House Passes Health Care Reform

The House passed the Patient Protection and Affordable Care Act. The act contains numerous tax law changes that take effect over the next several years. Here are some of the highlights of tax changes in the act, in chronological order:

• For small businesses (fewer than 25 employees with average wages less than $40,000), there’s a tax credit of up to 35% of contributions toward employee health coverage in 2011 through 2013. In 2014 and later, the credit is up to 50% of coverage; credit can be claimed only for two years. For employers with 10 or fewer employees having average annual wages of less than $20,000, there is a full credit.
• Deductible medical expenses for those who itemize deductions will be allowed only to the extent they exceed 10% of adjusted gross income (up from the current 7.5% floor), starting in 2013. However, for seniors age 65 or older, the current cap continues.
• Flexible spending accounts (FSAs) are capped at $2,500, starting in 2012; after 2013, this cap will be indexed for inflation. In addition, reimbursements from FSAs will be limited to prescription drugs (over-the-counter medications will no longer qualify).
• Distributions from health savings accounts (HSAs) for nonqualified purposes will be subject to a 20% penalty (up from the current 10% penalty), starting in 2013.
• An increase in Medicare taxes as part of FICA or self-employment tax on those earning about $200,000 or more if single or $250,000 if filing jointly. The increase is 0.9% of earned income. This starts in 2013. Note: There is a new Medicare tax of 3.8% on investment income, also starting in 2013.
• A nondeductible penalty for individuals without minimum health coverage. The penalty starts at $95 per person or 1% of income, whichever is higher, beginning in 2014; it increases to $395 or 2% of income in 2015 and, starting in 2016 it will be $695, as adjusted for inflation, or $2.5% of income.
• A 40% excise tax on so-called “Cadillac” plans, starting in 2018.