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Filling Potholes on the Road to Universal Health Care

Filling Potholes on the Road to Universal Health Care
by Matthew Brown, J.D.
As Published in the June/July 2011 issue of the Footnote

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act passed in 2010, put a plan in motion for universal health care. Several changes to tax law came with it, including different reporting requirements, new credits, and additional taxes for some taxpayers. Following the bill's passage, some revisions to provisions of the bill have eased the administrative burden on taxpayers and employers.

Overview

The health care bill provides that by 2014 all Americans will be required to have health insurance. Furthermore, certain employers must provide coverage for their employees. In the years leading up to 2014, the bill expands coverage for children, eliminates coverage denial for pre-existing conditions, and includes revenue raisers to help pay for universal health care.

Beginning in 2010, small businesses that provide health insurance for their employees are eligible for a tax credit up to 35 percent of the premiums paid. To qualify, an employer must pay at least 50 percent of the employees' premiums and have fewer than 25 full-time equivalent employees with average wages not greater than $50,000. Business owners and their family members don't count towards the number of employees or total wages. This credit is available every year until 2013. For 2014 through 2016, taxpayers are eligible to receive the credit for any two consecutive years, and the amount of the credit is up to 50 percent of the premiums paid.

Other important tax provisions include two additional taxes that take effect in 2013. The first is an additional 0.9 percent Medicare tax on wages exceeding $250,000 for married couples ($200,000 for single filers). The second is a 3.8 percent tax imposed on unearned investment income for married couples with modified adjusted gross income in excess of $250,000 ($200,000 for single filers).

When the health care bill was enacted, it allowed children up to age 26 to be covered under their parent's insurance coverage without being a dependent or a full-time student. Minnesota did not immediately adopt this change, and speculation followed that parents who chose to cover their adult children might be required to report the value of the child's coverage as income on their own return. On March 21, Governor Mark Dayton signed the federal tax conformity bill, which excluded the insurance coverage from income in Minnesota.

1099 reporting

The original health care bill expanded 1099 reporting by requiring businesses to report payments more than $600 to any single vendor for any goods or services on Form 1099. Further, the new law removed the current reporting exemption for nontax- exempt corporations. In essence, the law required all businesses to issue a 1099 to any vendor that received more than $600 in the tax year. Under the current law, 1099s only need to be issued to noncorporate vendors providing services.

The expanded reporting required business owners to track expenses by vendor in anticipation of issuing 1099s. This meant issuing Form W-9s to collect Federal Employer Identification Numbers from every vendor and updating accounting software to track each vendor separately. For many small businesses, the additional compliance work threatened to take away valuable time necessary to properly run a business. During 2010 several attempts to repeal the 1099 reporting requirements failed.

In April, President Obama signed H.R. 4, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, eliminating the 1099 reporting requirement. This takes reporting requirements back to the current law whereby payments to corporations are exempt from reporting as are the payments for goods received. This new act also eliminates 1099 reporting enacted in the Small Business Jobs Act of 2010, which required taxpayers receiving rental income from real estate to be treated as engaged in the trade or business of renting property, subjecting those taxpayers to 1099 reporting.

Free choice vouchers repealed

The original health care bill required that, beginning in 2014, employers paying for a portion of minimum essential coverage through an employer-sponsored plan would also be required to provide qualified employees with a free choice voucher. A free choice voucher would enable the employee to purchase an insurance plan through the Insurance Exchange, operated by each state, at a potentially reduced cost.
A qualified employee is one who does not participate in the employer's health plan, whose required contribution for health insurance (assuming participation in the employer-sponsored plan) would be between 8 percent and 9.8 percent of household income, and whose total household income does not exceed 400 percent of the federal poverty guidelines for the family.

On April 15, the President signed into law the Department of Defense and Full-Year Continuing Appropriations Act, which eliminated the requirement that employers offer qualified employees free choice vouchers. Qualified employees will still receive health care coverage, but will not have the option to purchase different insurance at their employer's expense. Taxpayers who are not qualified employees, because their required contribution for health insurance exceeds 9.8 percent of household income, will still be eligible for assistance in obtaining health care through a premium tax credit.

Conclusion

More than one year after the passing of the bill, lawmakers have revised the law twice. First by removing language requiring expanded 1099 reporting, and second by reducing the burden on employers by eliminating free choice vouchers. Minnesota has also taken steps to conform to the law by allowing coverage for children up to age 26 to be considered non-taxable to the parent.

As with any monumental change, the implementation of universal health care will continue to face challenges. Revenue-raising tax increases in 2013 will precede the implementation of mandatory health care in 2014 and will likely be challenged in the political elections leading up to final enactment. Taxpayers and their advisors need to be aware of this ever-changing law, so that they can benefit from tax credits and expanded coverage as well as prepare for the potential increase in tax.

Matthew Brown, J.D., is an accountant with Lurie Besikof Lapidus & Company, LLP. He assists clients with a variety of tax matters, including entity selection, compensation structures, and wealth preservation planning as they relate to individuals, businesses, trusts and estates. Brown is a member of the MNCPA and can be reached at mbrown@lblco.com.