Impact of the Affordable Care Act Tax Provisions

Impact of Health Reform Tax Provisions on Individuals and Small Businesses

A W-2 tax form.
A W-2 tax form. Nadya Lukic/Getty Images

Either as an individual or the owner of a small business, you may be affected by the Affordable Care Act tax provisions.

The Affordable Care Act was signed into law by President Obama on March 23, 2010. The purpose of the federal health reform legislation is to assure that all Americans have access to affordable health insurance. The law will impact virtually every American, including individuals who need government assistance to afford health insurance, people who purchase their own insurance individually, small business owners, seniors eligible for Medicare, and large employers who provide coverage as a job-related benefit.

The Affordable Care Act contains several tax provisions that will take effect as different parts of the health reform legislation are implemented. For the most part, implementation of the health reform law, including the development of rules and regulations, is the responsibility of the U.S. Department of Health and Human Services. However, the purchase and provision of health insurance is entwined with many people’s jobs and tax-related benefits. Because of this, almost all the new regulations also involve the participation of the U.S. Department of Labor and the IRS.

The following is an outline of some of the important tax-related consequences of the Affordable Care Act.

Employer-Provided Health Coverage — Not Taxable

The Affordable Care Act requires your employer to report the value of your health insurance coverage provided to you on your annual Form W-2. This reporting is for informational purposes only, to let you know the value of your health care benefits so you can be a more informed consumer.

The amount reported does not affect your tax liability, as the value of your employer’s contribution to your health coverage will continue to be excluded from your income and it is not taxable.

Excise Tax on Indoor Tanning Services

There is 10-percent excise tax on indoor UV tanning services. The tax will not apply to you if you receive phototherapy services performed by your healthcare provider in his or her office.

There is also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.

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Medicare Part D Coverage Gap Rebate

If you hit the Medicare Part D coverage gap, or donut hole, the Affordable Care Act provides a one-time $250 rebate. This payment is not made by the IRS and it is not taxable.

Small Business Health Care Tax Credit

If you own a small business, this new credit will help you (as well as small tax-exempt organizations) afford the cost of covering your employees. It is specifically targeted for those businesses with low- and moderate-income workers. The credit is designed to encourage you as a small employer to offer health insurance coverage for the first time or maintain the coverage you already have.

In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. To qualify for the small business tax credit you must meet the following eligibility rules:

  • Provide health care coverage. You must cover at least 50 percent of the cost of health care coverage for some of your workers based on the single rate.
  • Company size. You must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
  • Average annual wage. You must pay average annual wages below $50,000.

If your small business is eligible, the credit is worth up to 50 percent (35 percent for tax-exempt employers). The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

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Health Coverage for Older Children

If you are employed, health coverage for your children under 27 years of age is now generally tax-free.

This expanded health care tax benefit applies to various work place and retiree health plans. This change allows employers with cafeteria plans –– plans that allow you to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit.

This tax benefit also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

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