IRS getting bigger on health care reform responsibilities

Hi Folks,

Hope you had a memorable Memorial Day weekend.  I was in NYC and got to personally say "thank you for your service" to several sailors & marines that were on leave & taking in the scene at Time Square!

As the health care reform law enacted in March 2010 is being implemented, the Internal Revenue Service’s role is only going to get bigger

• the tax credit for small firms that provide employee health coverage,
• having employers list the value of medical insurance on W-2 forms for employees,
• the 10% excise tax on indoor tanning salons (the "Snooki" tax) and
• nondiscrimination rules for health plans.

Congress did remove one unpopular item – forcing businesses to prepare & file 1099 forms for any individual or business to whom they had paid $600 or more for goods or services.  The expansion of 1099 reporting was very unpopular and the repeal was only signed into law a few short months back.  Even though that was a potential bonanza of new revenue for our firm, we were pretty happy about that one being repealed!

Congressional opponents of the 2010 health care law won’t be able to repeal or “defund” it before 2013.  There aren’t enough votes in the Senate to repeal and the president has indicated that he would veto any such legislation. The opposition’s best hope for repealing “Obamacare” rests in the Supreme Court, which will determine the law’s constitutionality. Because a final decision isn’t likely until mid-2012, IRS will keep working on the rules so taxpayers will have guidance if the law is upheld.  Which ever way the Supreme Court goes will make for interesting politics as we head into next year’s presidential election.

One of the provisions IRS has to prepare for includes the refundable income tax credit to help low-income earners afford health coverage. The credit will be available for households with income up to 400% of federal poverty levels (currently, about $43,300 for an individual and about $88,200 for a family of four). IRS will have a lot of work to do to define exactly how household income is determined (total income, taxable income, AGI, etc.), so stay tuned for that.

Beginning in 2013 (after the next election -- what an unbelievable coincidence), IRS will begin collecting a special 3.8% Medicare surtax on unearned income of high-earners (defined as single taxpayers with adjusted gross incomes (“AGI”) over $200,000 and married taxpayers with AGI over $250,000).  The surtax is levied on the lesser of the taxpayer’s net investment income or the excess of AGI over the thresholds. Unearned income includes interest, royalties, dividends, capital gains, annuities and passive rental income, but not tax-free interest and retirement plan payouts. IRS is charged with making rules to clarify in which cases rents are treated as unearned income.

There has been some mis-information circulating about the 3.8% Medicare surtax on gains attributable to the sale of a principal residence.  The surtax would only apply if your GAIN (not proceeds, but gain) exceeded $500,000 (married taxpayers) or $250,000 (single taxpayers).  Note that there would be a 3.8% surtax liability on any gain from the sale of a second home, vacation home, rental property or other investment if the taxpayer’s income exceeded the applicable AGI limits.

IRS has also been charged with determining how to collect penalty taxes on individuals who remain uninsured after 2013. In 2014, the tax will be the greater of $95 or 1% of income above the filing threshold (the income amount below which an individual is not required to file a tax return) but not more than $285. Special rules will be required to apportion the penalty among uninsured people in a household. While $285 doesn’t sound too onerous, note that the fines increase sharply after 2014.  Reporting of insurance coverage to the IRS also will be required so they can determine which individuals owe the penalty tax for not having coverage (Big Brother really is watching).

An excise tax will be assessed on businesses with 50 or more full-time employees and no health plan. As of 2014, the tax is due if one or more employees get the insurance tax credit.  IRS regulations will have to spell out how to compute the number of full-time workers, since the excise tax is based on that figure.  The number of part-time workers will complicate the calculation.  We don’t see this a being a huge deal to our client base as most firms that large are providing health benefits to their employees.

And further down the road we’ll see an excise tax on high-value (“Cadillac”) health plans.  Starting in 2018, insurance companies and self-insurers owe a 40% excise tax on the value of plans in excess of $10,200 for individual coverage and $27,500 for family coverage. Higher thresholds apply to policies for retirees over age 55 and folks in high risk jobs, such as first responders. IRS is busily preparing for the enforcement of this now.

That’s it for now!  Carpe Diem~!.  So far, the IRS has issued rules on: