The Health Insurance-Tax Relationship
Medical coverage and taxes were somewhat unrelated before health reform laws took effect, but now there are several reasons why the Internal Revenue Service has something to do with your health plan. Under the Affordable Care Act’s individual mandate, your insurance status is now a factor when you file your income taxes. Additionally, if you earn up to a certain income level, you may be eligible for tax credits, or subsidies, to offset your premiums and out-of-pocket costs. These federal subsidies are issued in part by the IRS. Aside from the ACA, if you have a Health Savings Account (HSA) health plan, your coverage choice will affect your taxes positively by being a tax-deductible expense. There are several ways your coverage could be tied to taxes, most of which stem from health reform.
Taxes Under Health Reform
Obamacare is responsible for placing a tax on individuals who don’t buy coverage when they’re able to, and on employers who don’t offer health plans to their full-time workers. Under the law, certain services are also being taxed that place individuals at risk of health problems, such as a 10% tax on those who use indoor tanning salons, as their use has been repeatedly linked to skin cancer. Whether you’re in need of financial assistance for health insurance or you neglect to buy a plan, taxes go hand-in-hand with coverage.
The Individual Mandate places a tax on individuals who do not have a health plan, beginning in 2015 for the 2014 tax year. The penalty grows higher each year, beginning at the greater of $95 per person or 1% of annual income in 2014, and rising to the greater of $325 per person or 2% of income in 2015, and the greater of 2.5% of income in 2016 and beyond. In 2017, the tax amount will also increase with inflation. You may be exempt from the penalty if you cannot afford coverage.
The Employer Mandate establishes that large companies with 50 or more full-time equivalent workers (30 hours per week or more) are required to offer them coverage — or pay a tax. The penalty is due when you file your taxes, and it is determined by the number of full-time employees you have, how much they earn and how many hours they work each month. If you don’t offer coverage and your full-time workers qualify for tax credits on the exchange, you will have to pay a penalty for each worker you do not insure.
Refundable Tax Credits help low-income Americans gain coverage on health plans through the exchanges by offering financial assistance. Tax credits, also called subsidies, reduce premiums for those who earn between 100 and 400 percent of the poverty level, and lower both premiums and medical costs if you earn between 100 and 250 percent of poverty. Subsidies operate on a sliding scale, determining the amount of assistance you need based on how much a health plan costs in relation to your income. If a policy on the exchange costs more than 2% of your income and you earn up to 133 percent of the federal poverty line, you qualify for the highest subsidy amount.
W2 forms now include the amount of medical coverage given to a company’s workers so that employers can be in compliance with the Affordable Care Act.
Flexible spending accounts are limited to $2,500 per year. The limit used to be in the hands of the employer, typically capping at 4,000.
Over-the-counter medications can no longer be paid for with health savings accounts, flexible spending accounts or health reimbursement arrangements.
Non-qualified distributions from HSAs now have an increased penalty of 20% (it was previously 10%).
If denied by an insurance agency, an employer with over 50 employees are eligible for a non-deductible fee. They will be charged $2,000 per employee, minus the first 30 individuals included.
Small business tax credits are issued to companies who purchase coverage on the Small Business Health Options Program, the exchange for small employers, and qualify for assistance. Companies with 25 or fewer employees and who each earn about $50,000 per year or less may be eligible. Business owners who are eligible can receive a credit of up to 50% of premium expenses every year, cutting their share of premiums significantly.
Changes to Group Insurance
Insurance companies will have to pay a 40% tax on part of a business’s health insurance plan that goes over $10,200 for individuals or $27,500 for families. This excludes stand-alone plans for vision or dental, and includes the entire premium (employer and employee amounts).
This also has an effect on tax-advantaged Health Savings Accounts, as the premium cost and tax will be considered based on the savings account or flexible spending accounts. Though the insurer is the party being taxed, they will most likely charge more to employers, who will then charge their employees or increase deductibles in order for the premiums to be too low to tax.
Certain groups will experience a higher limit for the 40% tax, such as individuals in high-risk occupations and retired persons over age 55. In this case, individual plans over $11,850 and $30,950 for families will receive the tax.
Average premiums are expected to climb by 55% by 2018, so most will qualify if they have a plan under their employer.
Health Reform Resources
- Official US Government Health Reform site: www.healthreform.gov
- Kaiser Family Foundation Health Reform info: healthreform.kff.org
- Health Reform Timeline and Other Information: www.whitehouse.gov/healthreform/healthcare-overview
- US Department of Labor – Affordable Care Act: www.dol.gov/ebsa/healthreform