Affordable Care Act has tax implications

October 2, 2012

By James R. Armstrong, CPA, and Jodi Permenter, CPA

On June 28, 2012, the Supreme Court upheld the constitutionality of President Obama’s Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (know together as the Affordable Care Act).

The implementation of the Affordable Care Act (ACA) is expected to provide access to health insurance for 32 million currently uninsured Americans, drive innovation to reduce the rate health costs are rising, reform insurance markets to increase competition, and protect the insured’s rights by prohibiting the exclusion of people on the basis of pre-existing conditions, preventing annual or lifetime caps on coverage, seeking to end health insurance discrimination against optometrists and other health care providers (through the AOA-backed Harkin Amendment), banning the retroactive termination of benefits (known as rescission), and establishing minimum benefit packages, which includes the AOA-backed pediatric vision care essential benefit).

In addition to changing the landscape of the American Health Care System, the law also resulted in the largest set of tax law changes in more than 20 years.

All of that means the ACA has implications for optometrists, not only as health care practitioners, but as taxpayers, as individuals who must secure health care coverage for themselves or their families, and as employers who provide – or may wish to provide – insurance for their employees. With many Affordable Care Act provisions going into effect in 2013 or 2014, optometrists should begin now to consider how it could affect them as small business people and prepare accordingly. Here are some of the things they should know.

The individual mandate

One of the provisions in the Affordable Care Act requires non-exempt individuals to carry minimum essential health coverage for themselves and their dependents, including coverage for children’s vision care. Non-compliance with this provision will result in a penalty beginning in 2014. The penalty is calculated as the greater of either a flat fee or a percentage of the household income, which will be phased in from 2014 to 2016. For years after 2016, the flat fee will be adjusted for inflation.

Individuals are exempted from the provision if they do not meet certain income minimums, or if the required contribution for coverage exceeds 8 percent of their income. They are also exempt if they are covered by Medicare or Medicaid, incarcerated, members of a religion opposed to accepting medical benefits, or if they meet one of the additional criteria listed in the bill.

This individual mandate is one of the most important provisions included in the ACA. The increase in the number of health insurance policy holders is expected to allow insurance companies to shoulder the expense of some of the act’s other provisions, including those requiring insurance companies to extend health insurance coverage to more individuals with higher medical costs.

Implications for health insurance

In an attempt to increase competition and decrease administrative costs for small group (less than 50 employees) and individual plans, the act requires each state to set up a state-run insurance exchange by 2014. These exchanges will allow individuals and small businesses to compare different health insurance plans available. They will also serve to “pool” together individuals and small employers. The “pools” will lower the administrative costs and prevent rates from rising if a disproportionate number of “unhealthy” people enter a small plan. States are required to permit mid-size businesses (50-100 employees) to participate in exchanges by 2016, and may choose whether or not to allow large employers (100+ employees) to participate beginning in 2017.

Plans that were in existence as of March 23, 2010, the date the Affordable Care Act was enacted, may not be subject to all of the provisions of the act, as they are considered “grandfathered.” However, the “grandfathered” plans will not be eligible to participate in the state-run exchanges. All new plans must meet the following additional requirements.

The plan prevents insurance providers from imposing a pre-existing condition exclusion beginning in 2014, and prohibits the imposition of lifetime of annual limits on the dollar amount of coverage. Additionally, if a plan provides benefits for dependents, it must extend coverage to participant’s children up to age 26 without imposing additional penalties.

Perhaps one of the provisions that garnered the most bipartisan support was the prohibition of rescission of coverage. In the past, insurance companies have been able to rescind coverage retroactively if they found evidence that the insured incorrectly filled out information about their health history, even if the discrepancy were due to an oversight of the insured, or had no bearing on the insured’s current claims. For example, a nurse in Texas was diagnosed with aggressive breast cancer, and her insurance company rescinded her coverage retroactively, alleging that she did not disclose a trip to the dermatologist for treatment of acne. Under the new regulations, insurance companies may not rescind coverage except in the case of fraud or intentional misstatement of a material fact.

A major win for ODs, the Affordable Care Act also bans health insurance companies from discriminating against optometrists and other health care providers based on the type of license they hold. Known informally as the “Harkin Amendment,” the provision will – starting in 2014 – provide millions of Americans with new access to their local doctor of optometry, especially for some 73 million Americans now covered by ERISA health insurance plans.

Individual tax implications

For individual returns, the act increases the threshold to claim medical expenses as an itemized deduction from 7.5 percent of adjusted gross income (AGI) to 10 percent for individuals under age 65 starting in 2013. In addition, distributions from health savings accounts (HSA) and medical savings accounts (Archer MSAs) will be subject to an additional 10-20 percent penalty if not used for the beneficiary’s qualified medical expenses.

Beginning in 2012, an additional 0.9 percent Medicare tax will be imposed on individuals with more than $200,000 in income and married couples with income in excess of $250,000. Currently, Medicare tax is assessed at 2.9 percent of all wages and other earned income. Not only does the act increase the Medicare tax rate to 3.8 percent, it extends the Medicare contribution tax to unearned income as well. The tax is imposed on the lesser of net investment income or the AGI in excess of $200,000 ($250,000 for married couples filing jointly). Investment income includes income from interest, dividends, annuities, royalties, rents, passive business ownership, or net gain on sale of property.

Beginning in 2013, the Affordable Care Act caps maximum contributions to health flexible spending arrangements (Health FSAs) at $2,500.

Knowing the key role that health FSAs can play in patient access to primary eye and vision care and systemic preventive care, the AOA is actively working with Congress and federal regulators to eliminate or lessen the burden that these changes may bring about.

The act also excludes over-the-counter medicines from the list of eligible expenses for distributions from Health FSAs, HSAs, Health Reimbursement Accounts (HRAs) and Archer MSAs.

While most beneficiaries may not notice it immediately, the Medicare program will undergo historic changes in an effort to encourage innovations that improve quality and reduce cost. Medicaid will continue to provide health insurance to individuals with household incomes below the poverty line.

However, the act also creates a tax credit for individuals with a household income between 100 percent and 400 percent of the federal poverty level. In 2013, a family of four making between $23,050 and $92,200 would be eligible.

The credit is meant to subsidize the expense of purchasing health insurance. In order to qualify for the new Premium Assistance Tax Credit, the individual must not qualify for an affordable health insurance plan that provides minimum value.

For purposes of the credit, a plan is considered affordable if the contribution amount is below 9.5 percent of the household income.

Also, a plan provides minimum value if it covers at least 60 percent of the individual’s total allowed costs. In order to share the burden of providing this credit, the act imposes a penalty on larger employers (those with over 50 full-time equivalent employees) with employees who receive the credit.

Employees would be eligible for the credit either because the employer has failed to provide an employer-sponsored plan, because the employer-sponsored plan is unaffordable, or because the plan doesn’t provide minimum value.

The October issue of AOA News will feature Part 2 of this series. It will cover the ACA tax implications for business owners.

Armstrong is a partner in the firm of May & Company, LLP. Permenter is a member of the professional staff of May & Company, LLP. The firm consults with optometrists in 30 states, assisting with their tax planning and preparation, QuickBooks support, and business planning. May & Company was established in 1922 and has offices in Louisiana, Mississippi, and Alabama. Armstrong can be reached at 601-636-4762 or by e-mail at jarmstrong@maycpa.com.


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