On June 28, the U.S. Supreme Court issued its long-awaited landmark decision on the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA). In a 5 to 4 decision, the nation’s highest court upheld the law – except for one Medicaid provision involving state funding. The most contentious issue of the case was the individual mandate requiring individuals that fail to carry minimum health insurance coverage to be penalized. The Court declared the individual mandate to be within the Constitution based upon Congress’s power to tax.
The Supreme Court’s decision preserves far-reaching tax provisions and health insurance reforms of the overall health care reform legislation passed in 2010. Business taxpayers should take note of those provisions and effective dates that may affect their business planning and tax obligations.
Taxes are central to the new health care provisions. The court’s decision allows numerous tax provisions within the health care laws to move forward on schedule; some have already taken effect while others become effective in 2013 and beyond. The excise tax on high-cost employer-sponsored coverage, will not take effect until 2018. A partial list of PPACA and HCERA tax provisions follows.
- Small employer Sec. 45R credit. The government will provide a credit of 35 percent of health insurance premiums to small employers (25 percent for tax-exempt organizations. Effective for tax years beginning in 2010. The credit expires after 2015.
- Economic substance doctrine. The two-prong economic substance test requires that the transaction change the taxpayer’s economic position in a meaningful way, and that the taxpayer has a substantial business purpose for the transaction. Effective after March 30, 2010.
- Over-the-counter limitations for health accounts. Health accounts, such as flexible spending arrangements, health reimbursement arrangements, health savings accounts, and Archer Medical Savings Accounts, can only reimburse expenses for medicine and drugs if the item is a prescription drug (or insulin).
- Itemized deduction for medical expenses. The threshold for deducting medical expenses as an itemized deduction is raised from 7.5 percent to 10 percent of adjusted gross income. Effective for tax years beginning after December 31, 2012.
- Additional 0.9% Medicare tax. An additional 0.9 percent Medicare tax is imposed on wages and self-employment income of higher-income individuals: individuals earning more than $200,000; married filing jointly above $250,000; and married filing separately – above $125,000. Effective after December 31, 2012.
- 3.8% Medicare contribution tax. A 3.8 percent Medicare tax is imposed on unearned income for higher-income individuals, including interest, dividends, annuities, royalties, rents and other passive income. Effective after December 31, 2012
- Medical device excise tax. A 2.3 percent excise tax is imposed on sales of certain medical devices by manufacturers, producers and importers. Retail items such as eyeglasses are excluded from the tax. Effective for sales after December 31, 2012.
- Employer shared responsibility. The “employer mandate” requires large employers (50 or more full-time employees) to make a payment if any full-time employee can receive the premium tax credit. The payment is required if the employer does not offer minimum essential coverage, or offers coverage that is not affordable. Effective after December 31, 2013.
- Branded prescription drug fees. An annual fee imposed on manufacturers and importers with receipts from branded prescription drug sales. Effective for calendar years beginning after December 31, 2010.
- Sec. 36B premium assistance credit. Lower-income individuals who obtain health insurance coverage through an insurance exchange may qualify for the credit, unless they are eligible for other minimum essential coverage. Effective for tax years ending after December 31, 2013.
- Excise tax on high-dollar insurance. Employer-sponsored health coverage whose cost exceeds a threshold amount ($10,200 for self-on coverage; $27,500 for other coverage) will be subject to a 40-percent excise tax. Effective for tax years beginning after December 31, 2017.
Employers must prepare for sweeping changes in health care in coming years. The Supreme Court’s upholding of the PPACA clears the way for full implementation of the new law. Absent Congress repealing the law at some point in the future, the health care provisions – and attendant taxes – will roll out over the next decade. We will continue to publish updates on the changes as they roll out. Please contact Daniel Delau with any questions regarding the rule at 720.227.0065 or firstname.lastname@example.org.