Significant 2013 & 2014 Business Tax Implications of Health Care Reform

The Supreme Court upheld President Obama’s health care overhaul, holding that it is constitutional in substantially all respects. The ruling further confirms that major changes are coming as a result of the Patient Protection and Affordable Care Act and the Health Care and Education Tax Credits Reconciliation Act of 2010. The acts have tax and penalty implications for both individuals and businesses.

When the reform became law in 2010, many of the changes seemed far in the future; some don’t take effect until 2018. For this reason, the majority of small businesses have delayed related strategic planning. Now is the time to prepare for changes that take effect in 2013 and 2014.

Additional W-2 Reporting Requirements

Generally, employers who filed 250 or more Form W-2s for 2011, filed in January of 2012, will be required to disclose the value of employer-provided health insurance coverage as an informational item on each employee’s W-2.

Implications and Potential Penalty:  Employers should consider what is required to be reported and adjust payroll systems to accurately track this information. A penalty of anywhere from $30 to $100 per Form W-2 may be imposed for failure to file correct information returns. The IRS website has more information on this issue.

Additional Medicare Tax on Earned Income

Beginning in 2013, an additional 0.9 percent medical hospital insurance tax is due on earned income in excess of certain limits for individuals. Employers will be required to withhold the additional percentage on individuals with compensation in excess of $200,000.

Implications and Potential Penalty:   Employers will not be liable for any additional Medicare tax it fails to withhold and the employee later pays. However, employers will be responsible for any penalties resulting from its failure to withhold, so they should communicate with employees and make appropriate payroll system adjustments prior to 2013.

Flexible Spending Account Limit

Prior to 2013, there was no government-mandated limit related to Flexible Spending Account contributions, though a $5,000 limit has become common for many employers. In 2013, the contribution limit will be $2,500, with inflation adjustments going forward. In addition, nonprescribed over-the-counter medications are no longer eligible for reimbursement.

Implications and Potential Penalty:   Employers may adopt the required amendments to reflect the $2,500 limit at any time through the end of 2014. Failing to adopt the new provisions could result in employers offering a nonqualified benefit and terminating cafeteria plan status, thereby converting tax-free benefits to taxable benefits.

Small Employer Health Insurance Credit

Since 2010, a maximum credit of 35 percent (25 percent for tax-exempt employers) usually has been available to small business employers that cover at least 50 percent of the cost of single health care coverage for each employee, if the employer has fewer than 25 full-time equivalent employees and average wages of less than $50,000 per year.

The maximum credit increases to 50 percent in 2014 (35 percent for tax-exempt employers), but is only available to eligible employers who purchase health insurance coverage through a state exchange for a maximum of two years after 2014.

Implications:   The credit can help offset the cost of employer-provided insurance. However, the calculation is complex and subject to phase-out limits, causing many seemingly small employers to receive a credit far less than the maximum. Additional time commitments are necessary for employers to obtain information to calculate the credit and for tax return preparers to complete the required forms.

Penalty for Not Providing Minimum Essential Coverage

In 2014, nondeductible penalties will be imposed on employers who have 50 or more full-time equivalent employees and do not provide minimum essential coverage, as defined by the Secretary of Health and Human Services, to full-time employees. The penalty is applicable if any of those employees are certified to the employer as having enrolled in a qualified health plan and receives a premium tax credit or cost-sharing reduction. The annual penalty is equal to $2,000 per full-time employee, assessed monthly ($166.67 per month), less a 30-employee exclusion.

Implications:  To avoid penalties, employers with 50 or more full-time equivalent employees will need to adopt a health plan that meets the complex requirements. It could be more cost-effective to pay the penalty than to incur the cost of health insurance, but competitors’ actions and the potential effect on employee morale also should be considered.

For more information on this topic, contact your BKD advisor.