Health Care Reform

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (H.R. 3590) legislation to reform our health care system. On March 25, 2010, Congress passed the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) that amends the Act signed by President Obama. The process to determine how these landmark bills are going to affect businesses is just now beginning.

While some provisions of the bill are easy to quantify, most are not. We will be playing the "wait and see" game with our insurance providers, pharmaceutical manufacturers, the states, and those federal agencies responsible for writing the regulations for the bill.

Currently there is no way to factually quantify how this bill is going to affect business in the future. Many provisions in the bill do not go into effect for years. Some tax provisions that will eventually affect health care costs for business relate to the new "fees" imposed on the health insurance industry, pharmaceutical manufacturers and medical device manufacturers. It remains unclear how these new fees will be passed on to other businesses.

There are those in industry that believe the bill addressed many issues except the key issue for businesses: the rising cost of health care. The Act contains many cost cutting and waste ending provisions which may lead to cost savings in existing programs such as Medicare. It remains unclear whether these savings will impact the cost of health care for businesses.

Following is a summary of the provisions that affect businesses for the immediate future in 2010 and 2011.

Small Business Tax Credit
The Act provides a sliding-scale small employer tax credit to help offset the cost of employer-provided coverage. Generally, a small employer is one with no more than 25 full-time employees and average annual wages of less than $50,000. In 2010 through 2013, eligible employers may qualify for a tax credit for up to 35% of their contribution toward the employee's health insurance premium. In 2014 and beyond, eligible employers who purchase coverage through an insurance exchange may qualify for a credit for two years of up to 50% of their contribution. Qualified tax-exempt employers would be eligible for a reduced credit.

A sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S corporation, and any owner of more than 5% of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of employees or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. Any family member of the business owners or partners, or a member of their household, also is not considered an employee for purposes of the credit.

The Internal Revenue Service has issued guidance about the Small Business Tax Credit in the form of a question and answer document that can be found online at their website.

Tax on HSA and MSA Distributions
The additional tax on distributions from a health savings account (HSA) or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased from 10% for HSA and 15% for MSA to 20% of the amount disbursed.

The Act excludes from qualified distributions the costs of over-the-counter drugs not prescribed by a doctor.

This is effective for disbursements made in tax years starting after December 31, 2010.

Tax on Indoor Tanning Services
This is a 10% tax on amounts paid for indoor tanning services. This tax will operate much like a sales tax as the tax will be collected when payment for the tanning service is made

This applies to services performed on or after July 1, 2010.

Tax on Elective Cosmetic Medical Procedures
This is a 5% tax on amounts paid for any cosmetic surgery or elective medical procedure whether paid for by insurance or otherwise. The tax applies to any cosmetic surgery or other procedure which is 1) performed by a licensed medical professional, and 2) is not necessary to ameliorate a deformity arising from or related to a congenital abnormality, a personal injury resulting from an accident or trauma or a disfiguring disease.

This tax will operate much like a sales tax as the tax will be collected from the person on whom the procedure is performed and remitted by the person who received payment for the procedure.

This provision applies to procedures performed on or after January 1, 2010.

SIMPLE Cafeteria Plans for Small Business
The Act relaxes the cafeteria plan rules to encourage more small employers to offer tax-free benefits to employees, including those related to health insurance coverage. It does so by carving out a safe harbor from the nondiscrimination requirements for cafeteria plans for qualified small employers.

This provision is effective for tax years beginning after December 31, 2010.

Adult Children Coverage
The Act extends the employer-provided health coverage gross income exclusion to coverage for adult children under age 27. Self-employed individuals are allowed a deduction for the premiums paid on such dependent coverage.

This provision is effective six months following enactment.

Wellness Programs
The Act will provide grants for up to five years for small employers that establish wellness programs. Funds are appropriated beginning in fiscal year 2011.

Information Reporting
Employers will be required to disclose on each employee's annual Form W-2 the value of the employee's health insurance coverage sponsored by the employer.

This is effective for tax years after December 31, 2010.

Summary
While some provisions affect business in the near term, the major provisions of the Act come into play after 2011. We will follow up with additional information about these longer-term changes. We also hope by that time we will have some further indication about what to expect regarding future costs of other items such as the cost of insurance, prescription drugs, and the possibility of increased taxes at the state levels for their mandated participation in the Act.

News & Resources

Health Care Reform

2010 Patient Protection and Affordable Care Act