New Tax Laws. Detailed guidance released on new small business health care credit

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1 New Tax Laws Detailed guidance released on new small business health care credit IR ; Notice , IRB IRS has issued detailed guidance on the small employer health insurance credit created by the Patient Protection and Affordable Care Act (Affordable Care Act, P.L ). The guidance adopts a liberal approach to the statutory requirements, including three alternative methods for figuring total hours of service, and also explains how small employers claim the credit if their State provides a credit or subsidy for employee health coverage. Background. Under the Affordable Care Act, effective for tax years beginning after Dec. 31, 2009, an eligible small employer (ESE) may claim a tax credit for nonelective contributions to purchase health insurance for its employees. (Code Sec. 45R) An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. (Code Sec. 45R(d)) However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. (Code Sec. 45R(c)) Aggregation rules apply in determining the employer. (Code Sec. 45R(b)) The contributions must be provided under a qualifying arrangement, i.e., one requiring the ESE to make a nonelective contribution for each employee who enrolls in certain defined qualifying health insurance offered by the ESE equal to a uniform percentage (not less than 50%) of the premium cost of the qualifying health plan. (Code Sec. 45R(d)(4)) A transition rule applies for 2010; see below. The credit is a general business credit, can be carried back for one year and carried forward for 20 years, and can offset alternative minimum tax. (Code Sec. 38(b), Code Sec. 39(a)), Code Sec. 38(c)(4)(B)(vi)) Qualifying health insurance during initial credit phase. For any tax year beginning in 2010, 2011, 2012, or 2013, qualifying health insurance is health insurance coverage within the meaning of Code Sec. 9832(b)(1) (generally health insurance coverage bought from a State licensed insurance company). (Code Sec. 45R(g)(2)) Calculation of credit amount. For tax years beginning before 2014, the credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage: 1. Total nonelective contributions the ESE made on behalf of the employees during the tax year for the qualifying health coverage.

2 2. Total nonelective contributions the ESE would have paid if each employee were enrolled in a plan that had a premium equal to the average premium for the small group market in the State (or in an area in the State) in which the employer is offering health insurance coverage. Health and Human Services (HHS) determines whether separate average premiums apply for areas within a State and also determines the average premium for a State or sub-state area. (Code Sec. 45R(b)) The applicable percentage is 35% for tax years beginning after 2009 and before 2014 (25% for tax exempts) and is 50% for tax years beginning after 2013 (35% for tax-exempts). For exempts, the credit is a refundable tax credit limited to the amount of the employer's payroll taxes (income tax and Medicare tax withheld from employees' wages and the employer share of Medicare tax on employees' wages) during the calendar year in which the tax year begins. The credit is reduced for an ESE if: 1. It has more than 10 FTEs but not more than 25 FTEs. Find the number of FTEs by dividing (1) the total hours for which the ESE pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2, Average wages per employee is between $25,000 and $50,000. (Code Sec. 45R(c)) Find average annual wages by dividing (a) total wages (as defined for FICA purposes, without regard to the wage base limitation) paid to employees during the ESE's tax year by (2) the number of the FTEs for the year. Round the result down to the nearest $1,000 (if not otherwise a multiple of $1,000). Code Sec. 45R(d)(3)(A), Code Sec. 45R(e)(4)) If an ESE has more than 10 FTEs and average annual wages exceed $25,000, the credit reduction is the sum of the amount of the two reductions above. The Code Sec. 45R credit reduces the employer's Code Sec. 162 deduction for contributions to employees' health insurance coverage. (Code Sec. 45R(e)(5)) A sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S corporation, any owner of more than 5% of other businesses, a family member of any of these individuals, or a member of such a business owner's or partner's household: (1) are not considered employees for Code Sec. 45R purposes, (2) their wages or hours are not counted in determining either the number of FTEs or the amount of average annual wages, and (3) premiums paid on their behalf are not counted in determining the amount of the credit. (Code Sec. 45R(e)) In April, IRS issued preliminary guidance on the Code Sec. 45R credit in the form of frequently asked questions (FAQs) posted on its website; see Federal Taxes Weekly Alert 04/08/2010. New Notice formalizes much of the guidance in April's FAQs, but also contains new guidance as well as clarification of points raised in the FAQs. Here's a summary of the more important aspects of the new Code Sec. 45R guidance. Hours of service worked. An employee's hours of service for a year include each hour for which an employee is paid, or entitled to payment, for (a) the performance of duties for the employer; and (b) for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence (except that no more than 160 hours of service are required to be counted for an employee on account of

3 any single continuous period during which the employee performs no duties). (Notice , Sec. II.C.) In calculating the total number of hours of service which must be taken into account for an employee for the year, the employer may use any of three methods: 1. determine actual hours of service from records of hours worked and hours for which payment is made or due (payment is made or due for vacation, holiday, illness, incapacity, etc.); 2. use a days-worked equivalency where the employee is credited with 8 hours of service for each day for which he would be required to be credited with at least one hour of service under (1), above; or 3. use a weeks-worked equivalency where the employee is credited with 40 hours of service for each week for which he would be required to be credited with at least one hour of service under (1), above. (Notice , Sec. II.C.) Finding the number of FTEs. The number of an employer's FTEs is found by dividing (a) the total hours of service, as determined above, credited during the year to employees taken into account for Code Sec. 45R purposes, by (b) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. In some circumstances, an employer with 25 or more employees may qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (i.e., they are paid wages for 1,040 hours) has 23 FTEs and, therefore, may qualify for the credit. (Notice , Sec. II.D.) An example makes clear that in determining whether Code Sec. 45R applies, all FTEs must be taken into account, even though not all of them are enrolled in the employer's health insurance plan. (Notice , Sec. II.D., Ex. 4) What is health insurance coverage. For pre-2014 years, health insurance coverage for purposes of the Code Sec. 45R credit means benefits consisting of: Medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer. Limited-scope dental or vision; long-term care, nursing home care, home health care, community-based care, or any combination thereof. Coverage only for a specified disease or illness. Hospital indemnity or other fixed indemnity insurance. Medicare supplemental health insurance; and certain other supplemental coverage, and similar supplemental coverage provided to coverage under a group health plan. (Notice , Sec. II.G.)

4 Health insurance coverage does not include the benefits listed in Code Sec. 9832(c)(1) (e.g., coverage only for accident or disability income insurance, auto medical payment insurance, coverage for on-site medical clinics). (Notice , Sec. II.G.) Different types of health insurance plans are not aggregated for purposes of meeting the qualifying arrangement requirement. So, for example, if an employer offers a major medical insurance plan and a stand-alone vision plan, it must separately satisfy the requirements for a qualifying arrangement for each type of coverage. The average premium for the small group market in the State does not apply separately to each type of permissible coverage, but rather provides an overall cap for all health insurance coverage provided by an ESE. (Notice , Sec. II.G.) State credits or subsidies for health insurance. Small employers providing health insurance to employees may receive a State tax credit (refundable or nonrefundable), or a State subsidy for part of employees' health insurance premiums. Generally, a premium subsidy is paid either directly to the employer or to the employer's insurance company (or another entity licensed under State law to engage in the insurance business). If the employer gets a State tax credit (whether refundable or nonrefundable), or a premium subsidy paid directly to the employer, then: the employer's premium payment is not reduced by the credit or subsidy when determining if it has satisfied the requirement to pay an amount equal to a uniform percentage (not less than 50%) of the premium cost; and the maximum amount of the Code Sec. 45R credit is not reduced because of a State tax credit or because of State payments directly to the employer. (Notice , Sec. III.D.) Generally, a State that makes payments directly to an insurance company (or another entity licensed under State law to engage in the insurance business) for a part of employee premiums is treated as making these payments on behalf of the employer for purposes of determining whether the employer satisfies the requirement to pay an amount equal to a uniform percentage (not less than 50%) of the premium cost of coverage; and the State premium payments are treated as an employer contribution under Code Sec. 45R for purposes of calculating the credit. (Notice , Sec. III.D.) However, the amount of the Code Sec. 45R credit cannot exceed the amount of the employer's net premium payments. For a State tax credit or a State subsidy paid directly to an employer, the employer's net premium payments are found by subtracting the State tax credit or subsidy from the employer's actual premium payments. For a State payment directly to an insurance company (or another entity licensed under State law to engage in the insurance business), the employer's net premium payments are its actual premium payments. (Notice , Sec. III.D.) Transition relief for tax year beginning in For a tax year beginning in 2010, an employer that pays an amount equal to at least 50% of the premium for single (employee-only) coverage for each employee enrolled in coverage is deemed to satisfy the uniformity requirement for a qualifying arrangement, even if the employer does not pay the same percentage of the premium for each employee.

5 Thus, an employer meets the uniformity requirement if it pays at least 50% of single-coverage premiums for each employee receiving single coverage, and, if the employer offers more-expensive coverage (e.g., family or self-plus-one coverage), if it pays an amount for each employee receiving that more expensive coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the more expensive coverage the employee is actually receiving). (Notice , Sec. V.) Credit: Research Institute Hiring Incentives to Restore Employment (HIRE) Act March 18, 2010 On March 18, President Obama signed H.R. 2847, carrying the Hiring Incentives to Restore Employment (HIRE) Act, into law as P.L The President's signature sets the effective date for numerous HIRE Act provisions with an effective date geared to the March 18, 2010, date of enactment. Under the payroll tax holiday provision (Code Sec. 3111(d)(1), as amended by Act Sec. 101(a)), the OASDI tax on employers doesn't apply to wages paid by a qualified employer with respect to employment during the period beginning on Mar. 19, 2010 (day after enactment) and ending on Dec. 31, 2010, of any qualified individual for qualifying services. In addition, the up-to-$1,000 credit for retained workers under Act Sec. 102, applies for any tax year ending after Mar. 18, To help stimulate the hiring of workers by the private sector, the new law exempts any private-sector employer that hires a worker who had been unemployed for at

6 least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800 the maximum amount of wages subject to Social Security taxes by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after the date of the new law's enactment receive the exemption for payroll taxes. Here are some additional features of the new hiring incentive: The tax benefit of the new incentive is immediate. It puts money into a business' cash flow immediately, since the tax is simply not collected in the first place. The tax benefit generally applies only to private-sector employment, including nonprofit organizations public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution would qualify. There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no maximum on the dollar amount of payroll taxes per employer that may be forgiven. For workers that would otherwise be eligible for the Work Opportunity Tax Credit, the employer must select one benefit or the other for 2010 no double dipping. An employer can't claim the new tax breaks for hiring family members. A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause. For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins. The incentive is not biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.

7 The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of The Act creates a similar new set of rules permitting a payroll tax holiday for railroad retirement tax purposes. The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52- consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker's wages during the 52- consecutive-week period exceed $16, However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers). Continuing Extension Act of 2010 April 15, 2010 The Continuing Extension Act of 2010 was signed into Law by the President on April 15, The Act extends the eligibility period for the COBRA continuation premium subsidy for two additional months. Under prior law, the eligibility period had ended on March 31, Under the Act, the eligibility period for the subsidy is retroactively extended for two months and will end on May 31, The Act also carries extended COBRA election procedures for certain involuntarily terminated works and new notice requirements for plan administrations. The Act also extends a number of other programs, such as unemployment insurance, and includes a Sense of the Senate that a Value Added Tax would be a massive tax increase that will cripple families on fixed income and only further push back America s economic recovery, and that the Senate opposes a Value Added Tax. Patient Protection and Affordable Care Act March 23, 2010 March 23, 2010 and March 30, 2010 saw the signing into law of dramatic changes overhauling the health care in the United States, The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010.

8 Individual mandate. The new law contains an individual mandate a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S. Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the premium assistance credit ) for eligible individuals and families who purchase health insurance through an exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an exchange. Under the provision, an eligible individual enrolls in a plan offered through an exchange and reports his or her income to the exchange. Based on the information provided to the exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions. The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved. Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.

9 Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker's wages without limit. Under the provisions of the new law, which take in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies wouldn't be responsible for determining whether a worker's combined income with his or her spouse made them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on their spouses' pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years. Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed). Net investment income is 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). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax. Because the new tax on investment income won't take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and clarifications between now and when the tax is actually rolled out in Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective

10 for tax years beginning after Dec. 31, The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, Limit health flexible spending arrangements (FSAs) to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, The dollar amount will be indexed for inflation after Dependent coverage in employer health plans. Effective on the enactment date, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year. Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.

11 Tax changes affecting small business in the 2010 health reform legislation Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer's regular tax or its alternative minimum tax (AMT) liability. Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees ( FTEs ), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000. Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase. Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer's nonelective contributions toward the employees' health insurance premiums. The credit phases out as firm-size and average wages increase. Taxexempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer's nonelective contributions toward the employees' health insurance premiums. Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

12 Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a selfemployed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages. Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called pay or play ), most small businesses won't have to worry about this provision because employers with fewer than 50 employees aren't subject to the pay or play penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn't offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, The Cadillac tax on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as Cadillac health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers. Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for

13 coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax. Timeline for Legislation Ten percent excise tax on indoor tanning services begins July 1. Adoption tax credit is made refundable, effective Jan. 1, 2010; the thresholds for qualifying expenses are increased; and the adoption credit is extended through is modified to reduce the value of deductions from revenues to put additional pressure on Blue Cross and Blue Shield organizations to increase their share of spending on medical reimbursements or lose special tax breaks granted to them in the 1986 tax reform. Forgiven student debts for medical professionals that have participated in a program to bring medical care to underserved areas are excluded from taxable income beginning in the 2009 tax year. Employers are no longer allowed to deduct from their taxes the value of benefits bought for retirees with government subsidies in order to provide retiree prescription drug coverage under Medicare Part D. Businesses must begin reporting the value of health care benefits on employees' W-2 statements. Money in flexible spending arrangements, health savings accounts, and other health reimbursement arrangements cannot be used for over-the-counter medicines unless they are prescribed by a doctor.

14 The penalty for using health savings account funds for nonqualified uses will rise to 20 percent from 10 percent. New information reporting is required for businesses making payments to corporations in excess of $600 over the course of a calendar year. A new 0.9 percent surtax will be tacked onto the 1.45 percent Hospital Insurance (HI) payroll taxes paid by individuals earning more than $200,000 per year or joint filers earning more than $250,000 per year. The thresholds are not indexed for inflation. A 3.8 percent tax will be imposed on unearned income of individuals earning more than $200,000 per year ($250,000 for joint filers). The threshold for claiming medical expense deductions rises from 7.5 percent of adjusted gross income to 10 percent. The threshold for deductions will remain at 7.5 percent of income for individuals 65 or older until Contributions to health care flexible spending arrangements will be limited to $2,500 as of Jan. 1, The cap would be indexed to consumer price inflation beginning in A 40 percent excise tax on high-cost (aka Cadillac ) health insurance plans goes into effect. The tax, paid by insurers or selfinsured firms, is on the amount in excess of $10,200 for individuals and $27,500 for families.