Affordable Care Act Details

You will not be denied health insurance on the basis of a pre-existing condition.

Individual mandate: The new law contains an "individual mandate" requiring that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: a) $695 per year, up to a maximum of three times that amount ($2,085) per family or b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, $695 in 2016 for the flat fee or 1% of taxable income in 2014, 2% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. In very limited circumstances, exemptions from the penalty will be granted. For example, if the cost of health insurance exceeds certain defined percentages of household income. Persons covered by employer sponsored plans, Medicare or Medicaid are also exempt.  

Premium assistance tax credits for purchasing health insurance: The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the "premium assistance credit") for eligible individuals and families who purchase health insurance through an Exchange. States have been mandated to create health insurance Exchanges that will function as a marketplace where individuals may purchase health insurance, obtain information on plans offered and apply for the premium assistance credits. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through the Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and the IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($45,960 for an individual or $94,200 for a family of four) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising 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.

Higher Medicare payroll tax on wages: The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($113,700 for 2013) the Medicare tax is levied on all of a worker's wages without limit.

Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies won't be responsible for determining whether a worker's combined income with his or her spouse makes them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on both spouses' pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more people will be subject to the higher taxes in coming years.   

Medicare payroll tax extended to investments: Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with adjusted gross income (AGI) above $200,000 and joint filers with AGI over $250,000 (not indexed for inflation). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from the sale or disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans or IRAs. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. For example, if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.

Floor on medical expenses deduction raised from 7.5% of AGI to 10%: Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's adjusted gross income (AGI). The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10% effective for tax years beginning December 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit on reimbursement of over-the-counter medications from HRAs, HSAs, FSAs and MSAs: The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSA) and from being reimbursed on a tax free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA).

Increased Penalties on nonqualified distributions from HSAs and Archer MSAs: The new law increases the tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount.

Health flexible spending arrangements (FSAs) are limited to $2,500: An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan for an employee. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses and dependent care of other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will be capped at $2,500 per year, effective for tax years beginning after December 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans: Effective on March 23, 2010, the new law extends the general exclusion for reimbursements for medical care expenses under an employer provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion from income for employer provided coverage under an accident or health plan for injuries or sickness for such a child. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise tax on indoor tanning services: The new law imposes a 10% excise tax on indoor tanning services paid by the individual on whom the tanning services are performed.

As of July 2013, the Affordable Health Care Act requirement that businesses  with more than 50 employees provide health insurance to their employees or pay a penalty has been delayed from 2014 to 2015. However, the pieces of the legislation involving individual mandates are still set to take effect on January 1.

We hope this information is helpful. The Patient Protection and Affordable Care Act is a highly complicated piece of legislation. Please call our office should you have any questions. We will do our best to help you find an answer.