Healthcare Reform: It’s the Insured Thing

CHICAGO — The details of the recently passed healthcare-reform bills and their impact on businesses can be confusing. A recent webcast from accounting firm Grant Thornton LLP offered an analysis of the reforms and their impact.
Presenters discussed the potential tax implications to employers and individuals, including tax penalties and other revenue-generating provisions. The webcast also discussed changes to Medicare and Medicaid, and more.
The presenters are members of Grant Thornton’s Health Care Reform Resource Center Team, a national group that assembles to explore, analyze and collaborate on the impact of healthcare reform to clients such as the Textile Care Allied Trades Association (TCATA).
Many provisions in the two bills passed — the Patient Protection & Affordable Care Act and the Health Care & Education Reconciliation Act — will take effect within six months, including expanded coverage for children up to age 26 and the prevention of coverage denials based on pre-existing conditions. Other mandates will take effect over time, with most targeted to be in place by 2014.
Grant Thornton says there will likely be changes to the reforms between now and 2018, calling healthcare reform a “work in progress.” But the bills’ most salient features will do the following:

  • Establish a mandate for most U.S. residents to obtain health insurance or pay a penalty;
  • Set up 50 state insurance exchanges as a means to ensure competition and lower prices;
  • Expand eligibility for Medicaid to 133% of the federal poverty level (currently $29,327);
  • Substantially reduce the growth of Medicare payment rates for most services (funding about half of the bills’ estimated total costs);
  • Close Medicare’s prescription-drug “doughnut hole” to make the drugs more affordable for seniors;
  • Impose excise taxes on insurance plans with high premiums; and
  • Make additional changes to the federal tax code, Medicare, Medicaid and other programs.

Many insurance reforms will take effect this year. Insurers are now prevented from denying or rescinding coverage to people who get sick, and they can no longer place a lifetime limit on the dollar value of coverage.
Nondependent adult children must be allowed to stay on parents’ plans through age 26 and can’t be denied coverage due to pre-existing conditions; all plans must provide “first-dollar” coverage for preventive services and immunizations.
Also, the law is establishing temporary high-risk pools for people who are or have become uninsured due to a pre-existing condition. The high-risk pools are seen as a precursor to the state insurance exchanges, and will be displaced by traditional insurance coverage when the exchanges are up and running.
More reforms will take effect through 2014. Insurance exchanges will increase access to coverage for individuals and small employers, and foster competition to help keep prices down. Additional safeguards against discrimination based on pre-existing conditions, gender and other factors will take effect, and premiums will be streamlined to eliminate wide variations in fees.
Medicaid eligibility will increase to include anyone making up to 133% of the poverty level; states will receive increased federal funding to cover this new group.
The reforms will ultimately reduce the number of nonelderly uninsured by about 32 million, leaving just 23 million nonelderly uninsured—one-third of whom are illegal or unauthorized immigrants. After all reforms are in effect, about 94% of the U.S. population will be covered, up from 83%.PAYING FOR IT
According to Congressional Budget Office (CBO) estimates, the healthcare reforms passed will cost approximately $940 billion over 10 years, while reducing the federal deficit through cost savings.
Several new taxes and fees will help finance the reforms. “Cadillac” plans will be subject to a 40% excise tax; the wealthy will pay additional Medicare payroll taxes. The threshold for itemized medical-expense deductions will increase to 10%, and indoor tanning services will be taxed 10%.
The law will charge annual, nondeductible fees to medical device, pharmaceutical and health insurance companies, and limit compensation deductions by insurance companies. Medicare Part D prescription drug subsidies paid to employers will be slowly phased out.
Changes in rates of increase to Medicare providers save the government up to $500 billion through 2019, or about half the cost of the reform program. Additional measures will seek to limit claims fraud and self-referrals, while establishing programs to spur innovation, quality and efficiency.
Medicare taxes will rise for certain high-income earners. Starting in 2013, single people making more than $200,000 and joint filers making more than $250,000 will pay 2.35% on the employee’s share of earned income, up from 1.45%. The employer share remains 1.45% for a total of 3.8%.
There will also be a new 3.8% tax on unearned income, including capital gains, interest income and dividends. The deduction “floor” medical expenses has increased to 10% for those 64 and under in 2013, and will extend to all in 2017.MANDATES AND INCENTIVES
An individual mandate included in the reforms states that individuals must acquire minimum insurance, with assistance offered for premiums and out-of-pocket costs.
Assistance comes in the form of a refundable tax credit toward insurance premiums, awarded on a sliding scale from 100% to 400% of poverty level. The credit is unavailable if the individual is offered coverage from an employer, unless the employee’s cost is 9.5% of his or her income or more. 
Those making too little to file federal income tax forms, nonresidents, Native Americans and prisoners may be exempt from the mandate. A penalty for failing to buy insurance starts at the greatest of $95 or 1% of annual income in 2014, and rises to $695 or 2.5% of annual income in 2016 and beyond.
Approximately 24 million people will purchase coverage through an insurance exchange, and 16 million more will gain access to Medicaid and the Children’s Health Insurance Program (CHIP).
Most insurance will be made available through employers, however, with substantial incentives provided to smaller businesses. Eligibility for an employer plan can no longer be based on compensation, and employers must notify employees of their coverage options.
Small employers—defined as those with 25 or fewer employees and an average salary of $50,000 or less per year—will be able to take advantage of a tax credit for providing coverage if they pay 50% of the premium or more. The credit is equal to the percentage of employer cost up to 50% of the total.
“These provisions are designed to encourage employers to provide healthcare to their employees,” says Eddie Adkins, partner in the Washington National Tax Office of Grant Thornton. “They actually reward small employers for providing coverage to employees.”
The largest employers—those with more than 200 full-time employees—must automatically enroll workers under Department of Labor (DOL) regulations. Starting in 2014, penalties will be assessed to employers with 50 or more employees if they fail to offer healthcare coverage, offer inadequate coverage or maintain a waiting period greater than 30 days.
Large employers with 50 or more full-time employees will be subject to a penalty for failing to offer coverage equal to $166.67 per full-time employee in excess of 30 employees. Inadequate coverage is defined as too expensive for the employees to afford, or a plan that forces an employee to take a tax credit or cost-sharing reduction instead. “One employee triggers it, and the company pays on all,” Adkins warns.
Reporting requirements will expand somewhat to include information about any waiting period before coverage kicks in, monthly premiums, the employer’s share of the total costs, numbers of full-time employees each month, and so on. “These changes really aren’t a big deal,” Adkins says. “It’s a little more than employers have had to report up until now.”
If an employer offers a high-cost plan, it will be subject to a 40% excise tax on “excess benefits” by 2018. Excess-benefit calculation is based on an annual total premium of $10,200 for a single person, or $27,500 for family coverage, and will be adjusted for inflation. Employers must calculate any excess benefit amount and allocate it to the issuer, employer or plan administrator.
Ask your accountant or tax preparer for more information about the reforms, or visit for more information.


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