Mandatory Health Insurance Starts This Month—Are You Ready?

Tax Attorneys at Ainer & Fraker, LLP Discuss the Mandatory Health Insurance Requirements of the Affordable Care Act (Obamacare) in 2014.

Beginning in January 2014, everyone, with certain exceptions, is required to have minimum, essential health care insurance. This issue has received a significant amount of press coverage recently, both negative and positive. Regardless of your opinion related to the issue, the mandatory insurance requirement, together with the accompanying penalties for not being insured, premium assistance credits, and insurance subsidies, all begin in 2014. The new marketplace, also called exchanges, where insurance policies can be purchased, have debuted already, but with mixed success. These new provisions are all part of the Affordable Care Act (sometimes referred to as Obamacare) that are being phased in over a number of years.

How this will affect you and your family will depend upon a number of issues:

Already insured If you are already be insured through an employer plan, Medicare, Medicaid, the Veterans Administration, or a private plan that provides minimal, essential health care, then you will not be subject to any penalties under this new law.

Those exempt from the mandatory insurance requirement The following individuals are exempt from the insurance mandate, and will not be subject to a penalty for being uninsured:

  • Individuals who have a religious exemption
  • Those not lawfully present in the United States
  • Incarcerated individuals
  • Those who cannot afford coverage based on formulas contained in the law
  • Those who have an income below the federal income tax filing threshold
  • Those who are members of Indian tribes
  • Those who were uninsured for short coverage gaps of less than three months
  • Those who have received a hardship waiver from the Secretary of Health and Human Services, who are residing outside of the United States, or who are bona fide residents of any possession of the United States.

Help for those who can’t afford coverage Individuals and families whose household income is between 100% and 400% of the federal poverty level will qualify for a varying amount of subsidies to help pay for the insurance in the form of a Premium Assistance Credit. The lower the income, the more substantial the credit, which slowly phases out as the income increases, and is totally eliminated when the income reaches 400% of the poverty level. For those in the lower income levels, the subsidy will usually cover the bulk of the insurance costs.

To qualify for that credit, the insurance must be acquired from an insurance exchange operated by the individual’s or family’s resident state, or by the federal government when the state does not have an exchange. These exchanges have been up and running (more or less) since October 1, 2013, allowing individuals and families to apply for coverage which will become effective as of January 1, 2014.

There has been considerable negative press related to the federal exchange. The federal Internet site has not been functioning efficiently, but the administration says the problems will be corrected so everyone who needs to, can apply. Individuals who reside in states with their own exchange will use their state’s exchange and should not be concerned with the federal exchange. In general, the state-run exchanges seem to be operating smoother than the federal exchange, but some of the state exchanges have also had their problems. Some insurance companies offering insurance through an exchange also offer assistance in signing up through the exchange without going through the website. But be cautious—to be eligible for a subsidy, the insurance must be purchased through an exchange. If you purchase a policy directly from an insurance company without going through an exchange, you won’t be qualified for a subsidy, regardless of your income level.

It is important to note that the subsidy is really a tax credit based upon family income. It can be estimated in advance, and used to reduce the monthly insurance premiums; it can be claimed as a refundable credit on the tax return for the year; or it can be some combination of both. However, it is based upon the current year’s income and must be reconciled on the tax return for the year. If too much was used as a premium subsidy, some portion may need to be repaid. If there is an excess, it is refundable.

If household income is below 100% of the poverty level, the individual or family qualifies for Medicaid.

Penalty for noncompliance The penalty for noncompliance will be the greater of either a flat dollar amount or a percentage of income:

  • For 2014, $95 per uninsured adult ($47.50 for a child), or 1 percent of household income over the income tax filing threshold
  • For 2015, $325 per uninsured adult ($162.50 for a child), or 2 percent of household income over the income tax filing threshold
  • For 2016 and beyond, $695 per uninsured adult ($347.50 for a child), or 2.5 percent of household income over the income tax filing threshold

Flat dollar amounts The flat dollar amount for a family will be capped at 300% of the adult amount. For example, in 2014, the first year for the penalty, the maximum penalty for a family will be $285 (300% of $95). But for 2016, the maximum penalty jumps to $2,085 (300% of $695). The child rate will apply to family members under the age of 18.

Overall penalty cap The overall penalty will be capped at the national average premium for a minimal, essential coverage plan purchased through an exchange. This amount won’t be known until a later date.

Please Contact a Tax Attorney at Ainer & Fraker, LLP if you have any questions as to how the new insurance requirements of the Affordable Care Act (Obamacare) will affect you.

ACA Employer Letter Requirement

Tax Attorneys at Ainer & Fraker, LLP Discuss the Affordable Care Act’s Employer Letter Requirement

• Employers must give employees health care notification.
• Affects employers with one or more employees and a gross income of $500,000 or more.
• Notices due October 1, 2013.
• New Employees must be notified within 14 days.

Beginning Oct. 1, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s health care exchanges. The requirement applies to any business regulated under the Fair Labor Standards Act (FLSA), regardless of size. Going forward, letters are to be distributed to any new hires within 14 days of their starting date, according to the Department of Labor.

The Patient Protection and Affordable Care Act has a general $100-per-day penalty for non-compliance. Since this requirement is in the FLSA, concerns were raised in the business community that the $100-per-day penalty would apply to businesses that did not comply with the notification requirements.

On September 12, 2013, the Small Business Administration (sba.gov) posted a blog called “Myth #3: Business Owners Will Be Fined if They Don’t Notify Their Employees about the New Health Insurance Marketplace.”

The article clarifies the policy, stating: “If your company is covered by the FLSA, you must provide a written notice to your employees about the Health Insurance Marketplace by October 1, 2013. However, there is no fine or penalty under the law for failing to provide the notice.”

The Department of Labor provides model notices for employers:
• Employers with plans: http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf
• Employers without plans: http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf

Please Contact a Tax Attorney at Ainer & Fraker, LLP to help ensure you are in compliance with this law.

VIDEO: Understanding the Medicare Surtax

Tax Attorneys at Ainer & Fraker, LLP Discuss  the Unearned Income Medicare Contribution Tax

As part of the Affordable Care Act (the new health care legislation), a new tax kicks in this year. The official name of this tax is the Unearned Income Medicare Contribution Tax, and even though the name implies it is a contribution, don’t get the idea that it is voluntary or that you can deduct it as a charitable contribution. It is actually a surtax levied on the net investment income of taxpayers in the higher income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, stocks, or other investments.

The surtax is 3.8% on whichever is less: your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. Net investment income is your investment income reduced by investment expenses; MAGI is your regular AGI increased by income excluded for working out of the country.

The filing status threshold amounts are:

$250,000 for married taxpayers filing jointly and surviving spouses.
$125,000 for married taxpayers filing separately.
$200,000 for single and head-of-household filers.

Example: A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Investment income includes:

Interest, dividends, annuities (but not distributions from IRAs or qualified retirement plans), and royalties,
Rents (other than derived from a trade or business),
Capital gains (other than derived from a trade or business),
Home-sale gain in excess of the allowable home-gain exclusion,
A child’s investment income in excess of the excludable threshold if, when eligible, the parent elects to include the child’s investment income on the parent’s return,
Trade or business income that is a passive activity with respect to the taxpayer, and
Trade or business income with respect to trading financial instruments or commodities.

Planning Note: For surtax purposes, gross income doesn’t include interest on tax-exempt bonds. Thus, one can avoid or reduce the net investment income surtax by investing in tax-exempt bonds.

Investment expenses include:

Investment interest expense,
Investment advisory and brokerage fees,
Expenses related to rental and royalty income, and
State and local income taxes properly allocable to items included in Net Investment Income.

Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don’t be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home-gain exclusion, it will add to your income and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock, a second home, or a rental. So when planning to sell a capital asset, be sure to consider the impact of this new surtax.

The surtax also applies to the undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.

If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.

Please Contact a Tax Attorney at Ainer & Fraker, LLP to explore your options to mitigate the impact of the tax.