How will health care reform affect you and your taxes?

It’s massive, and it’s complicated. The aim of the law is to provide affordable, quality health care for all Americans. To reach that goal, the law requires large companies to provide health insurance for their employees starting in 2015. Medium-sized companies have until 2016 to provide health insurance to employees. Uninsured individuals must generally get their own health insurance starting in 2014. Those who fail to do so face penalties.

As business owners it is important to determine whether you meet the threshold of an applicable large employer (ALE) and are required to provide affordable, minimum essential coverage to employees.  Please review the following information carefully.

FOR BUSINESSES – It’s all in the numbers

  • Pre-Tax Reimbursement – Please call us if you reimburse anyone for their own individual policy to discuss your options. .

One unintended consequence of the Affordable Care Act is explained in an IRS Notice issued in September 2013.  Effective January 1, 2014, employers may no longer reimburse employees for their individual health insurance policies or pay the premiums directly to the insurance company on a pre-tax basis.  Employers that continue to pay employee’s premiums or reimburse their payment must include these amounts in the employee’s taxable wages.  Also, only if the employer offers a group health plan (GHP) in compliance with Chapter 100, which contains the requirements regarding Health Reimbursement Arrangements (HRAs), can pre-tax dollars be used for health insurance premiums and escape the following excise tax.

The excise tax imposed by Section 4980D is $100 per day in the noncompliance period with respect to each individual to whom the failure relates.  A noncompliance period begins on the date of the first failure and ends on the date the failure is corrected.  That amounts to $36,500 per year per owner or employee to whom the failure relates.  The excise tax is self-assessing and is reported and paid using form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code.

  • If two or more companies have a common owner or are otherwise related, they are combined for purposes of determining whether they employ enough employees to be subject to the Employer Shared Responsibility provisions.

 Section 498OH includes a longstanding provision that also applies for other tax and employee benefit purposes, under which companies that have a common owner or are otherwise related generally are combined and treated as a single employer, and so would be combined for purposes of determining whether or not they collectively employ at least 50 full-time employees (including full-time equivalents).  If the combined total meets the threshold, then each separate company is subject to the Employer Shared Responsibility provisions, even those companies that individually do not employ enough employees to meet the threshold.  (Note that these rules for combining related employers do not apply for purposes of determining whether a particular company owes an Employer Shared Responsibility payment or the amount of any payment.  That is determined separately for each related company).

  •  Fewer than 25 employees

For 2014, small companies that paid at least 50% of the health insurance premiums for their employees could be eligible for a tax credit for as much as 50% of the cost of the premiums. To qualify, the business must employ fewer than 25 full-time people with average wages of less than $50,000 ($50,800 in 2014, as adjusted for inflation).  Though to qualify for the credit, the insurance must be purchased through SHOP. Special rules apply where SHOP is not available.

  • Fewer than 50 employees

Companies with fewer than 50 employees are encouraged to provide insurance for their employees, but there are no penalties for failing to do so. A special marketplace is available for businesses with 50 or fewer employees, allowing them to buy health insurance through the Small Business Health Options Program (SHOP).

  • 50 to 99 employees

Businesses with 50 to 99 employees have until January 1, 2016, to meet the requirement of providing minimum, affordable health insurance to workers or face penalties. To qualify for this transitional relief, employers must certify that they have not laid off workers in order to come under the 100 employee threshold.

(1)  Limited Workforce Size.  The employer must employ on average at least 50 full-time employees (including full-time equivalents) but fewer than 100 full-time employees (including full-time equivalents) on business days during 2014.  (Employers with fewer than 50 full-time employees (including full-time equivalents) on business days during the previous year are not subject to the Employer Shared Responsibility provisions.)  The number of full-time employees (including full-time equivalents) is determined in accordance with the otherwise applicable rules in the final regulations for determining status as an applicable large employers.

(2)  Maintenance of Workforce and Aggregate Hours of Service.  During the period beginning on February 9, 2014 and ending on December 31, 2014, the employer may not reduce the size of its workforce or the overall hours of service of its employees in order to qualify for the transition relief.  However, an employer that reduces workforce size or overall hours of service for bona fide business reasons is still eligible for the relief.

(3)  Maintenance of Previously Offered Health Coverage.  During the period beginning on February 9, 2014 and ending on December 31, 2015 (or, for employers with non-calendar-year plans, ending on the last day of the 2015 plan year) the employer does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014.  An employer will not be treated as eliminating or materially reducing health coverage if (i) it continues to offer each employee who is eligible for coverage an employer contribution toward the cost of employee-only coverage that either (A) is at least 95 percent of the dollar amount of the contribution toward such coverage that the employer was offering on February 9, 2014, or (B) is at least the same percentage of the cost of coverage that the employer was offering to contribute toward coverage on February 9, 2014; (ii) in the event of a change in benefits under the employee-only coverage offered, that coverage provides minimum value after the change; and (iii) it does not alter the terms of its group health plans to narrow or reduce the class or classes of employees (or the employee’s dependents) to whom coverage under those plans was offered on February 9, 2014.

  • 100 or more employees

For companies with 100 or more full-time employees, the requirement to provide “affordable, minimum essential coverage” to employees is scheduled to become effective January 1, 2015. The IRS is encouraging large companies to comply with the ACA requirements in 2014 even though there are no penalties for failure to do so.

  •  The business play or pay penalty

Starting in 2015, companies with 100 or more employees that don’t offer minimum essential health insurance face an annual penalty of $2,000 times the number of full-time employees over a 30-employee threshold. If the insurance that is offered is considered unaffordable (it exceeds 9.5% of family income), the company may be assessed a $3,000 per-employee penalty. These penalties apply only if one or more of the company’s employees buy insurance from an exchange and qualify for a federal credit to offset the cost of the premiums.

The final regulations provide a transition rule to employers who first become an ALE with respect to an employee who was not offered coverage at any point in the prior calendar year.  If the applicable large employer offers coverage on or before April 1 of the first year in which the employer is an applicable large employer, the employer will not be subject to a shared responsibility payment for January through March of the first year the employer is an applicable large employer by reason of its failure to offer coverage to the employee or coverage providing minimum value for January through March of that year.  However, if the employer does not offer coverage or coverage with minimum value to the employee by April 1, the employer may be subject to a shared responsibility payment for those initial calendar months in addition to any subsequent calendar months for which coverage is not offered.  This rule applies only during the first year for which an employer is an applicable large employer (even if the employer falls below the 50 full-time employee plus FTE threshold for a subsequent year and then expands and becomes an applicable large employer again).

FOR INDIVIDUALS – It’s all about coverage

A great deal of attention has been focused on the health insurance exchanges or “Marketplace” that opened for business on October 1, 2013. If you are covered by Medicare, Medicaid, or an employer-provided plan, you don’t need to do anything.

Also, if you buy your health insurance on your own, you can keep your coverage if your plan is still offered by the insurance company. You can keep insurance that doesn’t meet the law’s minimum coverage requirements through October 2017 if your state permits it. However, the only way to get any premium-lowering tax credits based on your income is to buy a plan through the Marketplace.

  • The exchanges (Marketplace)

Each state will either develop an insurance exchange (Marketplace) or use one provided by the federal government.  There are four types of insurance plans to choose from: Bronze, Silver, Gold, and Platinum. The more expensive the plan, the greater the portion of medical costs that will be covered. The price of each plan will depend on several factors including your age, whether you smoke, and where you live.

Many individuals will qualify for federal tax credits which will reduce the premiums they actually pay. Each state’s Marketplace has a calculator to assist individuals in determining the amount, if any, of their federal tax credit.

  • The individual play or pay penalty

Individuals will generally need to have coverage for 2014 or pay a penalty of $95 or 1% of your income, whichever is greater. Under certain circumstances, you may qualify for an exemption from the 2014 requirement to have health insurance. Low-income individuals may qualify for subsidies and/or tax credits to help pay the cost of insurance.

The penalty increases to $325 or 2% of income for 2015 and to $695 or 2.5% of income for 2016. For 2017 and later years, the penalty is inflation-adjusted. Those who choose not to be insured and to pay the penalty instead will still be liable for 100% of their medical bills.


In addition to the penalties required by the Affordable Care Act, the law made other tax changes that could affect you. Among them are the following:

♦   Annual contributions to flexible spending accounts are limited to $2,500 (indexed for inflation).

♦   The 7.5% adjusted gross income threshold for deducting unreimbursed medical expenses is now 10% for those    under age 65. Those 65 and older can use the 7.5% threshold through 2016.

 ♦   The additional tax on nonqualified distributions from health savings accounts (HSAs) is 20%, an increase from the previous 10% penalty.

♦   The payroll Medicare tax increases from 1.45% of wages and self-employment income to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. This rate increase applies only to the employee portion, not to the employer portion.A 3.8% Medicare surtax is imposed on unearned income (examples: interest, dividends, most capital gains) for single taxpayers with income over $200,000 and married couples with income over $250,000.

♦   The Affordable Care Act may be one of the most complicated and confusing laws ever passed, but one thing is very clear: the law will affect the taxes of most Americans.


This Memo is intended to provide you with an informative summary of the tax issues connected with the Affordable Care Act. This massive package of legislation contains varying effective dates, definitions, limitations, and exceptions that cannot be summarized easily. Also be aware that in the political environment surrounding this law, changes to the law have already been made and more changes could be made at any time. For details and guidance in applying the tax provisions of this law to your situation, seek professional assistance from us, a health insurance broker and your payroll service.