Money Talk: Pay attention to health care

The centerpiece in the health reform laws, the massive and controversial, “Patient Protection and Affordable Care Act,” and the “Health Care and Education Reconciliation Act of 2010,” is the mandate for most Americans to obtain health insurance.

The new “reforms” include a number of new rules. There are new penalties for individuals who choose to remain uninsured, tax credits and other sweeteners for employers participating in new insurance pools, new penalties for larger employers that don’t provide insurance (or provide insurance deemed inadequate or unaffordable), plus a voucher system for certain lower income employees who choose not to be covered by their employer’s health plan.

The Internal Revenue Service has already begun encouraging small businesses to explore and, if qualified, claim the new small health insurance coverage credit. The credit was created for eligible small businesses to either maintain their current health insurance coverage or to begin offering health insurance coverage to their employees.

Small employers (with no more than 25 employees and average wages below $50,000 annually) are eligible for a federal tax credit — a direct reduction of the building operation’s tax bill — for the amount spent on health insurance for their employees, up to 35 percent.

The full amount of the credit is, however, available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages from the employer of less than $25,000. These wage limits would be indexed to the Consumer Price Index for Urban Consumers for years beginning in 2014.

Self-employed contractors and builders, including partners and sole proprietors, 2-percent shareholders of an S corporation, and 5-percent owners of the employer are not treated as employees for purposes of the Small Employer Health Insurance Credit. In fact, a special rule prevents sole proprietors from receiving the credit for the owner and their family members.

Self-employed builders can, of course, deduct the cost of health insurance for themselves and their spouses and dependents. Thus, if an S corporation pays accident and health insurance premiums (under a plan established by the S corporation) on behalf of a more-than-2-percent shareholder who is also its employee and who must include the value of the premiums in his or her gross income, the shareholder is permitted to deduct the cost of the premiums paid on his or her behalf.

How does this apply to you?
Starting in 2014, the new law will require nearly all Americans to have health insurance through an employer, a government program or by buying it directly. That year, new insurance markets will open for business, health plans will be required to accept all applicants and tax credits will start flowing to millions of people, helping them pay the premiums.

Those who continue to go without coverage will have to pay a penalty to the IRS, except in cases of financial hardship. Fines will vary by income and family size. For example, a single person making $45,000 would pay an extra $1,125 in taxes when the penalty is fully phased in, in 2016.

Prior to the passage of this reform, there was no federal requirement that employers offer health insurance coverage to employees or to their families. The new law imposes penalties on certain businesses for not providing coverage to their employees (“play or pay”).

Fortunately, many businesses will not have to worry about the provision because employers with fewer than 50 employees aren’t subject to the “pay or play” penalty. The new law exempts all small firms with fewer than 50 employees from the employer responsibility requirements that begin in 2014. This means 96 percent of all firms in the U.S., or 5.8 million out of 6 million total businesses, will be exempt from the requirement to provide health coverage for employees.

Small construction company employer mandate
In all other industries, firms with 50 or fewer employees are exempt from the mandate. In the construction industry, the exemption only applies to firms with five or fewer employees. Consider a construction firm with seven employees and a payroll of $250,000 that does not provide insurance. This firm will owe $5,250 (7 employees x $750). The new law does not define what it means by “construction firm,” and leaves that definition to the regulators.

Beginning in 2014, the new law creates state-based Health Insurance Exchanges to make health insurance affordable and accessible for small businesses and the self-employed. With the option of joining a large “pool,” small building businesses will have access to the same type of quality, affordable coverage that only large firms currently have. Employees of small businesses will be able to do one-stop comparison shopping for choices in quality, affordable, insurance plans that offer lower rates and stable pricing from year to year.

Employees of small businesses who do not receive insurance through their employers and are on the Exchange will have access to sliding-scale tax credits to help pay their premiums. Effective in 2014, for those with access to the Exchange, sliding scale tax credits are provided to individuals and families up to 400 percent of poverty. That means the tax credits phase out completely for individuals with $43,320 in income and families of four with $88,200 in income.

To help pay for making health insurance affordable for small businesses and the middle class, the new law includes an increase in taxes for high earners. Specifically, for tax years beginning after December 31, 2012, the hospital insurance or “HI” tax rate will increase by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly); these figures are not indexed for inflation.

Beginning in 2013, a 3.8 percent surtax called an “Unearned Income Medicare Contribution” will be placed on the net investment income of anyone earning more than $200,000 ($250,000 for a joint return). Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities and net gain from disposition of property (other than property held in a trade or business). It should be noted that income “actively” earned by anyone running a small, closely-held business, is exempt from the unearned income surtax.

The owners and operators of many building businesses, as well as their employees, have long utilized both flexible spending accounts (FSAs) and health savings accounts (HSAs) to pay for medical expenses with pretax dollars. An HSA goes along with a high-deductible insurance policy and gives individuals a tax deduction for money saved that can be used for health care expenses. An FSA has similar tax advantages, but contributions to it are deducted from an employee’s salary and money in the account must be used by the end of the year.

The new law modifies the definition of qualified medical expenses for health FSAs and HSAs to conform them to the definition used for the medical expense itemized deduction (excluding over-the-counter medicines unless prescribed by a health care professional) beginning in 2011. The law also caps health FSA contributions at $2,500 per year after 2012, which is indexed annually for inflation after 2013.

There are also increases in the additional tax on non-qualified distributions from HSAs from 10 percent to 20 percent and from Archer MSAs from 15 to 20 percent. And, as mentioned, the amount of contributions to FSAs will be limited to $2,500 per year, effective for tax years beginning after December 31, 2012. The dollar amount will be inflation-indexed after 2013.

Many of the changes in the new law’s more than 2,400 pages, such as requiring most people to have health insurance and employers to provide coverage, will take at least two years to go into effect. Will you and your building business be ready?

Mark Battersby, a regular Rural Builder columnist, has more than 30 years experience in small business issues, tax and financial matters. He writes extensively on business topics.

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