Health Care Reform Reshapes Tax Code

[ILLUSTRATION OMITTED] In March, Congress passed two pieces of legislation designed to reform the U.S. health care system. The Patient Protection and Affordable Care Act (PL 111-148) was enacted on March 23, and was quickly followed by the Health Care and Education Reconciliation Act of 2010 (PL 111-152), which amended several portions of the first act, as well as adding new provisions of its own. While the legislation generally deals with the health care system, it contains many revisions to the Internal Revenue Code. Individuals and businesses are affected and are likely to look to their accountants and financial advisers for guidance and compliance help. Among other things, the legislation provides a credit to help individuals afford insurance; it also imposes a penalty on individuals who do not obtain health insurance. Small businesses that provide health coverage for their employees are also eligible for a credit; large businesses that provide inadequate health coverage are subject to an excise tax. The medical deduction threshold is increased to 10% of adjusted gross income. And, in a provision not related to health care, Forms 1099 will now be required for payments of $600 or more to corporations (see sidebar, Provisions Unrelated to Health Care). This article describes many of the tax items in the two acts applicable to individuals and businesses. Note that most of these items do not take effect until future years. PROVISIONS FOR INDIVIDUALS Premium assistance credit. The Patient Protection Act provides for a refundable tax credit that eligible taxpayers can use to help cover the cost of premiums for health insurance purchased through a state health benefit exchange (which each state is required to establish under the act). Under new IRC [section] 36B, an eligible individual will enroll in a plan offered through an exchange and report his or her income to the exchange. Based on the information provided to the exchange and his or her income, the individual will receive a premium assistance credit. The Treasury Department will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual will then pay to the plan in which he or she is enrolled the dollar difference between the premium tax credit amount and the total premium charged for the plan. Alternatively, eligible individuals can pay for the insurance out of pocket and then claim the credit on their tax returns. Eligibility for the premium assistance credit is based on the individual's income for the tax year ending two years prior to the enrollment period. The premium assistance credit is available for individuals (single or joint fliers) with household incomes between 100% and 400% of the federal poverty level (for the family size involved) who do not receive health insurance through an employer or a spouse's employer. The credit amount is determined by the secretary of Health and Human Services, based on the amount by which premiums exceed a threshold amount. The threshold rises from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved. The Reconciliation Act provides for an inflation adjustment in the starting and ending percentages for years after 2014. The adjustment will be based on the rate of premium growth for the preceding calendar year over that year's rate of income growth. After 2018, the inflation adjustment will be based on the rate of premium growth for the preceding calendar year over that year's consumer price index growth, but only if the aggregate amount of premium assistance tax credits and cost-sharing reductions (under section 1402 of the Patient Protection Act) for the preceding calendar year exceeds an amount equal to 0.504% of the gross domestic product for the preceding calendar year. …