Health Care Reform’s Tax Provisions

The massive health care legislation, signed into law by President Obama, contains provisions that will affect every employer, but the timing of different pieces of the legislation ranges from items that apply immediately in 2010 to a variety of tax increases that become effective from 2011 to 2018.

At LarsonAllen, we have compiled the most relevant provisions of the bill that will affect dealerships and their owners and employees. We urge dealers to focus on those items taking effect in the next couple of years. The tax costs and coverage mandates don’t hit until 2013 or 2014.

Tax credit for small dealerships offering health coverage
Beginning in 2010 and continuing through 2015, small employers may qualify for a more lucrative credit to reimburse a portion of the cost of employer-provided insurance.

In general, an eligible small employer is one who meets three criteria:

• An employer with no more than 25 full-time equivalent employees (FTEs) for the tax year

• Average annual wages per employee do not exceed $50,000

• The employer contributed at least 50 percent of the premiums for employee health care

Amount of credit
Tax Year Beginning                 Taxable Employer
2010-2013                                 35 percent
2014-2015                                 50 percent

W-2 disclosure of health coverage cost
Beginning in 2011, employers are required to add information on each employee’s W-2 Form, detailing the aggregate cost of employer-sponsored health coverage.

Expanded 1099 information reporting requirements
Effective for payments made in 2012 and after, the health care legislation expands 1099 reporting to include amounts paid "in consideration for property.” This would include any inventory, material, equipment or merchandise. Further, the new legislation requires a 1099 be issued to any corporation (other than a tax-exempt entity) for payments for property or services over $600 in a calendar year.

Health insurance coverage mandate
Beginning in 2014, employers with at least 50 full-time employees during the preceding calendar year will face a non-deductible excise tax if they fail to offer employee health insurance or if they provide a plan with minimum coverage that is either unaffordable or incurs less than 60 percent of the cost of benefits.

Employers providing no health insurance
The excise tax is $2,000 annually per employee for employers not offering a health care plan or offering a plan without "minimum essential coverage" and for which at least one employee is eligible for federal subsidies. However, the tax excludes the first 30 employees in the computation.

Tax Provisions for Individuals
The Act has many provisions that will directly affect individuals, particularly those in the workforce. Following are the most significant changes.

Dependent coverage
Effective March 30, 2010, the tax-free exclusion is extended to employer-provided health coverage for a taxpayer’s child who has not attained age 27 as of the end of the tax year.

High-income employee Medicare rate
Effective in 2013, an additional 0.9 percent Medicare HI tax is imposed on the employee share, but only to the extent that an individual’s wages exceed $200,000. Although the 0.9 percent HI increase is on the employee share, the employer is required to withhold the tax and remit it to the IRS. Similarly, the self-employment HI tax is increased by 0.9 percent.

For joint returns, the extra 0.9 percent HI tax is calculated on wages and self-employment income in excess of $250,000, by considering both spouses as one for this computation. Accordingly, if the withholding has been inadequate (e.g., one spouse is over $200,000 of salary with 0.9 percent withholding on the excess, but the other spouse is under $200,000 of wages with no withholding), the additional 0.9 percent HI tax must be remitted via the Form 1040.

Medicare surtax on unearned income
In addition to the 0.9 percent Medicare increase on earned income, there is a new 3.8 percent surtax on net investment income of higher income individuals that also becomes effective in 2013. The surtax is 3.8 percent of the lesser of:

• Net investment income, or

• The excess of the taxpayer’s Form 1040 modified AGI over a threshold of $200,000 ($250,000 if married and filing jointly).

Net investment income includes interest, dividends and rents. It also includes passive income (from a business in which the taxpayer does not personally materially participate). This provision could have significant impact on dealerships that rent property they own to their own business or own companies they don’t actively work in.

Contribution cap on flexible spending accounts (FSAs)
Beginning in 2013, this law puts a cap of $2,500 on the amount an employee can annually contribute into a health FSA.

Individual penalty for failure to maintain health insurance
Beginning in 2014, the law imposes a penalty on any individual who fails to maintain “minimum essential coverage” for health care. When fully phased in by 2016, the penalty is the greater of:

• 2.5 percent of the taxpayer’s household income over the threshold for filing a 1040 for that year, or

• $695 per uninsured adult plus half of that amount per uninsured child under age 18, but capped at $2,085 per household.

The big picture on tax rates for upper-income filers
The Obama administration’s budget calls for taking the present top 1040 rate from 35 percent to 39.6 percent and bringing back the phase-out of personal exemptions and itemized deductions. This will push the top rate in 2011 to roughly 42 percent, and this is the same group that is being taxed to help fund health care reform (single filers over $200,000 and joint filers over $250,000).

To come up with an effective tax planning strategy, the two sets of rate hikes need to be seen as one.

When these Medicare tax hikes arrive in 2013, those with high salary or self-employment income paying the 0.9 percent will be at roughly a 43 percent top rate, and those with investment income incurring the 3.8 percent surtax will reach about 46 percent. Those are the rates we need to consider in looking at alternative business entities and investments.