Published in the Daily Journal of Commerce
The Patient Protection and Affordable Care Act, informally referred to as "Obamacare," will be funded by a variety of taxes and offsets that kick into full gear on January 1, 2013.
The PPACA imposes additional taxes on high earners, reduces allowable health-care-related deductions, and introduces taxes on several medical-related items. Many businesses will also be impacted by these changes. Following are highlights of the tax changes:
3.8 percent surtax on high-income individuals, estates, and trusts for unearned income
Certain individuals, estates, and trusts will be required to pay a Medicare contribution tax on (unearned) investment income. A 3.8 percent surtax is imposed on the lesser of either net investment income or the excess of the modified adjusted gross income over a certain threshold amount. The threshold amount is $250,000 for joint filers ($125,000 for married taxpayers filing separate returns) and $200,000 for all other taxpayers. For purposes of this surtax, gross income does not include otherwise excluded items such as interest on tax-exempt bonds and excluded gain from the sale of a principal residence.
0.9 percent hospital insurance tax for high-earning taxpayers
An additional 0.9 percent hospital insurance tax applies to wages and self-employment income received in excess of a defined threshold. Like the previous one, the threshold is $250,000 for joint filers ($125,000 for married taxpayers filing separate returns) and $200,000 for all other taxpayers.
Health savings account cap of $2,500
A flexible spending account under a qualified cafeteria plan may not allow more than $2,500 per year for reimbursement of incurred medical expenses of an employee. The $2,500 expense cap applies to the total of employee expenses as well as reimbursement for that employee's dependents or other eligible beneficiaries under the same flexible spending account.
Increase of medical expense deduction floor to 10 percent
Currently, a taxpayer may deduct unreimbursed medical expenses to the extent such medical expenses exceed 7.5 percent of the taxpayer's adjusted gross income. Starting in 2013, the medical expense deduction floor will increase to 10 percent for all taxpayers younger than 65. The floor will not increase to 10 percent for taxpayers older than 65 until 2017.
Health plan fee equal to $1 per life covered
The issuer of an accident and health insurance policy or a sponsor of a self-insured health plan will have to pay a fee equal to $1 multiplied by the average number of lives covered by the policy or plan. The fee will rise to $2 per life covered starting with policy and plan years ending after December 31, 2013.
$500,000 compensation deduction limit for health insurance providers
Currently, a publicly-held corporation may not deduct any amount in excess of $1 million for compensation paid to employees and other compensated individuals. Under the PPACA, health insurance providers will have a smaller cap limit of $500,000. The cap limit includes compensation paid to employees, officers, directors, and consultants. Compensation includes base pay as well as performance-based compensations and commissions. If the individual is paid compensation that would not be deductible until a later year (i.e., nonqualified deferred compensation amounts), the unused portion of that year's $500,000 deduction limit, if any, may be carried forward until the year when the compensation is deducted. That could allow a deduction greater than $500,000 for that later year.
2.3 percent excise tax on medical device manufacturers
A new 2.3 percent excise tax will apply to all sales of certain medical devices intended for humans. The excise tax must be paid by the manufacturer, producer or importer of the device. The excise tax will apply only to medical devices that the IRS determines are not generally purchased by the general public for individual use. For example, the excise tax will apply to heart valves, but will not apply to eyeglasses, contact lenses, or hearing aids.