipient is at least 65 years old. The penalty in 2010 is 10%; the penalty doubles in 2011 to 20%.

The penalty on distributions from MSAs are nonmedical purposes increases from 15% to 20% starting next year.