Tax and Penalty Provisions under the Health Care Reform Bill

Last week we covered the new 3.8% Medicare tax on unearned income and the increased 2.35% Medicare tax on wages, starting in 2013. Both apply to single filers earning more than $200,000 and joint filers earning more than $250,000.

Here are some more of the tax and penalty provisions under the new law.

Mandate for Employer Provided Coverage

Starting in 2014, employers with 50 or more employees generally are required to provide a level of “minimum essential coverage” health insurance for their employees or pay a penalty per employee.

The Secretary of the Department of Health and Human Services will determine what qualifies as “minimum essential coverage”. This applies both for the employer mandate and the individual mandate mentioned below.

Employers who fail to provide the coverage will pay a penalty of up to $2,000 per year (adjusted for inflation) times the number of full-time employees.

Mandate for Individual Coverage

Beginning in 2014, individuals are required to obtain “minimum essential coverage” health insurance or pay an annual penalty of up to the greater of $695 (adjusted for inflation) or 2 percent of their income (once fully phased in after 2016).

Limit on Health FSAs

The maximum salary reduction contribution to a Health FSA is limited to $2,500 per year, for tax years beginning after December 31, 2012.

Limit on medical expense itemized deduction

The itemized medical expense deduction “floor” is increased from 7.5 percent to 10 percent, generally starting in 2013.

Small Employer Tax Credit

Employers with no more than 25 employees are entitled to up to a 35 percent tax credit on the cost of providing health insurance for employees, starting this year. We’ll have more on this credit once the IRS issues guidance.

The Cadillac Tax

A 40 percent excise tax is imposed on high-cost, “Cadillac” employer-sponsored health coverage. The Cadillac tax doesn’t start until 2018. That’s a long ways off for us. So we’ll have more on this one as we get closer to 2018. Stay tuned.

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