Some of the provisions in the health care reform law were effective immediately; most had later effective dates. Tax provisions that will be effective beginning January 1, 2013, affect employers and individuals alike—including those that are briefly discussed below (this is not a complete list).
Additional hospital insurance tax on high income taxpayers
The health care reform law increases the employee portion of the Medicare hospital insurance (HI) tax (currently 1.45% of wages) by an additional 0.9% on wages exceeding a threshold amount.
The threshold amount is $250,000 for married couples filing a joint return, $125,000 for married individuals filing separately, and $200,000 for single taxpayers.
However, employers must withhold the additional HI tax on the portion of an employee’s wages, received from the employer, that exceeds $200,000—without regard to the amount of wages received by the employee’s spouse.
Unlike the employee portion of the general HI tax of 1.45%, the employee is directly liable for the additional 0.9% HI tax if not withheld by the employer. The additional 0.9% HI tax also applies to the HI portion of the Self Employment Contributions Act (SECA) tax on self-employment income in excess of the threshold amount.
Incentive stock options and certain benefits are not included in the definition of wages for purposes of Federal Insurance Contributions Act (FICA) taxes, including the HI tax.
Effective: For remuneration received and tax years beginning after 2012
In light of the 2013 effective date, some employers are considering an acceleration of FICA wage inclusion into 2012, or even acceleration of actual payments into 2012.
Unearned income tax
The PPACA adds a tax on most “investment income”—including capital gains, interest income, dividends, rental income, and annuity income—of highly paid individuals.
The tax is 3.8% of the lesser of:
- Net investment income, or
- The taxpayer’s modified adjusted gross income (AGI) that exceeds a threshold amount
Investment income does not include a distribution from a qualified retirement plan, income from tax-exempt bonds, non-passive S corporation trade or business income, or self-employment income subject to SECA. “Net investment income” is the income after deductions allocable to the income.
For the threshold amount, the tax applies to modified AGI exceeding:
- $250,000 for married couples filing a joint return
- $125,000 for married couples filing separately
- $200,000 for single taxpayers
This tax is not deductible, and it is not a tax reported by the employer.
Effective: Tax years beginning after 2012
Some employers are taking a closer look at compensation that is not subject to this tax or FICA—this generally includes qualified plan distributions.
Flexible spending accounts
The health care reform law limits the maximum amount available for reimbursement for medical expenses under a health flexible spending account (FSA) to $2,500 (indexed for inflation).
The health FSA limit currently is unlimited, but most employers select an amount between $3,000 and up to $5,000. Employers will need to amend their health FSA plans to adjust for the new limit.
Effective: Tax years beginning after 2012
Employers need to educate their employees concerning this change, especially if employees have contributed more than $2,500 to their health FSAs under the current rules. Employees also need to be aware that the lower health FSA limit may result in higher FICA costs because FSAs currently “shelter” some income from FICA taxes.
Form W-2 reporting
An employer is required to disclose on each employee’s Form W-2 the value of the employee’s health insurance coverage under any employer-sponsored plans in which the employee is enrolled.
While these rules are already in effect, as a reminder, Form W-2 is due in January 2013 for reporting the 2012 health care costs.
The reportable value is the aggregate premium for all such plans in which the employee is enrolled (excluding the value of a health FSA) based on the applicable premiums. Most employers will be using the rules for Consolidated Omnibus Reconciliation Act (COBRA) continuation coverage to determine the cost of the premiums for self-insured plans.
Employers need to identify any “outlier” employees—those outside the standard plans—to make sure all employees’ W-2s will accurately reflect the health care cost coverage.
Also, with respect to automatic enrollment procedures, employers will want to watch for guidance on the new rules for automatic enrollment of new hires in the employer’s health care plan. Automatic enrollment is generally expected to be effective in 2014, but only if guidance is released.
For more information, contact a professional in KPMG’s Washington National Tax practice: