- “Free Choice” Vouchers: Rather than participating in his/her employer-provided health insurance program, certain low-wage employees will have the option to buy health insurance from an Affordable Insurance Exchange using a “free choice voucher” provided by the employer.
- Amount: If a company offering the required coverage has at least one full-time employee receiving a federal premium tax credit (because the employer’s coverage is too expensive), the employer will be required to pay the lesser of $3,000 for each employee receiving a premium credit or $750 for each full-time employee.
Large Businesses (more than 200 employees) Automatic Enrollment: If these companies offer health insurance, they will have to automatically enroll their workers in the plan. Large businesses that fail to offer employee health insurance coverage would also be subject to per-employee penalties.
Effects on taxes
- Medicare Tax Increases on High-Income Individuals: Starting in 2013, the current Medicare tax of 2.9% (divided equally, 1.45% each, between employers and employees) will rise by .9% on individual income of more than $200,000 per year ($250,000 for married couples filing jointly).
- Medicare Payroll Tax on “Unearned” Income: Starting in 2012, an additional 3.8% “Medicare Contribution Tax” will be assessed on “unearned” income (e.g., interest, dividends, annuity payments, royalties, capital gains, and passive business income) of the above referenced High-Income individuals.
- Excise Tax ("Cadillac Plans"): Beginning in 2018, insurance companies will pay a 40% excise tax on so-called "Cadillac" high-end insurance plans worth over $27,500 for families ($10,200 for individuals). Dental and vision plans are exempt and will not be counted in the total cost of a family's plan.
Here are a few suggestions for reducing your additional taxes and claiming some of the credits under this new legislation:
- 3.8% Tax on Unearned Income: The 3.8% tax on unearned income might be substantially reduced by allocating assets that generate high income into an IRA, using annuities to shield income, and/or reallocating your portfolio to include more tax-free investments (e.g., tax-free municipal bonds), which are excluded from this additional tax.
- C-Corporations: Corporations can calculate the small employer health care credit on Form 8941 and claim it as part of the general business credit on Form 3800, which they would include with their corporate income tax return.
- Sole Proprietors, Partnerships, S-Corps, and LLCs: Sole proprietors who file Form 1040, partners (in partnerships) and S-corporation shareholders who report their income on Form 1040 would also use Form 8941 to calculate the small employer health care credit and claim it as a general business credit on Form 3800, reflected on line 53 of Form 1040.
- Consider an HDHP: “High-Deductible Health Plans” (plans with deductibles of at least $1,000 for individuals and $2,000 for families) have become more popular because they offer some cost savings, while allowing for employer reimbursements of deductibles (“HDHP/HRAs”) or savings plans contributed to by employers and/or employees) to cover their deductibles (“HDHP/SOs”).
- Compare the Cost: It would be unrealistic to think that employers won’t feel compelled to compare the cost of providing coverage versus not providing coverage and simply paying the mandated penalties (“taxes”). For reference purposes, in 2011, the average annual premium for employer-sponsored health insurance plans was $15,073 for family coverage, and $5,429 for single coverage according to the Kaiser Family Foundation. Comparing the cost only makes sense.
Like it or not, health care reform is now a reality. Discerning how best to satisfy its requirements as efficiently and inexpensively as possible will be an important part of most businesses’ planning processes going forward. Fortunately, the U.S. Dept. of Health and Human Services has set up an informative source of information about it at www.healthcare.gov (the website is interlinked with the IRS, HHS and Department of Labor websites as well). Forewarned is forearmed. I therefore recommend starting early by reviewing the website carefully (particularly the sections for “Employers”) and contacting your tax professional regarding how best to prepare.