The Supreme Court on June 28 upheld virtually all of the health care legislation enacted in 2010, preserving scores of tax provisions and benefits requirements that were included in the original bills.
The Supreme Court ruled in a 5–4 opinion that the federal government cannot compel individuals to buy insurance under the "commerce clause" of the Constitution, but that the "individual mandate" can still be imposed under Congress's power to tax. The individual mandate generally requires individuals with income exceeding the tax filing threshold to obtain a minimum level of health coverage or pay a penalty. The penalty is effective beginning in 2014 at a reduced rate, and in 2016 it will be the greater of $695 per uninsured adult in the household or 2.5 percent of income exceeding a threshold amount, capped at the cost of a defined category of coverage.
The decision essentially upholds the health care bill in its entirety (the court did rule that states can reject the expanded Medicaid coverage requirements in the bill and still receive funding for the rest of the program), and it affects nearly all taxpayers, including:
- employers, whose health plans are subject to new rules and who face a penalty beginning in 2014 for not offering adequate health coverage to employees;
- health care businesses, including health providers, insurers, pharmaceutical companies and medical device makers who face new taxes, fees and rules; and
- individuals, who face new penalties for inadequate health coverage and several changes to health-related individual tax rules.
The decision for now preserves the increase in Medicare taxes beginning in 2013 for individuals earning more than a threshold amount ($250,000 for married couples filing a joint return, $200,000 for singles), but Congress is expected to debate this increase, along with the expiration of both the 2001 and 2003 tax cuts and the individual payroll tax holiday, which are also scheduled to increase taxes at the end of the year.
Congressional Republicans have stated that they will continue to push for the repeal of all or parts of the health care legislation, including the medical device excise tax. This is likely to emerge as a campaign issue, but repeal will be an uphill battle. Absent further legislative action, taxpayers need to be in compliance with all provisions currently in effect and prepare to comply with the provisions that will take effect over the next several years. More details on the major provisions in the bill follow.
Employer benefit and tax changes
- New benefits requirements —
Employers with health plans that are not "grandfathered"
must remain in compliance with the new coverage rules that: o bar
lifetime and annual limits on coverage,
- require plans to offer coverage to employees' children up to the age of 26,
- bar copays on preventive care (except for preventive care provided by non-network providers), and
- bar plans from rejecting anyone based on pre-existing conditions.
- Flexible spending arrangement limits — Employers must be prepared to limit employee contributions to a flexible spending arrangement (FSA) to $2,500 beginning in 2013.
- Summaries of benefits and coverage — Employers must be prepared to provide their employees with a summary of benefits and coverage as required under the bill for plan years in which open enrollment begins on or after Sept. 23, 2012.
- Form W-2 reporting — Beginning with the 2012 calendar year, employers must report the cost of health coverage to their employees on Form W-2.
- Penalties for not offering adequate coverage — Employers with more than 50 full-time employees must be prepared to pay monthly penalties beginning in 2014 if they do not offer adequate coverage to employees.
- Health coverage tax credit — Small employers who received the new health coverage tax credit in 2011 will not need to refund this credit, and it remains available for 2012 and beyond.
- Exclusion from income for Part D subsidy — Employers who receive a subsidy for providing drug plans to Medicare Part D-eligible retirees will lose the exclusion from income for the subsidy as scheduled for tax years beginning after 2012.
- Economic substance — The new penalties for transactions lacking economic substance and the new definition of the economic substance doctrine will continue to apply to transactions entered after the date of enactment.
Insurance industry
- Excise tax on high-cost insurance — The 40 percent excise tax levied against insurance companies for offering high-cost health plans remains scheduled to take effect in 2018.
- Executive compensation deductions — Beginning in 2013, insurance companies cannot deduct employee pay exceeding $500,000 unless at least 25 percent of premium income comes from plans meeting minimum creditable coverage requirements.
- Industry fee — Insurers must prepare to pay the annual industrywide fee allocated by market share, which is effective beginning in 2014 at $8 billion and growing to $14.3 billion by 2018.
Pharmaceutical industry
- Drug industry fee — The new industrywide fee on drug manufacturers and importers took effect beginning in 2011, with the $2.5 billion cost allocated based on market share. The fee will not be refunded and will continue in future years as scheduled under the legislation.
Medical device makers
- Medical device excise tax — The 2.3 percent excise tax on devices sales by importers and manufacturers of medical devices is scheduled to take effect in 2013. Although there will be efforts to repeal the tax, device makers need to be prepared to implement and pay this tax beginning Jan. 1.
Individuals
- New Medicare taxes — Beginning in 2013, the individual Medicare tax rate on earned income higher than $200,000 for singles and $250,000 for joint filers will increase from 1.45 percent to 2.35 percent. The employer's 1.45 percent share does not change, resulting in a total Medicare tax rate of 3.8 percent. For the first time, unearned income exceeding this threshold (such as capital gains, dividends and interest) will be subject to Medicare tax at a rate of 3.8 percent. Although there will be efforts to repeal this tax before it takes effect, individuals should be prepared to pay it.
- Limits on deduction for medical expenses — Individuals under age 65 should remember that beginning in 2013 they can deduct only health care costs exceeding 10 percent of income (versus 7.5 percent now). This change will affect seniors beginning in 2017.
- Penalties for improper HSA spending — The penalty for improper expenditures from a health savings account (HSA) increased from 10 percent to 20 percent in 2011 and remains in effect.
- Qualified medical expenses — Individuals may no longer use an FSA, HSA or health reimbursement arrangements on over-the-counter drugs unless prescribed. This change took effect in 2011 and is retained.
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