The massive and controversial Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 - the two recently enacted health care reform bills - included more than $400 billion in so-called "revenue raisers" and new taxes on employers and individuals. The centerpiece in the health reform laws is the mandate for most Americans to obtain health insurance.
The new laws contain a number of rules, such as new penalties for individuals who choose to remain uninsured, as well as 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.
What impact will this massive overhaul of health care have on you and your woodworking business?
The small-business tax credit
The Internal Revenue Service has already begun encouraging small businesses to claim the new health insurance coverage credit if they're qualified. 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 (no more than 25 employees and average wages below $50,000 annually) are eligible for a federal tax credit - a direct reduction of the woodworking operation's tax bill of up to 35 percent - for the amount spent on health insurance for their employees. The full amount of the credit is, however, available only to an employer with 10 or fewer full-time equivalent employees that have average annual full-time equivalent wages of less than $25,000. These wage limits would be indexed to the Consumer Price Index for Urban Consumers beginning in 2014.
Self-employed woodworking professionals, 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 credit. In fact, a special rule prevents sole proprietors from receiving the credit for the owner and their family members.
Self-employed woodshop owners 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 company plan) for a shareholder (more than 2 percent) 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.
Penalty for remaining uninsured
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 to help them pay 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 by 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 (so-called "pay or play").
Fortunately, most woodworking 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 firms with fewer than 50 employees from the employer-responsibility requirements that begin in 2014. This means, according to our lawmakers, that 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.
The penalty for any month would be an excise tax equal to the number of full-time employees above a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by 1/12 of $2,000.
"Free choice" vouchers
After 2013, employers offering minimum coverage through an eligible employer-sponsored plan and paying a portion of that coverage would have to provide qualified employees choosing not to participate in the employer's health plan with a voucher. The value of the voucher could be applied to the purchase of a health plan through an insurance exchange. The voucher's value would be equal to the dollar value of the employer's contribution to the company-offered health plan.
Health insurance exchanges
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 furniture, cabinet and custom woodworking businesses will have access to the same type of coverage that large firms have. Employees of small businesses will be able to do one-stop comparison shopping for an affordable insurance plan that offers lower rates, stable pricing from year-to-year and a choice of plans.
Those who are employed by small businesses, but who do not receive insurance through their employer 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 making up to 400 percent of the poverty line. That means the tax credits phase out completely for an individual with $43,320 in income and a family of four with $88,200 in income.
Additional tax on high-wage earners
The new law includes an increase in taxes for high earners. Specifically, for tax years beginning after Dec. 31, 2012, the hospital insurance tax rate will be increased by 0.9 percentage points on an individual taxpayer earning more than $200,000 ($250,000 for married couples filing jointly); these figures are not indexed for inflation. Also added is a hospital insurance tax on unearned income.
The unearned-income surtax
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.
New limit on health plan contributions
The owners and operators of many woodworking 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 health savings accounts (HSAs) from 10 percent to 20 percent and from Archer medical savings accounts from 15 to 20 percent. And, as mentioned, the amount of contributions to FSAs will be limited to $2,500 per year, effective after Dec. 31, 2012. The dollar amount would be indexed for inflation after 2013.
New reporting responsibilities
Beginning after Dec. 31, 2010, employers will have to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual W-2 form. Plus, a woodworking business paying any amount greater than $600 during the year to corporate providers of property and services would have to file an information report with each provider and with the Internal Revenue Service for payments made after Dec. 31, 2011.
In 2014, shops and businesses employing more than 50 workers will be required to provide health coverage and most people will be required to have health insurance. The tax on high-cost "Cadillac" policies will not go into effect until 2018; the increase in Medicare payroll taxes begins in 2013; while the tax credits available to small employers for health care-related expenses starts this year.
Many of the changes in the new law's 2,400-plus 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 woodworking business be ready?
Mark E. Battersby is a freelance tax and financial writer based in Ardmore, Pa.
This article originally appeared in the June 2010 issue.