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The Patient Protection and Affordable Care Act / March 22, 2010March 2010 has been a month of significant action by Congress and President Obama. The Patient Protection and Affordable Care Act (the Patient Protection Act) and the Hiring Incentive to Restore Employment Act (HIRE Act) have been passed by Congress. President Obama has signed the HIRE Act, and is expected to sign the Patient Protection Act in short order. This article provides a summary overview of the health care act (PPA) and its known or anticipated affect on individuals, families and employers. You can find an article on the HIRE Act on our Resources page. We will keep you up to date as information changes; however, do not hesitate to contact us at any time with questions.
The Patient Protection Act is a comprehensive health care reform bill that raises nearly $400 billion through tax increases on high-income individuals, excise taxes on high-cost group health plans, and new fees on selected industries. The House has already approved a separate package of “fixes” to the legislation and plans are under way to move that package through the Senate in the coming days under an expedited procedure known as Reconciliation, and officially titled the Health Care & Education Affordability Reconciliation Act of 2010. The Patient Protection Act will become law as soon as President Obama signs it; the Reconciliation Act will proceed to the Senate where debate is expected to begin this week. In addition, legal and political challenges may be in store for the Act. The Act encompasses over 2,000 pages; it will take months, if not longer, to gain clarity on all aspects of the Act. In the meantime, the following pages highlight some key changes. Keep in mind that as the Reconciliation Act winds its way through the legislative process, many of these provisions will change in some way. We will keep you updated as the situation warrants. Increased Medicare Tax on Self-Employed Individuals. Beginning in 2013, the Act imposes an additional .9 percent Medicare Hospital Insurance tax on self-employed individuals and employees with respect to earnings and wages received during the year above specified thresholds. This additional tax applies to earnings of self-employed individuals or wages of an employee in excess of $200,000 ($250,000 if filing a joint return). It also imposes an unearned income Medicare “contribution” of 3.8% on investment income for individuals with Adjusted Gross income (AGI) above $200,000 and filers with AGI above $250,000. Investment income includes interest, dividends, royalties, rents, gain from disposing of property, and income earned from a trade or business that is a passive activity; distributions from qualified retirement plans would not be subject to the tax. Self- employed individuals as well as estates and trusts would also be liable for the additional tax. Individual Coverage Mandate. All individuals will be required to obtain health coverage or pay a penalty tax (beginning in 2014). There are religious and hardship exemptions, and low income individuals will either receive coverage through an expansion of Medicaid or receive subsidies to make coverage more affordable. Employer Coverage Mandate (Pay or Play). The Act does not require employers to provide health coverage to employees; but beginning in 2014, it penalizes them for failing to do so through penalties (administered by the IRS) that are imposed on certain employers with at least 50 full-time employees (those working 30 or more hours per week). Employers with more than 50 full-time employees will be required to make available to all employees a minimum level of coverage or pay a “per employee” fee. Employers will not be required to provide coverage for part-time employees, but these employees will be counted as partial employees for purposes of determining whether an employer has 50 employees. If the employer offers coverage but employees are forced to purchase insurance through the state-based exchanges (described below) because the employer’s coverage is not affordable, the employer must pay separate fees. The Pay or Play provision becomes effective 2014 upon the creation of the state-based exchanges. Creation of State Health Care Exchanges for Small Businesses and Individuals. Individuals and small businesses would have the option of purchasing health insurance through state-based exchanges. The exchanges would include a non-profit run insurance option that will offer competitive benefits at affordable prices. Individuals and small businesses may be eligible, in certain circumstances, to receive credits toward the purchase of insurance through the exchanges. The exchanges will begin in 2014. Creation of Excise Tax. Beginning in 2013 (in the House version; 2018 in Reconciliation), the Act imposes a nondeductible 40 percent excise tax on high-dollar health insurance plans (plans with health coverage exceeding certain government-set thresholds). This provision is projected to raise $149 billion through 2019. In addition, it provides for an increase in Medicare payroll taxes on taxpayers in the $200,000-plus income category in 2013. Elimination of Tax Break for Retiree Drug Subsidies. Employers that provide prescription drug benefits to Medicare retirees and receive subsidies will be taxed on the amount of the subsidy. This could have a significant impact on employers’ balance sheets under the Generally Accepted Accounting Principles and SEC reporting rules. This provision is effective at the beginning of 2011 in the Senate version, but the House version would delay the effective date to 2013. Medical Expense Deduction. The Act, as amended, raises the threshold for the itemized medical expense deduction from 7.5 percent of AGI to 10 percent of AGI for regular income tax purposes, effective for tax years beginning after December 31, 2012. Individuals age 65 and older (and their spouses) would be temporarily exempt from the increase. The exemption for seniors would apply to any tax year beginning after December 31, 2012 and ending before January 1, 2017 if the taxpayer or the taxpayer’s spouse attained age 65 for the tax year. The act makes no adjustment to the allowable medical expense deduction for purposes of computing alternative minimum tax (AMT) liability. For now, the AGI floor for AMT purposes remains at 10 percent. Adult Children Coverage. As amended, the Act extends the employer-provided health coverage gross income exclusion to coverage for adult children up to age 26. To be eligible, they must also be eligible to be claimed as a dependent for tax purposes. Market Sector Fees and Credits. Annual nondeductible fees will be imposed on various health-related industries, such as medical device manufacturers and importers, health insurance providers and others. The annual fees would be allocated across industry sectors according to market share. The Act, as amended, delays the effective dates of the taxes on brand name pharmaceuticals sales by one year until 2011 and on health insurance providers for three years until 2014. The Act also exempts qualified non-profit insurance providers serving lower-income and other targeted groups and some voluntary employee benefit associations. Under Reconciliation (if approved) the annual fees on medical device manufacturers would be replaced by an excise tax on medical device sales. Certain medical devices (such as eyeglasses and hearing aids) would be exempt. As amended, the Act would require tax-exempt hospitals to meet four new requirements: (1) the periodic preparation of a community health needs assessment at least once every three years; (2) maintenance of a qualified financial assistance policy; (3) limitations on charges to individuals eligible for assistance; and (4) avoidance of certain billing and collections activities. The IRS would be required to review a non-profit hospital’s community benefit activities at least once every three years and the hospital would be required to have audited financial statements. As amended, the IRS is authorized to share return information with the US Department of Health and Human Services to curb Medicare fraud. As amended, the Act imposes a tax of 10 percent on qualified indoor tanning services effective July 1, 2010. The Act provides a two-year temporary tax credit to encourage investments in new health care therapies for tax years beginning in 2009 and 2010. Increase in Permitted Wellness Program Incentives. The Act eases some current-law restrictions on employer-provided incentives for employee participation in wellness programs. Employers could offer increased incentives (in the form of rewards or premium reductions) of up to 30 percent (from the current 20 percent) of the cost of coverage for employees to participate in wellness programs. Employers must offer alternative arrangements for individuals who are not able to participate due to physical or other limitations. This provision becomes effective in 2014. Elimination of Preexisting Condition Exclusions and Lifetime Limits. Group health plans and insurers will no longer be permitted to exclude coverage for preexisting conditions or place lifetime limits on coverage. Lifetime limits are prohibited effective six months after the enactment of the legislation. Preexisting conditions exclusions must be eliminated for dependent children within six months of enactment and must be completely eliminated by 2014. Flexible Spending Account Changes. Two significant design changes to employers’ health flexible spending accounts also will be required for 2011. The first is a new $2,500 cap on the amount of salary reduction contributions employees can make to their FSAs each year. Although this will not affect most employees in most years, it will prevent some employees from fully utilizing their health FSAs in years when they anticipate significant out-of-pocket medical expenses. The second change is more subtle, but likely will affect a larger percentage of the employee population on a consistent basis. That is, health FSAs can no longer reimburse employees for the cost of over-the-counter medicines — a loss of flexibility that may make participants more vulnerable to the use-or-lose rule. (The Reconciliation Agreement would delay the effective date for changes to FSAs until 2013.) Note: Even though the Act will not become fully effective for a number of years, employer-sponsored group health plans will feel a much more immediate impact. In fact, a number of plan design changes will need to be implemented in time for the 2011 plan year. These include:
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