Key Provisions on the Healthcare Reform Legislation

Healthcare reform has dominated politics over the past year, and now we have a decent idea of what the final law will include, who will pay, and how. Below is a summary of what we know:

Individual Taxpayers

Individuals would be responsible for maintaining a minimum standard of health insurance beginning in 2014. Penalties equivalent to the greater of a stated flat fee and a stated percentage of household income would be assessed on individuals failing to maintain the minimum coverage standard.

The flat fee penalty is $95 per individual in 2014 escalating to $695 per individual in 2016. The household income percentage is 1% in 2014, 2% in 2015, and 2.5% each year thereafter. The fee is capped at 300% of the applicable flat fee amounts in a given year, and for individuals under age 18 or in college, the flat fee penalty is one-half of the “standard” penalty amount. Taxpayers below the tax return filing threshold are exempt from the minimum coverage penalty.

Premium tax credits are available for qualifying individual taxpayers. Available credits are based on income and family size with qualifying household income stated as a percentage of the federal poverty level for the applicable family size.

Employers

Employers are required to provide minimum healthcare coverage to their employees. Small employers (fewer than 50 employees), however, are exempt from the mandatory coverage requirement. The penalty for not providing this coverage is $167 per employee for each month the employee was not provided minimum coverage. Employers will be required to file information returns with the IRS providing the information necessary to determine whether the minimum coverage standard has been met.

Businesses with less than 25 employees and average annual wages less than $40,000 may be entitled to tax credits up to 35% of employer paid health insurance premiums.

Funding

The most prominent funding source for healthcare reform is the broadening of the Medicare tax base for higher income taxpayers beginning in 2013. Earned income greater than $200,000 ($250,000 for families) would be subject to an additional 0.9% Medicare tax. Unearned income, including interest, dividends, royalties, rents, certain capital gains, and income from passive investments, would be subject to a new 3.8% Medicare tax. Taxpayers with income less than $200,000 ($250,000 for joint filers) would be exempt from the assessment on unearned income.

Additionally, insurance companies would incur a 40% excise tax on high-cost insurance commonly known as Cadillac plans. Other funding sources include market segment fees aimed at medical device companies, health insurance providers, and other healthcare-related industries; greater IRS scrutiny of the community benefit activities of not-for-profit hospitals; and an increase in the deductible medical expense income threshold from 7.5% to 10% for individual taxpayers (effective in 2013 for taxpayers under age 65 and 2017 for taxpayers 65 and older.)

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