09/06/2009

The Tax Implications of The House's Proposed Health Care Plan

In the early morning hours of July 17, the House Ways and Means Committee passed H.R. 3200: “America’s Affordable Health Choices Act of 2009.”  While we expect that this plan will be amended many times, we wanted to update you on the tax effects of this leading reform plan as currently written:

• Surtax On High Income Earners.  For joint filers, the surtax would be as follows: 1% of AGI between $350,000-$500,000; 1.5% of AGI between $500,000-$1,000,000; 5.4% of AGI over $1,000,000.  For married individuals filing separately, the surtax would begin at 50% of the joint filer amounts.  For individuals, the surtax would kick in at 80% of the joint filer amounts (creating an additional marriage penalty).
• Surtax Increase In 2013.  In 2013, unless federal health reform savings hit a predetermined target level, the surtax would increase to 2% of AGI between $350,000-$500,000 and 3% of AGI between $500,000-$1,000,000.
• 2.5% Penalty For Not Purchasing Coverage.  Individuals who do not purchase an acceptable health plan would face a penalty of 2.5% of AGI in excess of the taxpayer’s exemption amount, but not more than the “national average premium.”
• 8% Tax On Employers Who Don’t Provide Coverage.  Employers electing not to provide health benefits would pay an excise tax, as follows: 2% if the annual payroll is over $250,000, but does not exceed $300,000; 4% if the payroll is over $300,000, but does not exceed $350,000; 6% if the payroll is over $350,000, but does not exceed $400,000; and 8% if the payroll exceeds $400,000.
• 8% Tax On Employers If Employees Enroll In The Government’s Plan, Instead Of The Employer’s Plan.  Beginning in the fifth year after enactment, if an employee declined to enroll in the employer’s health plan but instead enrolled in the government plan,  employers would pay the same tax (up to 8% of that employee’s compensation) that applies to non-electing employers.
• $100 Per Day, Per Employee Penalty For Not Providing Adequate Coverage.  An employer who elects to provide coverage, but whose plan does not meet the government’s minimum requirements, will be subject to an excise tax of $100 per day per employee.
• Up To 50% Tax Credit For Qualified Small Employers Who Provide Health Coverage.  “Qualified small employers” (25 or fewer employees with an average employee compensation of $40,000 or less) who provide coverage could receive a tax credit.  For employers with 10 or fewer employees, whose average compensation is under $20,000, the credit would be 50% of qualified health coverage expenses.  If an employer’s average compensation exceeds $20,000, the credit percentage is reduced by 1% for each $400 by which average compensation exceeds $20,000.  For example, an employer with an average compensation of $24,000 would get a 40% credit.  The credit would also be reduced for employers with over 10 employees by reducing the credit by an amount which bears the same ratio to the amount of the credit as the number of qualified employees of the employer in excess of 10 bears to 15.  For example, if a firm has 16 employees, the 50% credit would be reduced to 30%: [1 – (16-10)/15] x 50% = 30%.
• Worldwide Allocation Of Interest Delayed.  The worldwide allocation of interest would again be delayed (until the first tax year beginning after 2019).
• Economic Substance Doctrine Would Be Codified.  The economic substance doctrine would be codified.  In addition, an accuracy related penalty would apply for underpayments from transactions lacking economic substance and a significant penalty would apply for not disclosing “noneconomic substance transactions.”
• Over-The-Counter Drugs Could No Longer Be Reimbursed With Excludible Dollars.  To help pay for the bill, the cost of over-the-counter drugs could no longer be reimbursed with excludible income through health reimbursement accounts, health savings accounts, Archer medical savings accounts, or flexible spending accounts.
• Extension Of Tax Benefits To Same Sex And Domestic Partners.  The general exclusion for employer provided health coverage would be effectively extended to same sex and domestic partners.  Equivalent changes would be made to: 1) the health reimbursement arrangement rules; 2) the flexible spending account rules; and 3) the health insurance premium deduction for self-employed persons.