The Health Care Conundrum
By Mark E. Battersby
The massive, and controversial, overhaul of our health insurance and health delivery systems created by the recently-enacted “Patient Protection and Affordable Care Act,” and the “Health Care and Education Reconciliation Act of 2010,” included more than $400 billion in so-called “revenue raisers” and new taxes on employers and individuals. The centerpiece of the health reform laws is the mandate for most Americans to obtain health insurance.
The new “reform” laws contain new penalties for individuals who choose to remain uninsured, tax credits and other sweeteners for employers participating in new insurance pools, new penalties for larger employers that don’t provide insurance (or provide insurance deemed inadequate or unaffordable), plus a voucher system for certain lower income employees who choose not to be covered by their employer’s health plan.
What impact will this massive overhaul of health care have on you and your service center?
Small business health tax credit
The Internal Revenue Service has already begun encouraging small businesses to explore and, if qualified, claim the new small health insurance coverage credit. The credit was created for eligible small businesses to either maintain their current health insurance coverage or to begin offering health insurance coverage to their employees.
Small employers (no more than 25 employees and average wages below $50,000 annually) are eligible for a federal tax credit, a direct reduction of the company’s tax bill for the amount spent on health insurance for employees, up to 35 percent. The full amount of the credit, however, is available only to an employer with 10 or fewer full-time equivalent employees (FTEs) whose annual wages average less than $25,000.
Self-employed metals distributors, including partners and sole proprietors, 2 percent shareholders of an S corporation or 5 percent owners of the employer are not treated as employees for purposes of the Small Employer Health Insurance Credit. In fact, a special rule prevents sole proprietors from receiving the credit for the owner and family members.
Penalty for remaining uninsured
Starting in 2014, the new law will require nearly all Americans to have health insurance through an employer, a government program or by buying it directly. That year, new insurance markets will open for business, health plans will be required to accept all applicants, and tax credits will start flowing to millions of people to help them pay the premiums.
Those who continue to go without coverage will have to pay a penalty to the IRS, except in cases of financial hardship. Fines will vary by income and family size. For example, a single person making $45,000 would pay an extra $1,125 in taxes when the penalty is fully phased in, in 2016.
The new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”). Fortunately, most service centers will not have to worry about the provision because employers with fewer than 50 employees aren’t subject to the “pay or play” penalty. [Editor’s note: About 67 percent of the MCN readers who responded to last fall’s Outlook Survey employ less than 50 workers.] The new law exempts all small firms with fewer than 50 employees from the employer responsibility requirements that begin in 2014. This means, according to lawmakers, that 96 percent of all firms in the United States, or 5.8 million out of 6 million total businesses, will be exempt from the requirement to provide health coverage for employees.
“Free Choice” vouchers
After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage would have to provide qualified employees choosing not to participate in the employer’s health plan with a voucher whose value could be applied to the purchase of a health plan through a Health Insurance Exchange. The value of the voucher would be equal to the dollar value of the employer contribution to the employer-offered health plan.
Health insurance exchanges
Beginning in 2014, the new law creates state-based Health Insurance Exchanges to make health insurance affordable and accessible for small businesses and the self-employed. With the option of joining a large “pool,” small metals distribution businesses will have access to the same type of quality, affordable coverage currently only available to large firms. Employees of small businesses will be able to do one-stop comparison shopping for an affordable insurance plan that offers lower rates, stable pricing from year to year and a choice of quality plans, say government officials.
Those who are employed by small businesses but do not receive insurance through their employer and are on the exchange will have access to tax credits to help pay their premiums. Effective in 2014, tax credits will be provided to individuals and families on a sliding scale up to 400 percent of poverty. That means the tax credits phase out completely for an individual with $43,320 in income and a family of four with $88,200 in income.
Additional tax on high wage earners
To help pay for making health insurance affordable for small businesses and the middle class, the new law includes an increase in taxes for high earners. Specifically, for tax years beginning after Dec. 31, 2012, the hospital insurance or “HI” tax rate will be increased by 0.9 percent on an individual taxpayer earning over $200,000 annually or $250,000 for married couples filing jointly. Also added is a hospital insurance tax on unearned income.
Unearned income surtax
Beginning in 2013, a 3.8 percent surtax called an “Unearned Income Medicare Contribution” will be placed on the net investment income of anyone earning over $200,000 or $250,000 for joint filers. Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). It should be noted that income “actively” earned by anyone running a small, closely held business is exempt from the unearned income surtax.
New limit on health plan contributions
The owners and operators of many service centers, as well as their employees, have long utilized both flexible spending accounts (FSAs) and health savings accounts (HSAs) to pay for medical expenses with pretax dollars. An HSA goes along with a high-deductible insurance policy and gives individuals a tax deduction for money saved that can be used for health care expenses. An FSA has similar tax advantages, but contributions to it are deducted from an employee’s salary, and money in the account must be used by the end of the year. The new law modifies the definition of qualified medical expenses for health FSAs and HSAs beginning in 2011. The law also caps health FSA contributions at $2,500 per year after 2012, which is indexed annually for inflation after 2013.
New reporting responsibilities
For tax years beginning after Dec. 31, 2010, employers will have to disclose the value of the benefit provided by them for each employee’s health coverage on the employee’s annual W-2 form. Plus, a service center or business paying any amount greater than $600 during the year to corporate providers of property and services would have to file a report with each provider and with the Internal Revenue Service, effective for payments made after Dec. 31, 2011.
In summary, service centers employing more than 50 workers will be required to provide health coverage and most people will be required to have health insurance by 2014. The tax on high-cost “Cadillac” policies will not go into effect until 2018. The increase in Medicare payroll taxes begins in 2013, while the tax credits available to small employers for health-care related expenses start in 2010.
Truth be told, no one really knows for sure how the marketplace will react to the new regulations—whether the benefits touted by proponents or the doomsday predictions of opponents will actually come to pass. Many of the changes in the new law’s more than 2,400 pages, such as requiring most people to have health insurance and employers to cover workers, will take at least two years to go into effect. Will you and your metals distribution business be ready?
Mark E. Battersby is a freelance writer and consultant on tax and financial issues based in Ardmore, Pa. He can be reached at 610-789-2480 or by e-mail at MEBatt12@Earthlink.net.