Timeline of 2013–2018 Tax Changes in Health Care Reform Legislation

Three years ago, Congress passed legislation that overhauls the U.S. health care system and affects nearly all taxpayers, many employers, and many elements of the health care industry (The Patient Protection and Affordable Care Act (PPACA) P.L. 111-148, and the Health Care and Education Reconciliation Act of 2010 (HCERA) P.L. 111-152). The legislation contains many complex tax changes. Some have already gone into effect, some go into effect this year, and still others will be in place in 2014 and 2018. This article will help you understand the rules newly effective this year, as well as those looming on the horizon, by presenting selected tax changes in the health care legislation in chronological order from 2013 to 2018.

Tax Changes Taking Effect in 2013

Increased hospital insurance tax for high-earning workers and self-employed taxpayers. For tax years beginning after Dec. 31, 2012, an additional 0.9% hospital insurance (HI) tax applies to wages received with respect to employment in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases. The additional 0.9% HI tax also applies to self-employment income for the tax year in excess of the above figures.

Surtax on unearned income of higher-income individuals. For tax years beginning after Dec. 31, 2012, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the surtax is 3.8% of the lesser of either (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).

Higher threshold for deducting medical expenses. For tax years beginning after Dec. 31, 2012, unreimbursed medical expenses are deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGI) for the tax year. If the taxpayer, or their spouse, has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and a 10% floor applies for tax years ending after Dec. 31, 2016.

Dollar cap on contributions to health flexible spending accounts. For tax years beginning after Dec. 31, 2012, for a health flexible spending account (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) can't exceed $2,500.

Tax Changes Taking Effect in 2014

Larger employers not offering affordable health insurance coverage must pay penalty. Beginning after Dec. 31, 2013, an applicable large employer is liable for an annual assessable payment if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, and either the employer:

  1. fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan; or
  2. offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan, which for a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value.

An applicable large employer has employed an average of at least 50 full-time employees during the preceding calendar year. Full-time equivalent employees (FTEs) are taken into account when establishing an applicable large employer. The FTEs are determined based on the hours of service of employees who are not full-time.

An individual is eligible for employer-sponsored MEC only if the employee's share of the premiums is “affordable” and the coverage provides “minimum value” (i.e., at least 60% of the plan's total allowed cost of benefits provided). In general, an employer-sponsored plan is not affordable if the employee's required contribution with respect to the plan exceeds 9.5% of their household income for the tax year. This percentage may be adjusted after 2014.

Individuals not carrying health insurance face a penalty. For tax years beginning after Dec. 31, 2013, nonexempt U.S. citizens and legal residents must pay a penalty if they do not maintain minimum essential coverage, which includes government sponsored programs (e.g., Medicare, Medicaid, Children's Health Insurance Program), eligible employer-sponsored plans, plans in the individual market, certain grandfathered group health plans, and other coverage as recognized by HHS in coordination with IRS. There are a number of exceptions, such as one for certain lower-income individuals.

Refundable tax credit for low- or moderate-income families buying certain health insurance. For tax years ending after Dec. 31, 2013, a new refundable tax credit (the “premium assistance credit”) under Code Sec. 36B applies to qualifying taxpayers who get health insurance coverage by enrolling in a qualified health plan through a state-established American Health Benefit Exchange.

“Qualified health plans” may be offered through cafeteria plans by “qualified employers.” For tax years beginning after Dec. 31, 2013, a reimbursement (or direct payment) for the premiums for coverage under any “qualified health plan” through a health insurance Exchange is a qualified benefit under a cafeteria plan if the employer is a qualified employer (generally, smaller businesses). In very broad terms, a qualified health plan is one that meets certain certification requirements, provides “an essential health benefits package,” and is offered by an insurer meeting detailed requirements. Also, a health insurance “Exchange” is a federally supervised marketplace for health insurance policies meeting specific eligibility and benefit criteria, to be made available no later than Jan. 1, 2014, to qualifying individuals and employer groups of graduated sizes.

New information reporting of employer-provided health coverage. For periods beginning after Dec. 31, 2013, new information reporting and related statement obligations apply under Code Sec. 6056 for (1) certain applicable large employers are required to offer full-time employees, and their dependents, the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, and (2) offering employers (those offering minimum essential coverage to employees and paying any portion of the such coverage, but only if the required employer contribution of any employee exceeds 8% of the employee's wages).

Tax Change Taking Effect in 2018

Excise tax applies to high-cost employer provided health insurance coverage. For tax years beginning after Dec. 31, 2017, a 40% nondeductible excise tax will be levied on insurance companies and plan administrators for employer-sponsored health coverage to the extent that annual premiums exceed $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.