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Tax Provisions in the Health Insurance Reform Act

While much of the debate on health insurance reform has focused on political and philosophical issues, the final legislation contains numerous and broad tax provisions. Some take effect immediately while many will be deferred over the next several years.  

In this tax alert, we'll take a brief look at those provisions that will likely have the most impact on families and closely-held business employers.

Tax Penalty for Lack of Coverage
The new law contains a tax penalty for failing to carry qualifying health insurance coverage.  The penalty will be the greater of a flat fee per person (maximum of three per family) or percentage of taxable income.

The flat fee will be phased in as $95 in 2014, $325 in 2015 and $695 in 2016.  The percentage penalty will be phased in as 1% in 2014, 2% in 2015 and 2.5% in 2016.

Tax Credit for Premium Assistance
After 2013, certain low and middle income taxpayers will be entitled to a tax credit to partially offset the cost of buying health insurance through an exchange.  The credit will be based on a sliding scale of income and will be computed by the exchange.  The credit will be paid in advance to the insurer to reduce the premium payable by the policy owner.

Higher Medicare Taxes
In 2013, single taxpayers whose wages exceed $200,000 and married couples with combined wages exceeding $250,000 will be taxed an additional .9% on the excess amounts.  Employers will begin withholding the additional .9% from employees when their wages exceed $200,000.   Individuals with multiple jobs and most couples will have to reconcile the employer withheld amounts with what is actually owed when they file their Form 1040.  Some will wind up owing additional tax when they file, while others may receive a refund for over withheld amounts.

In addition to the payroll tax, a new Medicare tax will apply to investment income, which includes interest, dividends, royalties and gain resulting from disposing of investment property.  The 3.8% tax will begin in 2013 and apply to single taxpayers when adjusted gross income (AGI) exceeds $200,000 and to joint taxpayers when AGI exceeds $250,000.

Small Employer Tax Credit
A new tax credit will be available starting in 2010 for businesses that offer health insurance to employees and contribute at least half the total premium cost.  The business can have no more than 25 full-time equivalent employees and the employees must have annual full-time equivalent wages that average no more than $50,000.  The credit is 35% (50% after 2013) of the employer's contribution towards the employees' health insurance premiums.  The credit phases out as both number of employees and average wages increase.  Employers with 10 or fewer employees with average wages of less than $25,000 will qualify for the full tax credit.

Small Employer Penalty Exemption
Although the new law calls for penalties for employers not providing coverage to employees, businesses with fewer than 50 employees will be excluded.  Businesses with 50 or more employees will be subject to a penalty based on whether or not they provide coverage.  If coverage is not provided, the penalty is generally $2,000 per employee, but after excluding the first 30 employees.  Additional rules and scenarios apply when coverage is provided.

There is so much more to the tax provisions that are beyond the scope of this Tax Alert.  We welcome your specific inquiries, and will do our best to interpret these provisions and how they will impact your family and business.

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