I took this picture of a dental office that doubles as a pharmacy on a recent trip to Honduras.I saw several medical offices during, what felt like, “roller coaster” taxi rides around the city of Tegucigalpa. Many were similar to this building except that the others I saw had a fence or a wall in front of their establishment and it wasn’t unusual to find rolled barbed wire adorning the top of the barrier. We only spent about four days in Honduras and found the Central American people to be very hospitable. However, in that short time I realized, once again, that we live in the best country in the world. While I’m thankful for where I live and for the health-care system we have here in the United States, I’m afraid that our costs for this privilege are about to increase.
Did you have similar thoughts on March 23 when you saw President Obama sign the new Health Care Bills into law? No matter what side of the fence you are on regarding the issues that face us as a nation, one thing is certain – we are about to experience change in our businesses. The passage of the Health Care Act (a 906-page document) and the Reconciliation Act (a 2,310 page document) is not only historic, it is massive and will be complicated to implement. While the centerpiece of the new law is the mandate for most residents of the U.S. to obtain health insurance, it comes with a host of new tax rules, and ill-defined regulations.
In an effort to help you through the changes that will occur, we will continue to review various aspects of this law and others to help you manage your practice effectively. This month, let’s begin looking at some implications of the new health-care law.
Beginning in 2011, employers will be required to report the value of employee health care coverage on Form W-2. For this reason, we will begin asking you to separate the costs you pay for health care coverage by individual employee. We will be working on a plan for implementing this plan soon so that it doesn’t become a burden in early 2011.
Higher Payroll Taxes
Beginning in 2013, a new 0.9 percent increase in Medicare tax will be levied on taxpayers who file single and earn more than $200,000. Married couples will see the effects of this additional tax once their incomes hit $250,000. Currently, all taxpayers pay 1.45 percent of their earned income in Medicare taxes, which is matched dollar for dollar by their employer. While the employer will not be required to match the additional new tax, they will be required to withhold the amount on wages their employees earn above the applicable amount.
Medicare Taxes on Unearned Income
Also in 2013, people with incomes above the $200,000 (single) or $250,000 (married) will be required to pay Medicare taxes on unearned income. For every dollar of dividends, capital gains, annuities, royalties, and rents you will be required to give almost 4 cents to Uncle Sam for Medicare taxes.
How this will affect individual taxpayers will depend on the source of their income. For example, if a doctor who is married has $200,000 in wages and net investment income of $100,000, the couple will pay the additional Medicare tax on $50,000 of their investment income ($200,000 + $100,000 less $250,000). Their additional tax would be $1,900 ($50,000 X 3.8%).
Should the doctor have a higher wage in our example, say $300,000, the couple’s additional tax would total $4,250 (0.9 percent of earned income over $250,000 plus 3.8 percent of $100,000 net investment income).
Given these additional Medicare tax rules, it makes sense to explore ways in which you can defer more money in your qualified retirement plans. If you are not maximizing your contributions, consider doing so if you become subjected to these new taxes. Income from tax deferred retirement accounts such as a 401(k) or similar accounts will not be included in income subject to the additional tax.
Individuals without Coverage
Beginning in 2014, nonexempt U.S. citizens and legal residents will be required to maintain a minimum amount of health coverage. Individuals who fail to do so will be subject to certain penalties beginning in 2016. The penalty will be the greater of 2.5 percent of household income over the minimum income required to file a tax return or a per-person penalty rate. The rate for each adult in the household would be $695 while the rate for uninsured children under 18 years old will be half of the adult rate. The overall penalty cannot exceed 300 percent of the per-adult penalty, or $2,085.
Even though small employers will not be required to do so, the competition for good employees may necessitate that you give consideration to offering your employees such benefits.
Employer Health Care
After December 31, 2013, applicable large employers (generally those with at least 50 full-time employees) will be required to offer affordable coverage to all of their full-time employees. They will pay a penalty if one of their employees is certified as having purchased health insurance through a state exchange and the employee receives a tax credit or cost-sharing reduction.
Employers offering coverage through an eligible employer-sponsored plan and paying a portion of the cost will have to provide vouchers to their employees that can be applied to the cost of a health plan with an insurance exchange.
Certain small employers might be eligible for a credit if they provide health coverage to their employees.
The Health Care and Reconciliation Acts are complicated and will take time to sort out. We will continue to review the effects of the changes and offer information that will help you mind your own business.