Introduction
It is official. The Patient Protection and Affordable Health Care Act has passed Congress and was signed by the President on March 23, 2010. The law changes the entire paradigm behind healthcare and even changes some tax rules. While the law has passed and is now the rule of the land, The Center graciously reminds those reading this report that we do not take a position of endorsing the rule, nor opposing it. We write this report to inform the business community of what has changed in both healthcare and the tax consequences that will now affect closely-held business owners.
Rules on Preexisting Conditions
Starting in 2014, insurance companies will no longer be able to deny coverage to adults for preexisting conditions. Within the next 6 months, children under the age of 27, whose parents are purchasing insurance for them, will no longer be denied health coverage. Those with health considerations (or have children with) ailments such as epilepsy, cystic fibrosis, epilepsy, and a whole range of genetic and age-related diseases will gain the right to be covered.
Healthcare Exchanges
Currently, healthcare insurers and consumers are limited as to where and how they can buy and sell health insurance. Under the new law, “healthcare exchanges” will be created by the states allowing more flexibility as to how, who, and the means in which healthcare insurance can be purchased. While the exact mechanics of the healthcare exchanges remain to be seen, they are predicted to increase competition in the insurance marketplace and make healthcare insurance more affordable to consumers.
Individual Mandate
With the new law comes an obligation for all individuals to be insured. Those individuals who refuse to get coverage will face a fine of up to $695 per year to a maximum of $2,085 per family per year or 2.5% of the household income over the amount subject to income tax, whichever is greater. The penalty is being phased in as follows: 2014 – $95 or 1%, 2015 – $325 or 2%, 2016 – $695 or 2.5%.
The penalty then increases after 2016 based on a cost of living adjustment. For some, it may be less expensive to pay the fine as opposed to purchasing health insurance. However, be aware that the $695 penalty is a penalty by means of the Internal Revenue Code. In other words, the penalty must be paid or such individuals will face the IRS.
Investment Income
For those families making above $250,000, investment income will be subject to an additional 3.8% tax. This tax begins in 2012.
Credit for Small Businesses
Employers with, 1) 25 employees or less full-time employees, 2) average compensation of $50,000 or less, and 3) pay at least half of the health insurance coverage are eligible for a tax credit.
During tax years 2010, 2011, 2012, and 2013 employers will receive a 35% tax credit (in addition to a tax deduction for the premiums paid less the tax credit). In 2014 and 2015, the tax credit increases to 50%. After 2013, the credit is only available for 2 more years and only if the insurance is purchased from an insurance exchange.
On the other hand, if the employer has 10 or fewer employees, their average compensation must be less than $25,000 in order for the employer to qualify for the credit. Furthermore, their credit is 25% for 2010, 2011, 2012, and 2013. For 2014 and 2015, the credit increases to 35%
Conclusion
The healthcare bill has now become law. Not only are there incentives for small businesses to cover employees and new opportunities for individuals to obtain health insurance, a whole host of tax issues have surfaced. Just to name a few, business succession and exit planning will be affected because of the new capital gains rates. C Corporations with retained earnings should at least consider accelerating their payouts to avoid the increased taxes on dividends (2012). Along with these issues, many others exist in the tax world as a result of this law.
The Center routinely advises and acts as a consult for those engaging in succession and exit planning. Please contact the professionals at The Center for all of your tax needs regarding the tax law changes and challenges that it presents. If you want to receive a more detailed explanation of the law, contact The Center.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors