The Patient Protection and Affordable Care Act of 2010, in concert with the enactment of the Health Care and Education Tax Credits Reconciliation Act of 2010, resulted in a number of changes to the US tax code. As such there are a number of tax implications for individuals and businesses.
Healthcare Exchanges, which are also referred to as Health Insurance Marketplaces, officially opened for enrollment in October 2013. Some of these exchanges are run by the state in which you reside. Others are run by the federal government.
Individuals (including self-employed) who do not currently have insurance or buy insurance on their own can use these marketplaces to buy insurance, which becomes effective January 1 of each year. When you get health insurance through the Marketplace, you may be able to get the new advance Premium Tax Credit that will immediately help lower your monthly premium.
Starting in 2019, the individual mandate is eliminated; however, for 2018, the penalty remained the same as it was in 2017 - $695 per person ($347.50 per child under 18) for the year or 2.5 percent of yearly household income (again, whichever is higher). The maximum penalty per family using this method is $2,085.
Background. Under the Affordable Care Act and for tax years 2014 - 2018, United States citizens and legal residents were mandated to either obtain minimum essential health care coverage for themselves and their dependents, have an exemption from coverage, or make a payment when filing a tax return. The Individual Mandate is also known as the Individual Shared Responsibility Payment. Only the amount of income above the tax filing threshold ($10,000 indexed for inflation) for an individual, was used to calculate the penalty. For 2020, this amount was $12,400 and for 2021, it is $12,550.
Most people already have qualifying health care coverage and do not need to do anything more than maintain that coverage throughout the year. Self-insured ERISA policies used by larger employers, as well as Medicare, Medicaid, and CHIP (Children's Health Insurance Program), and all of the health insurance plans offered by the exchanges fall under the category of minimum essential health care coverage.
Certain individuals are exempt from the tax and include: (1) people with religious objections; (2) American Indians with coverage through the Indian Health Service; (3) undocumented immigrants; (4) those without coverage for less than three months; (5) those serving prison sentences; (6) those for whom the lowest-cost plan option exceeds 8 percent of annual income; and (7) those with incomes below the tax filing threshold who do not file a tax return ($12,550 for singles and $25,100 for couples under 65 in 2021).
Refundable Tax Credit
Effective in 2014, certain taxpayers are able to use a refundable tax credit to offset the cost of health insurance premiums so that their insurance premium payments do not exceed a specific percentage of their income. Qualified individuals are those with incomes between 133 percent and 400 percent of the federal poverty level. A sliding scale based on family size is used to determine the amount of the credit. In addition, married taxpayers must file joint returns to qualify.
FSA (Flexible Spending Arrangements) contributions are limited to $2,500 per year starting in 2013 and indexed for inflation after that. For 2021, the limit is $2,750 (same as 2020).
Rules for HSAs and Archer MSAs
Tax on non-qualified distributions from HSAs and Archer MSAs that are used to cover the cost of over the counter medicine without a script increased to 20 percent starting in 2011. Medical devices, eyeglasses, contact lenses, copays, and deductibles are not affected, nor is Insulin even if it is non-prescription.
Medicare Part D
The subsidy for the Medicare Part D tax deduction for employer-provided retirement prescription drug coverage was eliminated starting in 2013.
AGI Limits for Deductible Medical Expenses
For tax year 2020, the deduction threshold is 7.5 percent of AGI for all taxpayers (Tax Cuts and Jobs Act of 2017) and was made permanent by the pandemic tax relief package signed into law on December 27, 2020.
Health Coverage of Older Children
The cost of employer-provided health care coverage for children (through age 26) on tax returns is excluded from gross income.
Medicare Tax Increases for High Income Earners
Starting in 2013, there is an additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly).
Also starting in 2013, there is a new Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the new tax.
Exemptions are available for business owners and income from certain retirement accounts, such as pensions, IRAs, 401(a), 403(b), and 457(b) plans, is exempt.
If you run an income-generating business with no employees, then you're considered self-employed (not an employer) and can get coverage through the Marketplace and use it to find coverage that fits your needs. You are not considered an employer even if you hire independent contractors to do some work.
If you currently have individual insurance, that is, a plan you bought yourself and not the kind you get through an employer, you may be able to change to a Marketplace plan. Furthermore, you can't be denied coverage or charged more because you have a preexisting health condition.
Small Businesses (50 or Fewer Employees)
If you have 50 or fewer full-time equivalent (FTE) employees (generally, workers whose income you report on a W-2 at the end of the year) you are considered a small business under the health care law.
As a small business, you may get insurance for yourself and your employees through the SHOP (Small Business Health Options Programs) Marketplace. This applies to non-profit organizations as well.
And, if you have fewer than 25 employees, you may qualify for the Small Business Tax Credit (see next section). Non-profit organizations can get a smaller tax credit.
As an employer, you must provide notification to your employees of coverage options available through the Marketplace and are required to provide this notice to all current employees and each new employee effective October 1st, 2013, regardless of plan enrollment status or full or part-time employment. The Department of Labor has sample notices that employers can use to comply with this regulation. One notice is for employers who do not offer a health care plan and the second is for employers who offer a health care plan.
Small Business Health Care Tax Credit
Small businesses and tax-exempt organizations that employ 25 or fewer, full-time equivalent workers with average incomes of $55,200 or less in 2020, and that pay at least half (50 percent) of the premiums for employee health insurance coverage are eligible for the Small Business Health Care Tax Credit.
Starting in 2014, the tax credit is worth up to 50 percent of your contribution toward employees' premium costs (up to 35 percent for tax-exempt employers). The tax credit is highest for companies with fewer than 10 employees who are paid an average of $27,800 or less in 2021 ($27,600 in 2020). The smaller the business, the bigger the credit is. The credit is available only if you get coverage through the SHOP Marketplace.
Additional Tax on Businesses Not Offering Minimum Essential Coverage
Effective January 1, 2015, an additional tax is levied on businesses with 50 or more full-time equivalent (FTE) employees that do not offer minimum essential coverage. This penalty is sometimes referred to as the Employer Shared Responsibility Payment or "Pay or Play" penalty.
For tax years 2015 and after, an applicable large employer is liable for an Employer Shared Responsibility payment only if:
(a) The employer does not offer health coverage or offers coverage to fewer than 95 percent of its full-time employees and the dependents of those employees and at least, one of those full-time employees receive a premium tax credit to help pay for coverage on a Marketplace;
(b) The employer offers health coverage to all or at least 95 percent of its full-time employees but at least one full-time employee receives a premium tax credit to help pay for coverage on a Marketplace, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value.
Employers with fewer than 50 FTE (full-time equivalent) employees are considered small businesses and are exempt from the additional tax.
Employers that are subject to the employer shared responsibility provisions (Applicable Large Employers or ALEs) also have information reporting responsibilities regarding minimum essential coverage offered to employees. These responsibilities require employers to send reports to employees and to the IRS. Information reporting returns are to be filed and furnished in early 2021 for 2020. An employer that sponsors self-insured health insurance coverage - whether or not the employer is an ALE - has insurer information reporting responsibilities as a provider of minimum essential coverage.
The amount of the annual Employer Shared Responsibility Payment is based partly on whether you offer insurance.
Unlike employer contributions to employee premiums, the Employer Shared Responsibility Payment is not tax deductible. In addition, Employer Shared Responsibility payments (either $2,000 or $3,000) are indexed to inflation beginning in years after 2014. For 2021, these numbers are $2,700 and $4,060, respectively.
A health plan meets minimum value if it covers at least 60 percent of the total allowed costs of benefits provided under the plan. All plans in the Marketplace meet minimum value, so any coverage offered through the SHOP Marketplace should qualify.
Excise Tax on Indoor Tanning Services
A 10 percent excise tax on indoor tanning services went into effect on July 1, 2010. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.
Health Care Taxes Repealed
Three healthcare-related taxes enacted to fund the Affordable Care Act - and that had previously been delayed or suspended - were repealed under the Further Consolidated Appropriations Act, 2020: