PPACA Tax Information
Small Business Health Insurance Tax Credit
A temporary tax credit is available for certain small businesses that provide qualified health insurance. The maximum credit equal to 35 percent of the employer contribution was available from 2010 to 2013. Beginning in 2014, a 50 percent credit is available for an additional two consecutive years, if the small business purchases health insurance through a Small Business Health Options Program (SHOP) health insurance exchange. The business must pass a series of tests to determine if they qualify and how much credit they may receive. Businesses with 10 or fewer employees paying $25,000 or less in average wages are potentially eligible for the full credit. Businesses with between 11 to 24 employees and average annual wages of less than $50,000 may be eligible for a partial credit. Businesses with 25 or more employees and/or $50,000 or more in average annual wages are not eligible for any credit. Employers must uniformly contribute at least 50 percent toward employees’ health insurance premiums.
The rules and calculations to determine eligibility for the credit are complicated. The tax credit can be claimed using Form 8941. There are a number of tools to help you determine whether you may receive a credit and how much it is worth. Also, please be sure to consult an accountant or tax professional to determine your eligibility.
- NFIB background information on the small business health insurance tax credit
- NFIB tax credit calculator
- IRS guidance on the tax credit
On July 1, 2010, a 10 percent tax was imposed on certain indoor tanning services. Specifically, the tax applies to the use of tanning devices utilizing ultraviolet lamps. Certain businesses, such as qualified physical fitness facilities, were exempt. The tax is collected from the purchases of tanning services and is remitted quarterly to the IRS using Form 720.
Brand-Name Drug Tax
In 2011, the manufacturers and importers of brand-name prescription drugs began paying an annual tax based on their share of the total brand-name drug market.
Flexible Spending Account (FSA) Limitations under Cafeteria Plans
FSAs are a qualified benefit that may be offered to employees under a cafeteria plan. Beginning in 2013, for an FSA to qualify as a benefit under a cafeteria plan, the maximum amount available for reimbursement cannot exceed $2,500. A cafeteria plan that includes an FSA that exceeds the maximum limitation will fail to qualify as a cafeteria plan.
Increased Penalty for Non-Qualified Distributions from Health Savings Accounts (HSAs)
Distributions from an HSA can only be used for qualified medical expenses and a nonqualified distribution is subject to a penalty. The penalty for making nonqualified distributions from an HSA increased from 10 percent to 20 percent in 2011.
Cafeteria Plan Safe Harbor Rules
In 2011, the application of nondiscrimination rules did not apply to cafeteria plans established by certain small businesses. Cafeteria plans were subject to nondiscrimination rules to ensure that benefits were not disproportionately allocated to highly compensated employees. Many smaller businesses struggled to meet the nondiscrimination tests because of the employee size calculation in the test.
An eligible small employer is provided a safe harbor from the nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements. An eligible small employer is an employer who employed an average of 100 or fewer employees during either of the two preceding years. A cafeteria plan satisfies the eligibility requirements if all employees are eligible to participate and able to elect any benefit available under the cafeteria plan. The minimum contribution requirement is met if the employer provides a minimum contribution for each employee who is not highly compensated, equal to, not less than, two percent of each eligible employee’s compensation for the plan year.
Medical Device Tax
Beginning in 2013, an annual 2.3 percent excise tax is imposed on manufacturers and importers of certain medical devices .
Limitation of Deduction Medical Expenses
Beginning in 2013, the medical expense threshold is increased to costs exceeding 10 percent of the taxpayer’s Adjusted Gross Income (AGI). Previously, an individual could deduct the cost of medical expenses exceeding 7.5 percent of the taxpayer’s AGI on their individual tax return.
Limited Use of Certain Medical Accounts for the Purchase of Over-the-Counter Drugs
Beginning in 2011, the cost of over-the-counter medicine could not be reimbursed with funds from an FSA, HRA, HSA or Archer MSA, unless the over-the-counter medicine was prescribed by a physician, except for insulin.
Beginning in 2013, the employee portion of the Medicare payroll tax (specifically the Hospital Insurance portion of the tax) is increased by 0.9 percent from the current 1.45 percent. The increase only applies to wages over $250,000 for joint return filers, $200,000 for individual filers, and $125,000 for married individuals filing separate returns. The tax increase also applies to the Medicare portion of SECA taxes for self-employment income.
New Medicare Payroll Investment Income Tax
Beginning in 2013, a new 3.8 percent Medicare payroll tax is assessed on certain investment income. This tax imposes a 3.8 percent tax on unearned income above $200,000 for individual filers or $250,000 for joint filers. In other words, it imposes an additional layer of tax on passive investment income, which includes investors in pass-through businesses, such as S corporations, LLC’s and partnerships. Income received in the ordinary course of a trade or business is not subject to the tax.
Calculating the tax, however, is complicated because it is imposed on the lesser of this investment income or the amount by which an individual’s modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers. The tax will be assessed annually using Form 8960.
Small Business Health Insurance Tax
In 2014, a new tax on fully insured health insurance products begins. The small business health insurance tax will cost small businesses and their employees $145 billion in the first 10 years. Although the tax is levied on health insurance providers, it will be passed on to small businesses and the self-employed in the fully insured market in the form of increased premiums. The tax will raise $8 billion in 2014, rise to $18 billion in 2024, and the amount will continue to increase by the rate of premium growth for subsequent years.
Tax on Cadillac Health Insurance Plans
Beginning in 2018, businesses providing employer-sponsored health insurance coverage that exceeds a threshold amount will be charged a 40 percent excise tax. The threshold amounts are $10,200 for individual coverage and $27,500 for family coverage.
 For copies and instructions of Form 8941 visit https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace
For IRS guidance and copies of Form 720 visit http://www.irs.gov/businesses/small/article/0,,id=224600,00.html
For final regulations from the IRS, visit medical device final regulation.